UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________________
FORM 10-Q
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
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 000-22400
| STRATEGIC DIAGNOSTICS INC. |
| (Exact name of Registrant as specified in its charter) |
____________________________
| Delaware | 56-1581761 | |
| (State or other jurisdiction of | (I.R.S. employer | |
| incorporation or organization) | identification no.) |
| 111 Pencader Drive | ||
| Newark, Delaware | 19702 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (302) 456-6789
____________________
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 No
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes No
As of March 31, 2004 there were 19,235,546 outstanding shares of the Registrant’s common stock, par value $.01 per share.
STRATEGIC DIAGNOSTICS INC.
INDEX
Item 1. FINANCIAL STATEMENTS
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
| March 31, | December 31, | ||||||||||||
| 2004 | 2003 | ||||||||||||
| ASSETS | |||||||||||||
| Current Assets: | |||||||||||||
| Cash and cash equivalents | $ | 5,950 | $ | 5,158 | |||||||||
| Receivables, net | 4,195 | 3,795 | |||||||||||
| Inventories | 3,198 | 3,230 | |||||||||||
| Deferred tax asset | 1,137 | 1,336 | |||||||||||
| Other current assets | 743 | 502 | |||||||||||
| Total current assets | 15,223 | 14,021 | |||||||||||
| Property and equipment, net | 3,834 | 3,947 | |||||||||||
| Other assets | 3 | 3 | |||||||||||
| Deferred tax asset | 8,347 | 8,347 | |||||||||||
| Intangible assets, net | 6,918 | 6,957 | |||||||||||
| Total assets | $ | 34,325 | $ | 33,275 | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||
| Current Liabilities: | |||||||||||||
| Accounts payable | $ | 632 | $ | 788 | |||||||||
| Accrued expenses | 1,684 | 1,342 | |||||||||||
| Current portion of long term debt | 652 | 211 | |||||||||||
| Total current liabilities | 2,968 | 2,341 | |||||||||||
| Long-term debt | 931 | 983 | |||||||||||
| Stockholders’ Equity: | |||||||||||||
| Preferred stock, $.01 par value, 20,920,648 shares authorized, | |||||||||||||
| no shares issued or outstanding | — | — | |||||||||||
| Common stock, $.01 par value, 35,000,000 shares authorized, | |||||||||||||
| 19,235,546 and 19,200,488 issued and outstanding | |||||||||||||
| at March 31, 2004 and December 31, 2003, respectively | 192 | 192 | |||||||||||
| Additional paid-in capital | 36,165 | 36,140 | |||||||||||
| Accumulated deficit | (5,844 | ) | (6,262 | ) | |||||||||
| Deferred compensation | (184 | ) | (192 | ) | |||||||||
| Cumulative translation adjustments | 97 | 73 | |||||||||||
| Total stockholders’ equity | 30,426 | 29,951 | |||||||||||
| Total liabilities and stockholders’ equity | $ | 34,325 | $ | 33,275 | |||||||||
The accompanying notes are an integral part of these statements.
2
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
| Three Months Ended March 31, |
||||||||||||||||
| 2004 | 2003 | |||||||||||||||
| NET REVENUES: | ||||||||||||||||
| Product related | $ | 6,350 | $ | 6,365 | ||||||||||||
| Contract and other | — | 115 | ||||||||||||||
| Total net revenues | 6,350 | 6,480 | ||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Manufacturing | 2,520 | 2,853 | ||||||||||||||
| Research and development | 689 | 716 | ||||||||||||||
| Selling, general and administrative | 2,528 | 2,387 | ||||||||||||||
| Total operating expenses | 5,737 | 5,956 | ||||||||||||||
| Operating income | 613 | 524 | ||||||||||||||
| Interest income (expense), net | 4 | (12 | ) | |||||||||||||
| Income before taxes | 617 | 512 | ||||||||||||||
| Income tax expense | 199 | 177 | ||||||||||||||
| Net income | 418 | 335 | ||||||||||||||
| Basic net income per share | $ | 0.02 | $ | 0.02 | ||||||||||||
| Shares used in computing basic | ||||||||||||||||
| net income per share | 19,211,000 | 18,939,000 | ||||||||||||||
| Diluted net income per share | $ | 0.02 | $ | 0.02 | ||||||||||||
| Shares used in computing diluted | ||||||||||||||||
| net income per share | 19,742,000 | 19,495,000 | ||||||||||||||
The accompanying notes are an integral part of these statements.
3
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
(unaudited)
| Three Months Ended March 31, |
||||||||||||||
| 2004 | 2003 | |||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||
| Net income | $ | 418 | $ | 335 | ||||||||||
| Adjustments to reconcile net income to net | ||||||||||||||
| cash provided by (used in) operating activities: | ||||||||||||||
| Depreciation and amortization | 227 | 214 | ||||||||||||
| Deferred income tax provision | 199 | 177 | ||||||||||||
| (Increase) decrease in: | ||||||||||||||
| Receivables | (400 | ) | (551 | ) | ||||||||||
| Inventories | 32 | 113 | ||||||||||||
| Other current assets | (237 | ) | (468 | ) | ||||||||||
| Other assets | — | 14 | ||||||||||||
| Increase (decrease) in: | ||||||||||||||
| Accounts payable | (156 | ) | (284 | ) | ||||||||||
| Accrued expenses | 342 | 437 | ||||||||||||
| Net cash provided by (used in) operating activities | 425 | (13 | ) | |||||||||||
| Cash Flows from Investing Activities: | ||||||||||||||
| Purchase of property and equipment | (71 | ) | (21 | ) | ||||||||||
| Net cash used in investing activities | (71 | ) | (21 | ) | ||||||||||
| Cash Flows from Financing Activities: | ||||||||||||||
| Proceeds from exercise of incentive stock options | 21 | — | ||||||||||||
| Proceeds from employee stock purchase plan | 4 | 5 | ||||||||||||
| Proceeds from issuance of long and short term debt | 551 | 328 | ||||||||||||
| Repayments on financing obligations | (162 | ) | (120 | ) | ||||||||||
| Net cash provided by financing activities | 414 | 213 | ||||||||||||
| Effect of exchange rate changes on cash | 24 | (9 | ) | |||||||||||
| Net increase in Cash and Cash Equivalents | 792 | 170 | ||||||||||||
| Cash and Cash Equivalents, Beginning of Period | 5,158 | 2,098 | ||||||||||||
| Cash and Cash Equivalents, End of Period | $ | 5,950 | $ | 2,268 | ||||||||||
| Supplemental Cash Flow Disclosure: | ||||||||||||||
| Cash paid for taxes | 5 | 4 | ||||||||||||
| Cash paid for interest | 12 | 17 | ||||||||||||
The accompanying notes are an integral part of these statements
4
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
(in thousands, except share and per share data)
(unaudited)
1. BACKGROUND:
Business
Strategic Diagnostics Inc. and its subsidiaries (the “Company”) develop, manufacture and market immunoassay and bioluminescence-based test kits for rapid and cost-effective detection of a wide variety of substances in the food safety and water quality markets and provide antibody and immunoreagent research, development and production services.
Basis of Presentation and Interim Financial Statements
The accompanying unaudited consolidated interim financial statements of 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, 2003. In the opinion of management, the accompanying financial statements include all adjustments (all of which are of a normal recurring nature) necessary for a fair presentation of the results of operation.
Revenue Recognition
Product related revenues are composed of the sale of immunoassay-based test kits and the sale of certain antibodies and immunochemical reagents. Revenue from sales of immunoassay-based test kits and certain antibodies and immunochemical reagents are recognized upon the shipment of the product and transfer of title or when related services are provided. For the three months ended March 31, 2004 and 2003, revenues from these sales represented 78% and 77%, respectively, of total Company revenues.
Revenues from sales of certain antibodies and immunochemical reagents are recognized under the percentage of completion method and are recorded based on the percentage of costs or time incurred through the reporting date versus the estimate for the entire contract or project. For the three months ended March 31, 2004 and 2003, revenues from these sales represented 22% and 21%, respectively, of total Company revenues.
Contract revenues are recognized upon the completion of contractual milestones. For the three months ended March 31, 2003 these sales represented 2% of total Company revenues.
5
Use of Estimates
The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. These estimates include those made in connection with assessing the valuation of accounts receivable, inventories and deferred tax assets. Actual results could differ from these estimates.
2. BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Basic earnings (loss) per share (EPS) is computed by dividing net income or loss available for common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is similar to basic EPS, except that the dilutive effect of converting or exercising all potentially dilutive securities is also included in the denominator. The Company’s calculation of diluted EPS includes the dilutive effect of converting preferred stock and exercising stock options and warrants into common shares. Basic loss per share excludes potentially dilutive securities.
As of March 31, 2004, options to purchase 2,189,000 shares of the Company’s common stock were outstanding, with options to purchase approximately 1,327,000 shares exercisable. Listed below are the basic and diluted share calculations.
| Three Months Ended March 31, |
|||||
| 2004 | 2003 | ||||
| Average common shares outstanding | 19,211,292 | 18,938,832 | |||
| Shares used in computing basic | |||||
| net income per share | 19,211,292 | 18,938,832 | |||
| Stock options | 529,607 | 554,823 | |||
| Warrants | 1,040 | 1,040 | |||
| Shares used in computing diluted | |||||
| net income per share | 19,741,939 | 19,494,695 | |||
3. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock Based Compensation-Transition and Disclosures. This statement amends the requirements of SFAS No. 123, Accounting for Stock Based Compensation. As permitted by SFAS No. 148, the Company applies the intrinsic-value-based method to account for its fixed-plan stock options. Compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”. Under the Company’s employee share option plans, the Company grants employee and outside directors stock options at an exercise price equal to the fair market value at the date of grant. No compensation expense is recorded with respect to such stock option grants. Compensation expense with respect to stock awards granted to all others is measured based upon the fair value of such awards and is charged to expense over the vesting period.
6
The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.
| Three Months Ended March 31, |
|||||||
| 2004 | 2003 | ||||||
| Net income, as reported | $ | 418 | $ | 335 | |||
| Add: Stock-based employee compensation expense included in | |||||||
| reported net income, net of related tax effects | — | 1 | |||||
| Deduct: Total stock-based employee compensation expense | |||||||
| determined under fair value based method for all awards, net of | |||||||
| related tax effects | (238 | ) | (140 | ) | |||
| Pro forma net income | $ | 180 | $ | 196 | |||
| Earnings per share: | |||||||
| Basic – as reported | $ | 0.02 | $ | 0.02 | |||
| Basic – pro forma | $ | 0.01 | $ | 0.01 | |||
| Diluted – as reported | $ | 0.02 | $ | 0.02 | |||
| Diluted – pro forma | $ | ||||||