SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark one)
/X/ Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999
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or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to ___________ .
Commission File Number: 1-12748
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CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1176514
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1111 S. PACA STREET, BALTIMORE, MARYLAND 21230 2834
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (SIC)
(410) 843-5000
(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), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares outstanding of each of the Registrant's classes of common
stock, as of June 30, 1999:
Class A Common Stock, $.01 per share - 5,590,351 shares
Class B Common Stock, $.01 per share - none
This Form 10-Q consists of 12 pages.
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets
as of June 30, 1999 and March 31, 1999..................... 3
Consolidated Statements of Operations
for the three months ended June 30, 1999 and 1998 ......... 4
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended June 30, 1999 .................. 5
Consolidated Statements of Cash Flows
for the three months ended June 30, 1999 and 1998 ......... 6
Notes to Consolidated Financial Statements ................ 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition And Results of Operations............... 9-10
Part II. Other Information
Item 1. Legal Proceedings.................................. 10
Item 5. Other Information.................................. 10
Item 6. Exhibits and Reports on Form 8-K................... 11
Signatures.......................................................... 12
2
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1999 March 31, 1999
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(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,220,988 $ 410,595
Restricted cash 350,000 350,000
Accounts receivable, net of allowances of
$ 64,490 and $55,490 respectively 1,414,492 1,114,674
Inventories 638,962 491,177
Prepaid expenses 315,674 477,319
Deferred tax asset 124,084 124,084
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TOTAL CURRENT ASSETS 4,064,200 2,967,849
Property, plant and equipment, net 10,153,242 10,171,932
Deferred financing costs and other assets 102,673 101,375
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TOTAL ASSETS $ 14,320,115 $ 13,241,156
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 689,196 $ 799,089
Line of credit -- 644,445
Current portion of long term debt 702,457 717,369
Current portion of capital lease obligations 14,712 853
Current portion of accrued restructuring costs 417,778 523,094
Deferred revenue 431,642 382,208
------------ ------------
TOTAL CURRENT LIABILITIES 2,255,785 3,067,058
Long term debt, net of current portion 7,142,276 7,564,276
Capital lease obligations, net of current portion 78,355 --
Accrued restructuring costs, net of current portion 536,597 561,215
Other liabilities 30,000 30,000
Deferred tax liability 124,084 124,084
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TOTAL LIABILITIES 10,167,097 11,346,633
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A-1 convertible preferred stock, par value $.01 per share;
liquidation preference of $1,551,000, 6% cumulative dividends,
beginning May 31, 2001, 15,510 shares authorized,
issued and outstanding 155 --
Class A common stock, par value $.01 per share;
7,984,490 shares authorized; 5,590,351 and
5,365,101 shares issued and outstanding 55,904 53,651
Class B common stock, par value $.01 per share;
2,000,000 shares authorized; no shares issued
and outstanding -- --
Additional paid-in capital 9,335,154 7,613,014
Additional paid-in capital - warrants outstanding 422,170 --
Accumulated deficit (5,660,365) (5,772,142)
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TOTAL STOCKHOLDERS' EQUITY 4,153,018 1,894,523
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,320,115 $ 13,241,156
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED BALANCE SHEETS.
3
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
June 30,
---------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
Revenues $ 2,449,193 $ 1,117,172
Cost of sales 1,763,765 1,208,044
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Gross profit (loss) 685,428 (90,872)
Operating expenses:
General and administrative 302,868 372,550
Selling 140,932 211,063
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Profit (loss) from operations 241,628 (674,485)
Interest expense (154,820) (38,070)
Interest income & other, net 24,969 59,831
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Earnings (loss) before taxes 111,777 (652,724)
Benefit from taxes -- 261,089
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Net earnings (loss) $ 111,777 $ (391,635)
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----------- -----------
Earnings (Loss) Per Common Share:
Basic
Net earnings (loss) $ 0.02 $ (0.07)
----------- -----------
----------- -----------
Diluted
Net earnings (loss) $ 0.02 $ (0.07)
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Weighted average common shares outstanding:
Basic 5,570,365 5,282,487
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----------- -----------
Diluted 6,184,258 5,282,487
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED STATEMENTS.
4
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------------- PAID-IN
ADDITIONAL CAPITAL
PAR PAR PAID-IN WARRANTS ACCUMULATED
SHARES VALUE SHARES VALUE CAPITAL OUTSTANDING (DEFICIT) TOTAL
------ ----- --------- ------- ----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1999 -- $ -- 5,365,101 $53,651 $ 7,613,014 $ -- $(5,772,142) $ 1,894,523
Issuance of shares pursuant
to private placement 225,000 2,250 447,750 450,000
Issuance of convertible
preferred stock, net of
issuance costs of $137,409 15,510 155 1,413,436 1,413,591
Issuance of preferred stock
warrants (153,218) 153,218 --
Vesting of below market stock
option grants 13,800 13,800
Issuance of debt warrants 268,952 268,952
Issuance of shares pursuant
to exercise of stock options 250 3 372 375
Net income 111,777 111,777
------ ----- --------- ------- ----------- -------- ----------- -----------
BALANCE, JUNE 30, 1999 15,510 $ 155 5,590,351 $55,904 $ 9,335,154 $422,170 $(5,660,365) $ 4,153,018
------ ----- --------- ------- ----------- -------- ----------- -----------
------ ----- --------- ------- ----------- -------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED STATEMENTS
5
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
June 30,
-----------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 111,777 $ (391,635)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 161,790 81,885
Non-cash compensation expense 13,800 --
Deferred income taxes -- (261,089)
(Increase) decrease in accounts receivable (299,818) 512,509
Increase in inventories (147,785) (340,901)
Decrease in prepaid expenses and other assets 161,645 50,161
(Decrease) increase in accounts payable
and accrued expenses (109,894) 204,924
Decrease in accrued restructuring costs (129,934) --
Increase in deferred revenue 49,434 132,295
Decrease in other non-current liabilities -- (7,517)
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NET CASH USED IN OPERATING ACTIVITIES (188,985) (19,368)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (143,099) (713,931)
Decrease in bond funds held by trustee -- 336,980
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NET CASH USED IN INVESTING ACTIVITIES (143,099) (376,951)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments of) proceeds from short term borrowings, net (644,445) 338,357
Repayments of long-term debt (167,960) (5,605)
Capital lease obligations 92,214 (7,516)
Net proceeds from sale of stock 1,863,966 208
Deferred financing costs (1,298) --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,142,477 325,444
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 810,393 (70,875)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 410,595 3,041,705
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,220,988 $ 2,970,830
----------- -----------
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CASH PAID DURING THE PERIOD FOR:
Interest $ 154,820 $ 38,071
Income taxes $ -- $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED STATEMENTS.
6
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Chesapeake Biological Laboratories, Inc. ("CBL" or the "Company") is a
provider of pharmaceutical and biopharmaceutical parenteral product
development and production services on a contract basis for a broad range
of customers, from major international pharmaceutical firms to emerging
biotechnology companies. Since 1990, CBL has provided its parenteral
product development services to more than 100 pharmaceutical and
biotechnology companies and has contributed to the development and
production of more than 100 therapeutic products intended for human
clinical trials. Customers contract with the Company to produce development
stage products for use in U.S. Food and Drug Administration ("FDA")
clinical trials and to produce and manufacture FDA approved parenteral
products for commercial sale. The Company's business depends in part on
strict government regulation of the drug development process, especially in
the United States. CBL's production facilities operate under the current
Good Manufacturing Practices ("cGMP") established and regulated by the FDA.
The Company's operations are treated as one operating segment,
pharmaceutical and biopharmaceutical product development and production
services, as it only reports profit and loss information on an aggregate
basis to operating management of the Company.
During the fiscal year ended March 31, 1999, the Company successfully
validated and completed the FDA initial inspection of the new Camden
production facility, and reorganized and expanded the sales and marketing
organization to utilize the additional capacity now available to the
Company. The Company also initiated a management reorganization, including
hiring a new President and Chief Executive Officer, implemented a workforce
reduction and began to consolidate all production into the Camden facility.
These actions were taken to address the Company's recent significant
operating losses which resulted from costs associated with the start-up of
the new Camden facility and the related delay in the new sales and
marketing programs. The implementation of these plans have resulted in a
positive sales trend in the first quarter of the current fiscal year 2000
and the recent signing of new customer agreements. Additionally as
described in note 6, in first fiscal quarter of 2000, the Company raised
$1.9 million, net of related fees of approximately $137,000, in private
placements of common and convertible preferred stock. During June 1999, the
Company also negotiated revised loan covenants with its primary lender
allowing the Company to be in compliance at March 31, 1999 and for the
first quarter of the current fiscal year (see Note 3). The Company is
required to achieve substantial growth in revenues and improvement in
operating results over the prior year in order to meet these covenants and
its obligations through March 31, 2000. Management believes its plans will
generate sufficient cash resources to meet its covenants and cash needs
through at least April 2000. However, there can be no assurance that this
will occur.
2. INVENTORIES
Inventories consisted of the following at:
June 30,1999 March 31,1999
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Raw materials $273,110 $273,506
Work-in-process 365,852 217,671
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$638,962 $491,177
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3. LONG TERM DEBT
Under the documentation applicable to the bond financing, the Company is
obligated to maintain certain financial ratios and balances, including a
minimum tangible net worth, a liability to net worth ratio, an EBITDA ratio
and current ratio, all as defined and established in the applicable
documents. As of March 31, 1999, the Company was not in compliance on three
covenants due to the fiscal year operating loss. The EBITDA ratio covenant
had been waived as of March 31, 1998 through fiscal 1999. Subsequent to
March 31, 1999, the Bank modified the covenants as of March 31, 1999 and
for the fiscal year ending March 31, 2000. As of June 30,1999, the Company
was in compliance with modified covenants. In return for the covenant
modifications, the Company agreed to issue warrants for 75,000 shares of
Class A Common stock at $2.25 per share, which was the market price at the
date of the agreement. Using the Black-Scholes option pricing model, these
warrants have a fair value of $268,952 and are included as Additional
Paid-in Capital - Warrants Outstanding in the accompanying balance sheet at
June 30, 1999. As this amount represents debt issuance costs which are
being amortized as interest expense over the life of the related debt.
7
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board, (FASB), issued a
Statement of Financial Accounting Standards, ("SFAS"), No. 128, and
"Earnings per Share". SFAS 128 simplifies the standards for computing
earnings per share ("EPS") previously found in APB Opinion No. 15,
"Earnings per Share". It replaces the presentation of primary EPS with a
presentation of basic EPS and requires a reconciliation of the numerator
and denominator of the diluted EPS calculation. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted EPS is computed similarly to primary EPS pursuant to APB Opinion
No. 15. The adoption of SFAS 128 did not have a significant impact on the
Company for the three months ended June 30, 1999. Earnings per share
information for prior quarters reflect the new requirements.
5. RESTRUCTURING CHARGES
In the fourth quarter of fiscal year 1999, the Company implemented a
realignment of management, a workforce reduction and decided to close its
Seton experimental facility during fiscal year 2000 and consolidate its
operation into the new Camden facility. The workforce reduction resulted in
the termination of full time and temporary employees. This action in
addition to other non-personnel cost reductions resulted in a restructuring
charge of $1.2 million in fiscal 1999. The realignment and the workforce
reduction resulted in a charge of $693,000 in fiscal year 1999 and $548,000
was provided for the closing of the Seton facility for a total
restructuring charge of $1.2 million of which $1.1 million remained as of
March 31, 1999.
Restructuring expenses totaling $129,000 were charged against the
accrual in current fiscal quarter. Of the remaining accrual balance of
$955,000, $418,000 is classified in current liabilities as accrued
restructuring cost and is expected to be paid over the next 12 months, with
the remaining balance of $537,000 recorded as a non-current liability.
6. STOCKHOLDER'S EQUITY
In April 1999, the Company raised $450,000 through the private placement
sale of 225,000 shares of its Common Stock to eight investors. The
investors include board members Thomas P. Rice, Harvey L. Miller, Regis F.
Burke, and Narlin B. Beaty. The proceeds from the sale will be used for
general corporate purposes.
In May 1999, the Company also raised $1.4 million, net of related costs of
approximately $137,000, through the sale of 15,510 shares of its Series A-1
convertible Preferred Stock (the "Preferred Stock") together with warrants
to purchase an aggregate of 51,700 shares of the Company's Common Stock at
an exercise price of $1.50 per share. Under the terms of the Preferred
Stock, the investors are permitted, as a separate class, to elect one
person to the Company's Board of Directors. The proceeds from the sale will
be used for general corporate purposes.
In connection with the issuance of the Series A-1 convertible Preferred
Stock, the Company issued warrants to purchase 51,700 shares of the
Company's Common Stock at an exercise price of $1.50 per share. Using the
Black-Scholes option pricing model, the fair value of these warrants is
$153,218 and have been included as Additional Paid-in Capital - Warrants
Outstanding in the accompanying balance sheet as of June 30, 1999.
8
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The management discussion below should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Operating revenues were $2,449,000 for the quarter ended June 30,1999 compared
to $1,117,000 for the comparable quarter in the previous fiscal year. Revenues
for the first quarter were primarily from non-commercial development and
production of FDA clinical trial supplies, which is representative of the
Company's historical business. CBL has experienced increasing demand for this
business. There was a 55% increase in number of customers serviced during the
first quarter of the fiscal year as compared to the same quarter of the prior
year.
Gross profit for the quarter was $685,000 compared to a loss of $91,000 for the
comparable period last year. The primary factors in the gross profit improvement
include the overall increase in the revenues for the Company as a whole and
production volume in the new Camden facility, which during the first quarter of
last fiscal year was being validated and therefore not operational.
General and administration expenses decreased $70,000 to $303,000 as a result
of the general management reorganization during the fourth quarter of the
fiscal year ended March 31,1999. General and administration expenses were 12%
of operating revenues for the quarter compared to 33% for the quarter in the
prior year. Selling expenses for the quarter were $70,000 below expenses for
the same period as the prior year. Selling expenses for this quarter in the
previous fiscal year included $71,000, related to a non-recurring sales
expense. As a percentage of operating revenues these expenses decreased to 6%
from 19% for the comparable quarter in the prior year.
As a result of the increased operating revenues and cost reductions, operating
income for the quarter was $242,000 or 10% of revenues as compared to a
quarterly operating loss of $675,000 for the quarter in the previous fiscal
year.
Interest expense for the quarter was $155,000 in the current year compared to
$38,000 for the quarter in the prior year. During the comparable quarter of the
prior year interest related to the construction of the new facility was being
capitalized. The current year includes interest expense applicable to the entire
facility which, is now fully operational.
Due to the net operating losses generated during the previous fiscal year ended
March 31,1999, there is no tax liability related to the current quarter income
resulting in $112,000 net income for the quarter. The pre-tax losses of
$653,000, incurred during the first quarter last year was reduced by a tax
benefit resulting in a net loss of $392,000.
FINANCIAL CONDITION AND LIQUIDITY
On June 30, 1999 CBL had cash and cash equivalents of $1,221,000 compared to
$411,000 March 31, 1999. These balances do not include $350,000 held as
collateral for the Company's obligation under the Letter of Credit and
Reimbursement Agreement with First Union National Bank of North Carolina,
pursuant to which, a letter of credit was issued as credit enhancement for bonds
issued by the Maryland Industrial Development Financing Authority. The proceeds
of these bonds were used by the Company to finance a portion of the purchase
price, renovation and equipping of the Camden production facility.
The Company continues to maintain a $750,000 Revolving Line of Credit from First
Union National Bank of Maryland. There was no outstanding balance as of June
30,1999, as the Company used a portion of the proceeds from the May 1999 equity
placement to pay down the line of credit which had an outstanding balance of
$644,000 as of March 31,1999.
9
In May 1999 the Company completed two private placements of equity securities
grossing $2.0 million, before expenses. The equity includes 225,000 shares of
common stock with proceeds of $450,000 purchased by a group led by Company
officers and Directors. An investment banking and management firm purchased
15,510 shares of convertible Preferred Stock for $1,551,000. The shares of
preferred stock may be converted into 1,034,000 shares of common stock using
the current conversion ratios. In addition, warrants to purchase 51,700
shares of the Company's common stock were issued with this placement.
The $810,000 increase in the cash position during the quarter was the result of
several factors, including the equity placements, operating profits and
depreciation. This was offset in part by the pay down of the March 31, 1999,
Revolving Credit balance, capital expenditures and the increase in the accounts
receivable and inventory balances required to support the operating revenue
increase. Management believes that based on the current financial position, its
operating plan will generate sufficient cash resources to meet its covenants and
cash needs through at least April 2000. However the can be no assurance this
will occur.
YEAR 2000 ISSUE
The year 2000 issue, (Y2K) refers to computer applications using only the last
two digits to refer to a year rather than all four digits. As a result, some
applications could fail or create incorrect results if they interpret "00" as
the year 1900 rather than 2000. The Company addressed the Y2K situation during
the construction of the Camden facility.
In conjunction with the Company's expansion of its commercial production
capabilities, the Company has upgraded both its computer hardware and software.
Management believes the upgrades will resolve the Y2K issue for the Company. The
equipment installed in the Company's new commercial production facility over the
past two years is certified by the suppliers as Y2K compliant.
Due to the nature of CBL's business, it is unlikely that a customer with a Y2K
problem would adversely effect CBL to any significant degree. CBL does not
expect to be dependent on one customer or a small group of customers, which
limits CBL's exposure if some customers have not resolved their Y2K problems.
The Company is working on contingency plans which include increasing inventory
levels and potential staff adjustments. There can be no assurance that these
contingency plans will be successful. There have been no material changes in
plans or costs since the Company's fiscal year-end on March 31, 1999.
STATEMENTS REGARDING FORWARD-LOOKING DISCLOSURE
Certain information contained in this Report includes forward-looking statements
which can be identified by the use of forward-looking terminology such as "may",
"will", "expect", "should", "believes", "anticipates", "intends", or words of
similar import. These statements may involve risks and uncertainties, as
outlined in Item 1 of the Company's March 31, 1999, Form 10-K that could cause
actual results to differ materially from those described in the statements.
These risks and uncertainties include (without limitation) general economic and
business conditions, changes in business strategy or development plans, and
others. Given these uncertainties, the reader is cautioned not to place undo
reliance on such forward-looking statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 5. OTHER INFORMATION
None
10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
10.22 Employment agreement dated as of March 22, 1999 by
and between the Registrant and John. T. Botek
10.23 Letter agreement dated as of June 22, 1999 by and
between the Registrant and William P. Tew, Ph.D.
27 -- Financial Data Schedule
b. REPORTS ON FORM 8-K:
An 8-K on the private placements of $2.0 million on the
convertible preferred and common stock was filed by the
Registrant during the quarter for which this report is
filed.
11
SIGNATURES
Pursuant to the requirement 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.
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
By: /s/ Thomas P. Rice By: /s/ John T. Janssen
------------------------ -------------------------
Thomas P. Rice John T. Janssen
President and Treasurer and
Chief Executive Officer Chief Financial Officer
12