UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
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 March 31, 2003
[ ] 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
--------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report: None
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 ____
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2of the Act). Yes ____ No __X__
As of March 31, 2003 there were 18,938,832 outstanding shares of the
Registrant's common stock, par value $.01 per share.
STRATEGIC DIAGNOSTICS INC.
INDEX
Item Page
- ---- ----
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2003 and December 31, 2002 2
Consolidated Statements of Operations - Three months ended
March 31, 2003 and 2002 3
Consolidated Statement of Stockholders' Equity and
Comprehensive Income - Three months ended
March 31, 2003 4
Consolidated Statements of Cash Flows - Three months ended
March 31, 2003 and 2002 5
Notes to Consolidated Interim Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16
ITEM 4. Controls and Procedures 17
PART II OTHER INFORMATION 19
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
1
Item 1. Financial Statements
PART I
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
March 31, December 31,
- ------------------------------------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 2,268 $ 2,098
Receivables, net 4,507 3,956
Inventories 6,708 6,821
Deferred tax asset 832 1,009
Other current assets 967 499
- ------------------------------------------------------------------------------------------------
Total current assets 15,282 14,383
- ------------------------------------------------------------------------------------------------
Property and equipment, net 3,862 4,013
Other assets 26 40
Deferred tax asset 7,664 7,664
Intangible assets, net 7,024 7,066
- ------------------------------------------------------------------------------------------------
Total assets $ 33,858 $ 33,166
- ------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 740 $ 1,024
Accrued expenses 1,102 665
Current portion of long term debt 472 211
- ------------------------------------------------------------------------------------------------
Total current liabilities 2,314 1,900
- ------------------------------------------------------------------------------------------------
Long-term debt 1,159 1,212
- ------------------------------------------------------------------------------------------------
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,
18,938,832 and 18,937,330 issued and outstanding
at March 31, 2003 and December 31, 2002, respectively 190 190
Additional paid-in capital 35,317 35,312
Accumulated deficit (5,073) (5,408)
Cumulative translation adjustments (49) (40)
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 30,385 30,054
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 33,858 $ 33,166
- ------------------------------------------------------------------------------------------------
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,
- -----------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------
NET REVENUES:
- -----------------------------------------------------------------------------------------
Product related $ 6,365 $ 5,567
Contract and other 115 177
- -----------------------------------------------------------------------------------------
Total net revenues 6,480 5,744
- -----------------------------------------------------------------------------------------
OPERATING EXPENSES:
Manufacturing 2,853 3,111
Research and development 716 756
Selling, general and administrative 2,387 2,823
- -----------------------------------------------------------------------------------------
Total operating expenses 5,956 6,690
- -----------------------------------------------------------------------------------------
Operating income (loss) 524 (946)
Interest expense, net (12) (16)
Gain on sale of assets - 374
- -----------------------------------------------------------------------------------------
Income (loss) before taxes 512 (588)
Income tax expense (benefit) 177 (215)
- -----------------------------------------------------------------------------------------
Net income (loss) 335 (373)
- -----------------------------------------------------------------------------------------
Basic net income (loss) per share $ 0.02 $ (0.02)
=========================================================================================
Shares used in computing basic net income
net income (loss) per share 18,939,000 17,860,000
=========================================================================================
Diluted net income (loss) per share $ 0.02 $ (0.02)
=========================================================================================
Shares used in computing diluted net income
net income (loss) per share 19,495,000 17,860,000
=========================================================================================
The accompanying notes are an integral part of these statements.
3
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Additional Cumulative
Common Paid-In Accumulated Translation
Stock Capital Deficit Adjustments Total
- -------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2002 $ 190 35,312 (5,408) (40) $ 30,054
Employee stock purchase plan - 5 - - 5
Currency translation adjustment - - - (9) (9)
Net income - - 335 - 335
---------------
Total comprehensive income 326
---------------
- -------------------------------------------------------------------------------------------------------------
Balance,
March 31, 2003 $ 190 35,317 (5,073) (49) $ 30,385
=============================================================================================================
4
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months
Ended March 31,
- -----------------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ 335 $ (373)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 214 217
Deferred income tax provision 177 (215)
Gain on sale/disposal of assets - (374)
(Increase) decrease in:
Receivables (551) 495
Inventories 113 167
Other current assets (468) (201)
Other assets 14 90
Increase (decrease) in:
Accounts payable (284) (311)
Accrued expenses 437 (630)
- -----------------------------------------------------------------------------------------------
Net cash used in operating activities (13) (1,135)
Cash Flows from Investing Activities:
Purchase of property and equipment (21) (377)
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (21) (377)
Cash Flows from Financing Activities:
Proceeds from exercise of incentive stock options - 37
Proceeds from employee stock purchase plan 5 17
Proceeds from issuance of long and short term debt 328 554
Proceeds from sale/disposal of assets - 573
Repayments on financing obligations (120) (700)
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 213 481
Effect of exchange rate changes on cash (9) -
Net increase (decrease) in Cash and Cash Equivalents 170 (1,031)
Cash and Cash Equivalents, Beginning of Period 2,098 2,379
- -----------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 2,268 $ 1,348
===============================================================================================
Supplemental Cash Flow Disclosure:
Cash paid for taxes 4 3
Cash paid for interest 17 26
===============================================================================================
Non-cash investing and financing activity:
Note receivable in connection with the sale of assets - 300
===============================================================================================
The accompanying notes are an integral part of these statements
5
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 provides 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 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, 2002. 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. The sale 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, 2003 and
2002 these sales represented 77% and 86% of total Company revenues,
respectively.
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
complete contract or project. For the three months ended March 31, 2003 and 2002
these sales represented 21% and 11% of total Company revenues, respectively.
Contract revenues are recognized upon the completion of contractual milestones.
For the three months ended March 31, 2003 and 2002 these sales represented 2%
and 3% of total Company revenues, respectively.
6
New Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements requires the 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 those 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.
In the three months ended March 31, 2002, the effect of approximately 832,000
equivalent shares of stock options and warrants were excluded from the diluted
shares calculation, because they were anti-dilutive.
Three Months Ended
March 31,
2003 2002
----------------- -----------------
Average common shares outstanding 18,938,832 17,859,979
Shares used in computing basic
net income (loss) per share 18,938,832 17,859,979
================= =================
Series A preferred stock - -
Stock options 554,823 -
Warrants 1,040 -
----------------- -----------------
Shares used in computing diluted
net income (loss) per share 19,494,695 17,859,979
================= =================
7
3. STOCK-BASED COMPENSATION
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations including FASB Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation," an
interpretation of APB Opinion No. 25, issued in March 2000, to account for its
fixed-plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, 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. 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. 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,
2003 2002
-------- -------
Net income (loss), as reported $ 335 $ (373)
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects 1 1
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all
awards, net of related tax effects (140) (128)
-------- -------
Pro forma net income (loss) $ 196 $ (500)
======== =======
Earnings (loss) per share:
Basic--as reported $ 0.02 $ (0.02)
======== =======
Basic--pro forma $ 0.01 $ (0.02)
======== =======
Diluted--as reported $ 0.02 $ (0.02)
======== =======
Diluted--pro forma $ 0.01 $ (0.03)
======== =======
8
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 March 31, 2003 and December
31, 2002, inventories consisted of the following:
March 31, 2003 December 31, 2002
-------------- -----------------
Raw Materials $ 3,344 $ 2,969
Work in progress 787 911
Finished goods 2,577 2,941
------------------------------------------------------------------------
$ 6,708 $ 6,821
========================================================================
5. INTANGIBLE ASSETS:
March 31, 2003 December 31, 2002
-------------- -----------------
Goodwill $ 5,168 $ 5,168
Other 2,730 2,730
Less - accumulated amortization (874) (832)
-------------------------------------------------------------------------
Net intangible assets $ 7,024 $ 7,066
=========================================================================
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 up to a $5,000 revolving line of credit,
none of which was outstanding and approximately $2,696 of which was available at
March 31, 2003, based on eligible assets.
The revolving line of credit bears a variable interest rate of between 1.75% and
2.75% over 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 4.09% at March 31, 2003.
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 provides for up to $1,500 in financing, $1,370 of which
was outstanding at March 31, 2003, and is repayable over seven years, with
principal payments having begun 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 March 31, 2003 was approximately 4.34%.
9
Under the terms of the above financing, the Company is required to meet certain
quarterly financial covenants. The Company was in breach of certain of the these
financial covenants for all four quarters during 2002, and has received a waiver
and suspension of these loan covenants for all four quarters of 2002. The loan
covenants have been modified to a minimum quick ratio of 2.25 and a minimum
tangible net worth ratio of $22,500 for the first three quarters of 2003.
Beginning with the fourth quarter of 2003, the original provisions of the loan
agreement regarding financial covenants will be operative, namely a ratio of
EBITDA to current maturities of debt plus interest and cash paid for taxes and a
ratio of funded debt to EBITDA. The Company was in compliance with the minimum
quick ratio and minimum tangible net worth requirements at March 31, 2003 and
expects to be in compliance with the various financial covenants throughout
2003.
As of March 31, 2003, the outstanding balance on all of the Company's commercial
bank debt was approximately $1,370. This indebtedness is secured by
substantially all of the Company's assets.
In March 2003, the Company entered into an agreement to finance its 2003
insurance premiums with a commercial lender. The agreement provides for $329 in
insurance premium financing, of which approximately $261 was outstanding at
March 31, 2003. Payments are due in nine equal monthly payments ending November
1, 2003. This insurance premium loan bears a fixed annual interest rate of
5.82%.
7. GAIN ON SALE AND DISPOSAL OF ASSETS:
In March 2002, the Company sold most of the remaining assets of its antibody
production facility near San Diego, California. The Company received proceeds of
$600 for the sale of the property, which included a $300 cash payment and a
one-year note from the purchaser for the remaining $300. The note carried an
interest rate of 5% annually, and was payable in three monthly installments of
interest only payments, with the balance being paid over an additional nine
months of principal and interest payments. The note was repaid in full in August
2002. The Company recorded a gain on sale of $131, which represents the amount
the Company received above the carrying value of the assets sold.
In March 2002, the Company reached an agreement with its insurance carrier in
settlement of costs related to a building fire on its Maine property. The
Company has received proceeds of $359 and is carrying an additional $19 on its
balance sheet in accounts receivable as an amount due for the balance of the
insurance settlement. The Company recorded a gain on disposal of $243, which
represents the amount the Company received above its investment in the assets
destroyed.
8. ACQUISITIONS:
On July 8, 2002, the Company purchased certain assets of Molecular Circuitry,
Inc. ("MCI"). The purchased assets consist primarily of various proprietary
media technology that will be used in combination with the Company's new
diagnostic tests for food-borne pathogens including Salmonella and E. coli. The
assets purchased also include the sales and marketing rights to the ruminant
feed test product line that the Company and MCI had been jointly developing in
collaboration with McDonald's Corporation.
10
In consideration for these and other related assets, the Company issued to MCI
600,000 unregistered shares of the Company's common stock with a value of $4.17
per share or $2,502 in the aggregate, computed by averaging the closing price of
the Company's common stock for the period beginning on the two business days
before the acquisition and ending two business days after the acquisition. In
addition the Company will also pay MCI a continuing royalty for ten years on
sales of specified products and/or components of products, which will be charged
to operations if and when incurred.
The assets of MCI were valued by AUS Consultants Valuation Services of New
Jersey (AUS). AUS determined the value of the assets purchased to be $261 in
laboratory equipment (tangible assets) and approximately $2,280 for the
intellectual and property rights to the MCI developed Express Media, Chromagenic
Media and Ruminant Feed Test product lines (intangible assets).
The intangible assets were valued using the income approach. This method
estimates market value as the present value of future economic benefits to be
derived from the exploitation of these assets or product lines. This methodology
requires a forecast of net cash flow from each product line, an estimate of the
relative risk of achieving that income stream, and an estimate as to the
duration of the income. An economic life of twenty years was used in the above
calculations utilizing a discount rate of approximately 25%.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements reflecting the
current expectations of Strategic Diagnostics Inc. and its subsidiaries (the
"Company"). These forward-looking statements include, without limitation,
statements regarding the ability of the Company to compete within the industry,
the ability of the Company to achieve economies of scale and otherwise control
production costs, the adoption by prospective customers of the Company's various
testing products, the outcome of independent third party evaluations of the
Company's testing products, the Company's ability to meet loan covenants in the
future and the Company's ability to obtain necessary capital. In addition, when
used in this Form 10-Q, the words "anticipate", "enable", "estimate", "intend",
"expect", "believe", "potential", "may", "will", "should", "project" and similar
expressions as they relate to the Company are intended to identify said
forward-looking statements. Investors are cautioned that all forward-looking
statements involve risks and uncertainties, which may cause actual results to
differ from those anticipated at this time. Such risks and uncertainties
include, without limitation, changes in demand for products, delays in product
development, delays in market acceptance of new products, retention of
customers, attraction and retention of management and key employees, adequate
supply of raw materials, the successful integration and consolidation of the
Maine production facilities, inability to obtain or delays in obtaining third
party approvals, including American Organization of Analytical Chemists Research
Institute ("AOAC"), or required government approvals, the ability to meet
increased market demand, competition, protection of intellectual property,
non-infringement of intellectual property, seasonality, the ability to obtain
financing and other factors more fully described in the Company's public filings
with the U.S. Securities and Exchange Commission.
11
Background
The Company develops, manufactures and markets 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 also
provides antibody and immunoreagent research, development and production
services.
Since its inception, the Company and its predecessors have, in addition to
conducting internal research and development of new products, entered into
research and development agreements with multiple partners that have led to the
introduction of various products to the food safety, water quality and other
markets. The Company believes that its competitive position has been enhanced
through the combination of talent, technology and resources resulting from the
relationships it developed and the acquisitions it concluded during the past
five years. These relationships and acquisitions have enabled the Company to
achieve meaningful economies of scale for the unique products it offers through
the utilization of its consolidated facilities in Newark, Delaware, for the
manufacture of test kits and antibodies, its facility located in Oceanside,
California, for the manufacture of instruments, and its facility located in
Windham, Maine for the manufacture of antibodies.
On July 8, 2002, the Company purchased certain assets of Molecular Circuitry,
Inc. (MCI). The purchased assets consist primarily of various proprietary growth
media technology that will be used in combination with the Company's diagnostic
tests for food-borne pathogens, including Salmonella and E. coli. The assets
purchased also include the sales and marketing rights to the ruminant feed test
product line that the Company and MCI had been jointly developing in
collaboration with McDonald's Corporation. In consideration for these and other
related assets, the Company issued to MCI 600,000 unregistered shares of the
Company's common stock with a value of $4.17 per share, or $2.5 million in the
aggregate. The per share price was computed by averaging the closing price of
the Company's common stock on the Nasdaq National Market for the period
beginning two business days before the acquisition and ending two business days
after the acquisition, plus an additional $40,000 in transaction- related costs.
In addition, the Company will pay MCI a continuing royalty for 10 years on sales
of specified products and/or components of products, which royalty will be
charged to operations if and when incurred.
On September 28, 2001, the Company acquired AZUR Environmental (AZUR), a
privately-held manufacturer of proprietary rapid test systems, including the
Microtox(R) toxicity test system, which measures toxicity in drinking and
process water. Mentioned in more than 500 peer-reviewed scientific articles and
with more than 1,700 instruments sold worldwide, the Microtox(R) toxicity test
system has been approved in regulations or standards in Canada, eight European
countries, and has been submitted to the U.S. Environmental Protection Agency
for approval. Under the terms of the merger agreement with AZUR, the Company
issued 700,000 shares of Series C preferred stock, with a fair market value of
approximately $3.0 million in the aggregate, as determined by an independent
valuation firm. On November 2, 2001 the 700,000 Series C preferred shares were
automatically converted into 700,000 shares of the Company's common stock in
accordance with their original terms.
12
With the 1999 acquisitions of HTI BioProducts, Inc. and certain assets of
Atlantic Antibodies, the Company formed Strategic BioSolutions (SBS), which has
since become one of the largest producers of antibodies in the United States.
The mission of Strategic BioSolutions is to supply monoclonal and polyclonal
antibodies, immunochemical reagents and related services to medical diagnostic
and pharmaceutical companies, as well as research institutions.
Results of Operations
Three Months Ended March 31, 2003 vs. March 31, 2002
Net revenues for the first quarter of 2003 were $6.5 million versus $5.7 million
in the first quarter of 2002, an increase of $800,000 or 14%.
Food safety revenues in the first quarter of 2003 increased 21%, to $1.7 million
from $1.4 million in the first quarter of 2002, as the Company saw an increased
demand for both food pathogen and GMO tests. In the first quarter of 2002, the
Company saw an increased number of customers in the beef processing industry
convert to the Company's E. coli 0157 pathogen test from competitive lateral
flow E. coli tests, and more than ten of these customers converted all or a
significant portion or all of their E. coli testing to the Company's
RapidChek(R) lateral flow test.
Also in the first quarter of 2003, the Company released its Salmonella test,
which received AOAC Research Institute approval in March 2003. Several of the
Company's E. coli customers, as well as other potential new customers, have
initiated evaluation of the Salmonella test.
On February 27, 2003 the Company announced the release of its screening test for
the detection of meat and bone meal (MBM) in animal feed, which is linked to the
transmission of BSE, commonly known as mad cow disease. This test, known as
FeedChek(TM), was designed in a lateral flow format to be both sensitive and
easy to use. This test does not require weighing or boiling of samples. By
eliminating these steps, the FeedChek(TM) test is fast, easy to use and does not
require additional test equipment. This method for testing animal feed has been
designed with multiple tests per strip to address the various analytical
requirements throughout the world. The Company's product has been shown to
detect as little as 0.1% bovine MBM in feed.
The Company believes its leadership position in GMO testing continues to grow.
The Company believes that acceptance of GMO technology continues to grow both in
the U.S. and abroad, and thus, the demand for the Company's testing products is
increasing as well. Sales of grain, non-StarLink(TM) GMO tests increased during
the quarter over the first quarter of 2002 by 65%.
Water quality product sales increased $100,000 or 6%, to $1.7 million in the
first quarter of 2003, primarily due to increasing sales of the Microtox(R)
toxicity screening systems, which was somewhat offset by a decrease in sales of
the Company's pollutant and pesticide tests for the remediation market, due to
continued weak general economic conditions and harsh weather experienced during
the first quarter.
13
The Company continues to work with drinking water utilities as they assess their
vulnerability to chemical contamination. At this time, more than 25% of the
major water utilities have adopted Microtox(R) to screen their water. In
addition, the Company is participating in the EPA's Environmental Technology
Verification (ETV) program to formally evaluate Microtox(R) for drinking water
protection. The ETV program, which will be run by the Advanced Monitoring
Systems Center managed by the Battelle Memorial Institute in Columbus, Ohio in
partnership with the Environmental Protection Agency, is designed to verify the
Microtox(R) system's performance at detection of potential toxic threats to
drinking water, including chemicals, nerve agents and biologics.
The Company is also collaborating with the U.S. Navy to further evaluate and
develop the capabilities of the Deltatox(R) system for toxin detection. This
work will be done at the Naval Surface Warfare Center in Florida.
Antibody revenues in the first quarter 2003 increased 17% to $3.0 million from
$2.5 million in the first quarter 2002. This increase reflects the results of
several new or expanded relationships established in 2002 as customers and
prospects had the opportunity to validate manufacturing and quality procedures
at the Company's expanded manufacturing facilities in Maine. The Company's
project to develop a point-of-treatment diagnostic test for Bayer's new product
Repinotan(TM) is continuing with Bayer's Phase III clinical trials expected to
be completed during 2003-2004.
Contract and other revenues decreased slightly to $115,000 in the first quarter
of 2003, when compared to the $177,000 recorded in the first quarter of 2002.
Gross profits (total revenues less manufacturing costs) increased $1.0 million,
or 38%, to $3.6 million in the first quarter of 2003 compared to $2.6 million in
the prior year quarter, and gross margins increased to 56.0% in 2003 from 45.8%
in 2002. The increase in gross profits was primarily driven by the $800,000
increase in product sales for the quarter and lower manufacturing expenses.
First quarter manufacturing expenses decreased $200,000 to $2.9 million in 2003
compared to $3.1 million in 2002. The decrease for the quarter was primarily
driven by benefits realized from the consolidation of the California antibody
production facility into the Maine location, which was completed in 2002, and by
the Company's initiatives taken in the fourth quarter 2002 and early in the
first quarter 2003 to leverage its manufacturing capacity and improve production
yields. One such effort was the elimination of separate test kit and antibody
business units, resulting in a single manufacturing organization.
Research and development expenses decreased slightly to $716,000 in the first
quarter of 2003 compared to $756,000 in the prior year first quarter. Selling,
general and administrative expenses decreased to $2.4 million in the first
quarter of 2003 from $2.8 million in the prior year first quarter, primarily due
to the Company's efforts to streamline its operations, including creating a
single sales and marketing organization, which had previously been organized in
three distinct teams, and the effect of the consolidation of its antibody
facilities in Maine, which was completed in 2002.
Interest expense decreased slightly to $12,000 in the first quarter of 2003 from
$16,000 in the first quarter of 2002. This decrease is primarily attributable to
the lower levels of outstanding debt during the 2003 period.
14
Income before taxes totaled $512,000 in the first quarter 2003 compared to a
loss before taxes of $588,000 in the first quarter 2002. Net income totaled
$335,000 in the first quarter 2003 compared to a net loss of $373,000 in the
first quarter 2002.
Liquidity and Capital Resources
Net cash used in operating activities of $13,000 for the first quarter 2003
compared favorably to net cash used in operating activities of $1.1 million in
the prior year first quarter. The improvement was primarily the result of the
turnaround from a pretax loss in the first quarter 2002 of $588,000 to a pretax
income of $512,000 in the first quarter in 2003.
The Company's working capital, current assets less current liabilities,
increased to $13 million at March 31, 2003, compared to $12.5 million at
December 31, 2002. Outstanding debt increased $207,000 from $1.4 million at
December 31, 2002 to $1.6 million on March 31, 2003, primarily due the Company
entering into an agreement to finance its 2003 insurance premiums with a
commercial lender.
On May 5, 2000, the Company entered into a financing agreement with a commercial
bank. This agreement provides for a $4 million term loan, all of which had been
paid on or before December 31, 2002, and for up to a $5 million revolving line
of credit, none of which was outstanding and approximately $2.2 million of which
was available at December 31, 2002. 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
$1.5 million in financing, of which approximately $1.4 million was outstanding
at December 31, 2002, and is repayable over seven years, with principal payments
beginning on October 1, 2002. Under the terms of the financings, the Company is
required to meet certain quarterly financial covenants. The Company was in
breach of certain of these financial covenants for all four quarters during
2002, and has received a waiver and suspension of these loan covenants for all
four quarters of 2002. Also, the loan covenants have been modified to a quick
ratio and tangible net worth ratio for the first three quarters of 2003.
Beginning with the fourth quarter of 2003, the original provisions of the loan
agreement regarding financial covenants will be operative, namely a ratio of
EBITDA to current maturities of debt plus interest and cash paid for taxes and a
ratio of funded debt to EBITDA. At March 31, 2003, the Company met the quick
ratio and tangible net worth ratio with respect to this indebtedness and expects
to be in compliance with the various financial covenants throughout 2003.
The Company believes it has, or has access to sufficient resources to meet its
operating requirements for the foreseeable future. The Company's ability to meet
its long-term capital requirements will depend on a number of factors, including
compliance with existing and new loan covenants, the success of its current and
future products, the focus and direction of its research and development
program, competitive and technological advances, future relationships with
corporate partners, government regulation, the Company's marketing and
distribution strategy and the success of the Company's plan to make future
acquisitions. Accordingly, no assurance can be given that the Company will be
able to meet the future liquidity requirements that may arise from these
inherent and similar uncertainties.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to changing interest rates, and is currently not
engaged in hedging activities. Interest on approximately $1.4 million of
outstanding indebtedness is at a variable rate of between 2% to 3% over the
published London Interbank Offered Rate (LIBOR), based upon the Company's ratio
of funded debt to EBITDA, and was 3% over LIBOR on average for the year. At the
Company's current level of indebtedness, each 1% change in the variable interest
rate will have an effect of $14,000 on the Company's annual interest expense
charges.
The Company conducts operations in United Kingdom. The consolidated financial
statements of the Company are denominated in U.S. dollars and changes in
exchange rates between foreign countries and the U.S. dollar will affect the
translation of financial results of foreign subsidiaries into U.S. dollars for
purposes of recording the Company's consolidated financial results.
Historically, the effects of translation have not been material to the
consolidated financial results.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on an evaluation conducted within 90 days prior to the filing
date of this report, that the Company's disclosure controls and procedures have
functioned effectively so as to provide those officers the information necessary
to evaluate whether:
(i) this report contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report, and
(ii) the financial statements and other financial information included
in this report fairly present, in all material respects, the financial
condition, results of operations and cash flows of the Company as of, and for,
the periods presented in this report.
There have been no significant changes in the Company's internal controls or
other procedures since the date of the Chief Executive Officer's and the Chief
Financial Officer's evaluation that could significantly affect these internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 - Certification of Richard C. Birkmeyer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 - Certification by Stanley J. Musial pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
On January 27, 2003, the Company filed a report on Form 8-K pursuant to
Item 7 and Item 9 announcing the completion of independent evaluations
of its E. coli test and launch of its Salmonella test.
On February 27, 2003, the Company filed a report on Form 8-K pursuant
to Item 7 and Item 9 announcing fourth quarter 2002 and year-end 2002
results.
On March 24, 2003, the Company filed a report on Form 8-K pursuant to
Item 7 and Item 9 announcing the third party approval of its Salmonella
test.
17
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.
STRATEGIC DIAGNOSTICS INC.
Date: May 15, 2003 Richard C. Birkmeyer
-----------------------------------
Richard C. Birkmeyer
President, Chief Executive Officer
(Principal Executive Officer) and Director
Date: May 15, 2003 Stanley J. Musial
--------------------------------------------
Stanley J. Musial
Vice President - Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
Certifications
I, Richard C. Birkmeyer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Strategic
Diagnostics Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
Richard C. Birkmeyer
- --------------------------
Richard C. Birkmeyer
President and CEO
19
I, Stanley J. Musial, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Strategic
Diagnostics Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
Stanley J. Musial
- --------------------------
Stanley J. Musial
Chief Financial Officer
20