UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM 10-Q
(Mark One)
 |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 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 Exchange Act).
| Yes
|
No
|
As of September 30, 2004 there were 19,252,465 outstanding shares of the Registrant’s common stock, par value $.01 per share.
STRATEGIC DIAGNOSTICS INC.
INDEX
1
PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
| September 30, | December 31, | |||||||
| 2004 | 2003 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 7,444 | $ | 5,158 | ||||
| Receivables, net | 3,629 | 3,795 | ||||||
| Inventories | 3,113 | 3,230 | ||||||
| Deferred tax asset | 965 | 1,336 | ||||||
| Other current assets | 463 | 502 | ||||||
| Total current assets | 15,614 | 14,021 | ||||||
| Property and equipment, net | 3,593 | 3,947 | ||||||
| Other assets | 3 | 3 | ||||||
| Deferred tax asset | 8,385 | 8,347 | ||||||
| Intangible assets, net | 6,838 | 6,957 | ||||||
| Total assets | $ | 34,433 | $ | 33,275 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 711 | $ | 788 | ||||
| Accrued expenses | 1,638 | 1,342 | ||||||
| Current portion of long term debt | 321 | 211 | ||||||
| Total current liabilities | 2,670 | 2,341 | ||||||
| Long-term debt | 825 | 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, 19,252,465 and 19,200,488
issued and outstanding at September 30, 2004 and December 31, 2003, respectively |
192 | 192 | ||||||
| Additional paid-in capital | 36,267 | 36,140 | ||||||
| Accumulated deficit | (5,425 | ) | (6,262 | ) | ||||
| Deferred compensation | (178 | ) | (192 | ) | ||||
| Cumulative translation adjustments | 82 | 73 | ||||||
| Total stockholders’ equity | 30,938 | 29,951 | ||||||
| Total liabilities and stockholders’ equity | $ | 34,433 | $ | 33,275 | ||||
The accompanying notes are an integral part of these statements.
2
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
| Three Months | Nine Months | |||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||
| NET REVENUES: | ||||||||||||||
| Product related | $ | 5,546 | $ | 6,414 | $ | 17,316 | $ | 19,196 | ||||||
| Contract and other | — | 2 | — | 117 | ||||||||||
| Total net revenues | 5,546 | 6,416 | 17,316 | 19,313 | ||||||||||
| OPERATING EXPENSES: | ||||||||||||||
| Manufacturing | 2,487 | 3,045 | 7,483 | 8,762 | ||||||||||
| Research and development | 610 | 652 | 1,908 | 1,986 | ||||||||||
| Selling, general and administrative | 2,114 | 2,266 | 6,786 | 7,268 | ||||||||||
| Total operating expenses | 5,211 | 5,963 | 16,177 | 18,016 | ||||||||||
| Operating income | 335 | 453 | 1,139 | 1,297 | ||||||||||
| Interest income (expense), net | 17 | (11 | ) | 31 | (34 | ) | ||||||||
| Income before taxes | 352 | 442 | 1,170 | 1,263 | ||||||||||
| Income tax expense | 81 | 178 | 333 | 453 | ||||||||||
| Net income | 271 | 264 | 837 | 810 | ||||||||||
| Basic net income per share | $ | 0.01 | $ | 0.01 | $ | 0.04 | $ | 0.04 | ||||||
| Shares used in computing basic net income per share | 19,250,000 | 18,989,000 | 19,241,000 | 18,957,000 | ||||||||||
| Diluted net income per share | $ | 0.01 | $ | 0.01 | $ | 0.04 | $ | 0.04 | ||||||
| Shares used in computing diluted net income per share | 19,432,000 | 19,541,000 | 19,606,000 | 19,526,000 | ||||||||||
The accompanying notes are an integral part of these statements.
3
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
Nine
Months |
||||||
2004 |
2003 |
|||||
| Cash Flows from Operating Activities: | ||||||
| Net income | $ | 837 | $ | 810 | ||
Adjustments
to reconcile net income to net cash
provided by operating activities: |
||||||
| Depreciation and amortization | 712 | 642 | ||||
| Deferred income tax provision | 333 | 453 | ||||
| (Increase) decrease in: | ||||||
| Receivables | 166 | (292 | ) | |||
| Inventories | 117 | 172 | ||||
| Other current assets | 39 | (174 | ) | |||
| Other assets | — | 32 | ||||
| Increase (decrease) in: | ||||||
| Accounts payable | (77 | ) | (317 | ) | ||
| Accrued expenses | 296 | 880 | ||||
| Net cash provided by operating activities | 2,423 | 2,206 | ||||
| Cash Flows from Investing Activities: | ||||||
| Purchase of property and equipment | (182 | ) | (200 | ) | ||
| Purchase of intangible assets | — | (70 | ) | |||
| Net cash used in investing activities | (182 | ) | (270 | ) | ||
| Cash Flows from Financing Activities: | ||||||
| Proceeds from exercise of incentive stock options | 73 | 78 | ||||
| Proceeds from employee stock purchase plan | 11 | 13 | ||||
| Proceeds from issuance of long and short term debt | 551 | 372 | ||||
| Repayments on financing obligations | (599 | ) | (502 | ) | ||
| Net cash provided by (used in) financing activities | 36 | (39 | ) | |||
| Effect of exchange rate changes on cash | 9 | 45 | ||||
| Net increase in cash and cash equivalents | 2,286 | 1,942 | ||||
| Cash and cash equivalents, beginning of period | 5,158 | 2,098 | ||||
| Cash and cash equivalents, end of period | $ | 7,444 | $ | 4,040 | ||
| Supplemental Cash Flow Disclosure: | ||||||
| Cash paid for taxes | 5 | 4 | ||||
| Cash paid for interest | 38 | 52 | ||||
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 consolidated 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 nine months ended September 30, 2004 and 2003, revenues from these sales represented 79% and 78%, 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 nine months ended September 30, 2004 and 2003, revenues from these sales represented 21% of total Company revenues.
Contract revenues are recognized upon the completion of contractual milestones. For the nine months ended September 30, 2003 these sales represented 1% 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, deferred tax assets and percentage of completion projects for revenue recognition. Actual results could differ from these estimates.
Comprehensive Income
Comprehensive income consists of the following for each period:
| Three
Months Ended September 30, |
Nine
Months Ended September 30, |
|||||||||||
| |
|
|
||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| |
||||||||||||
| Net income | $ | 271 | $ | 264 | $ | 837 | $ | 810 | ||||
| Currency translation adjustment | (5 | ) | — | 9 | 45 | |||||||
| |
||||||||||||
| Total comprehensive income | $ | 266 | $ | 264 | $ | 846 | $ | 855 | ||||
| |
||||||||||||
| 2. | BASIC AND DILUTED INCOME (LOSS) PER SHARE: |
Basic earnings per share (EPS) is computed by dividing net income 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 exercising stock options and warrants into common shares.
As of September 30, 2004, options to purchase 2,255,000 shares of the Company’s common stock were outstanding, with options to purchase approximately 1,501,000 shares exercisable. Listed below are the basic and diluted share calculations.
6
| Three Months Ended | Nine Months Ended | |||||||
| September 30, | September 30, | |||||||
| 2004 | 2003 | 2004 | 2003 | |||||
| Average common shares outstanding | 19,250,125 | 18,988,923 | 19,241,063 | 18,956,842 | ||||
Shares
used in computing basic net income per share |
19,250,125 | 18,988,923 | 19,241,063 | 18,956,842 | ||||
| Stock options | 180,936 | 550,614 | 363,842 | 568,142 | ||||
| Warrants | 1,040 | 1,040 | 1,040 | 1,040 | ||||
Shares
used in computing diluted net income per share |
19,432,101 | 19,540,577 | 19,605,945 | 19,526,024 | ||||
| 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 employees 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.
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.
7
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
|
|
|
|||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| Net income, as reported | $ | 271 | $ | 264 | $ | 837 | $ | 810 | ||||
Add:
Stock-based employee compensation expense included in
reported net income, net of related tax effects |
— | 7 | — | 8 | ||||||||
Deduct:
Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects |
(273 | ) | (189 | ) | (818 | ) | (495 | ) | ||||
| Pro forma net income (loss) | $ | (2 | ) | $ | 82 | $ | 19 | $ | 323 | |||
| Earnings per share: | ||||||||||||
| Basic—as reported | $ | 0.01 | $ | 0.01 | $ | 0.04 | $ | 0.04 | ||||
| Basic—pro forma | $ | — | $ | — | $ | — | $ | 0.02 | ||||
| Diluted—as reported | $ | 0.01 | $ | 0.01 | $ | 0.04 | $ | 0.04 | ||||
| Diluted—pro forma | $ | — | $ | — | $ | — | $ | 0.02 | ||||
| 4. | INVENTORIES: |
The Company’s inventories, which consist primarily of test kit components, bulk serum and antibody products, are valued at the lower of cost or market. Cost is determined using the first in, first out method. At September 30, 2004 and December 31, 2003, inventories consisted of the following:
| September 30, 2004 | December 31, 2003 | |||||
| Raw materials | $ | 1,399 | $ | 1,246 | ||
| Work in progress | 465 | 578 | ||||
| Finished goods | 1,249 | 1,406 | ||||
| $ | 3,113 | $ | 3,230 | |||
| 5. | INTANGIBLE ASSETS: |
At September 30, 2004 and December 31, 2003, intangible assets consisted of the following:
| September 30, 2004 | December 31, 2003 | |||||
| Goodwill | $ | 5,168 | $ | 5,168 | ||
| Other | 2,800 | 2,800 | ||||
| Less – accumulated amortization | (1,130 | ) | (1,011 | ) | ||
| Net intangible assets | $ | 6,838 | $ | 6,957 | ||
8
| 6. | DEBT: |
On May 5, 2000, the Company entered into a financing agreement with a commercial bank. This agreement provides for a $4,000 term loan, all of which had been paid on or before December 31, 2002, and for a revolving line of credit of up to $5,000, none of which was outstanding and approximately $2,575 of which was available at September 30, 2004, based on eligible assets.
The revolving line of credit bears a variable interest rate of between 1.75% and 2.75% over the London Interbank Offered Rate (LIBOR) depending upon the ratio of the Company’s funded debt to EBITDA, and is subject to a borrowing base determined by the Company’s eligible accounts receivable. The Company’s annual effective rate of interest on this line of credit, taking into account the variable interest rate and LIBOR, was approximately 3.39% at September 30, 2004.
On December 13, 2001 the Company entered into an agreement with a commercial bank to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $1,500 in financing, $1,036 of which was outstanding at September 30, 2004, and is repayable over seven years, with principal payments that began on October 1, 2002. The loan bears a variable interest rate of between 2% and 3% over LIBOR depending upon the ratio of the Company’s funded debt to EBITDA. Payments are due monthly, with equal amortization of principal payments plus interest. The Company’s annual effective rate of interest on this loan at September 30, 2004 was approximately 3.64%.
Under the terms of the above financings, the Company is required to meet certain quarterly financial covenants. The loan covenants were modified to a minimum quick ratio of 2.25 and a minimum tangible net worth of $22,500 for the first three quarters of 2003, and the Company met the requirements during those periods. Beginning with the fourth quarter of 2003, the original provisions of the loan agreement regarding financial covenants became operative, namely a ratio of EBITDA to current maturities of debt plus interest and cash paid for taxes greater than 1.50 and a ratio of funded debt to EBITDA not to exceed 3.25. The Company was not in compliance with these fourth quarter 2003 covenants at December 31, 2003. In February 2004, the Company and the lender agreed to amend the terms of the EBITDA covenants, effective as of December 31, 2003, to exclude the impact of up to $3,315 of charges the Company incurred in the fourth quarter 2003, and therefore, the Company met the covenant requirements for the fourth quarter 2003. Under the amended covenant, the Company was in compliance with these required ratios at September 30, 2004 and expects that it will be able to meet all of its financial covenants with respect to this indebtedness for the next twelve months.
As of September 30, 2004, the outstanding balance on all of the Company’s commercial bank debt was $1,036. This indebtedness is secured by substantially all of the Company’s assets.