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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
[ ] 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 X No
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of March 31, 2005 there were 19,570,339 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, 2005 and
December 31, 2004 2
Consolidated Statements of Operations - Three months ended
March 31, 2005 and 2004 3
Consolidated Statements of Cash Flows - Three months ended
March 31, 2005 and 2004 4
Notes to Consolidated Interim Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16
ITEM 4. Controls and Procedures 17
PART II OTHER INFORMATION 18
ITEM 6. Exhibits 18
SIGNATURES 19
1
PART I. - FINANCIAL INFORMATION
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,
- -----------------------------------------------------------------------------------------------------
2005 2004
- -----------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,947 $ 8,096
Receivables, net 3,965 3,858
Inventories 3,150 3,090
Deferred tax asset 892 1,071
Other current assets 1,004 336
- -----------------------------------------------------------------------------------------------------
Total current assets 16,958 16,451
- -----------------------------------------------------------------------------------------------------
Property and equipment, net 3,647 3,605
Other assets 5 2
Deferred tax asset 8,157 8,288
Intangible assets, net 6,956 6,996
- -----------------------------------------------------------------------------------------------------
Total assets $ 35,723 $ 35,342
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 452 $ 868
Accrued expenses 1,651 1,525
Current portion of long term debt 211 211
- -----------------------------------------------------------------------------------------------------
Total current liabilities 2,314 2,604
- -----------------------------------------------------------------------------------------------------
Long-term debt 720 773
- -----------------------------------------------------------------------------------------------------
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,
19,570,339 and 19,379,602 issued and outstanding
at March 31, 2005 and December 31, 2004, respectively 196 194
Additional paid-in capital 37,125 36,596
Accumulated deficit (4,341) (4,759)
Deferred compensation (411) (206)
Cumulative translation adjustments 120 140
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 32,689 31,965
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 35,723 $ 35,342
=====================================================================================================
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,
=============================================================================
2005 2004
=============================================================================
NET REVENUES:
- -----------------------------------------------------------------------------
Product related $ 6,555 $ 6,350
- -----------------------------------------------------------------------------
Total net revenues 6,555 6,350
- -----------------------------------------------------------------------------
OPERATING EXPENSES:
Manufacturing 2,901 2,622
Research and development 642 587
Selling, general and administrative 2,442 2,528
- -----------------------------------------------------------------------------
Total operating expenses 5,985 5,737
- -----------------------------------------------------------------------------
Operating income 570 613
Interest income, net 27 4
- -----------------------------------------------------------------------------
Income before taxes 597 617
Income tax expense 179 199
- -----------------------------------------------------------------------------
Net income 418 418
- -----------------------------------------------------------------------------
Basic net income per share $ 0.02 $ 0.02
=============================================================================
Shares used in computing basic
net income per share 19,458,000 19,211,000
=============================================================================
Diluted net income per share $ 0.02 $ 0.02
=============================================================================
Shares used in computing diluted
net income per share 19,615,000 19,742,000
=============================================================================
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,
================================================================================
2005 2004
================================================================================
Cash Flows from Operating Activities:
Net income $ 418 $ 418
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 263 219
Stock Compensation Expense 35 8
Deferred income tax provision 179 199
(Increase) decrease in:
Receivables (107) (400)
Inventories (60) 32
Other current assets (668) (237)
Other assets (3) --
Increase (decrease) in:
Accounts payable (416) (156)
Accrued expenses 126 342
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (233) 425
Cash Flows from Investing Activities:
Purchase of property and equipment (234) (71)
Purchase of intangible assets (17) --
- --------------------------------------------------------------------------------
Net cash used in investing activities (251) (71)
Cash Flows from Financing Activities:
Proceeds from exercise of incentive stock options 406 21
Proceeds from employee stock purchase plan 2 4
Proceeds from issuance of long and short term debt -- 551
Repayments on financing obligations (53) (162)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 355 414
Effect of exchange rate changes on cash (20) 24
Net increase (decrease) in Cash and Cash Equivalents (149) 792
Cash and Cash Equivalents, Beginning of Period 8,096 5,158
- --------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 7,947 $ 5,950
================================================================================
Supplemental Cash Flow Disclosure:
Cash paid for taxes 8 5
Cash paid for interest 11 12
================================================================================
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") develops and
markets biotechnology-based detection solutions for a broad range of food,
water, agricultural, industrial, environmental and scientific applications. By
leveraging its expertise in immunology, proteomics, bio-luminescence, and other
bio-reactive technologies with innovative application and production
capabilities, the Company is able to provide sophisticated diagnostic testing
and immunoreagent systems to a diverse customer base serving multiple vertical
markets. The Company also serves the research, human diagnostic and
pharmaceutical sectors with a wide range of services, including the production
of monoclonal and polyclonal antibodies used in commercialized products offered
by leading diagnostic and pharmaceutical companies.
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, 2004. 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 operations.
Certain amounts have been reclassified to conform to the current period's
presentation.
Revenue Recognition
- -------------------
Revenues 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, 2005 and 2004, revenues from these sales represented 79% and
78%, respectively, of total Company revenues. Revenue associated with such
products or services are recognized when persuasive evidence of an order exists,
shipment of product has occurred or services have been provided, the price is
fixed and determinable and, collectibility is probable. Management is required
to make judgments based on actual experience about whether or not collectibility
is reasonably assured.
5
Revenues from sales of custom 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 project. The Company enters into contracts related to
the production of such custom antibodies and reagents, which provide for the
performance of defined tasks for a fixed price, with delivery of the product
upon completion of production. The standard time to complete a project is
typically longer than 30 days but less than 12 months, effort is expended over
the life of the project, and the Company can reasonably estimate the hours and
costs to be incurred throughout the contract term and such hours and costs are
expensed as incurred. The Company's revenue under such contracts is not at risk
if the outcome of the project is unsuccessful. For the three months ended March
31, 2005 and 2004, revenues from these sales represented 21% and 22%,
respectively, of total Company revenues.
The Company's application of percentage of completion accounting is based on the
fact that the outcome of projects can be estimated reliably. A project's outcome
can be estimated reliably when total contract revenue can be estimated reliably,
it is probable that economic benefit will flow to the Company and the stage of
project completion can be measured reliably. The percentage of completion method
relies on estimates of total expected project revenue and costs, as well as the
dependable measurement of the progress made towards completing a particular
project. Recognized revenues and profits are subject to revisions during the
project in the event that the assumptions regarding the overall project outcome
are revised. The cumulative impact of a revision in estimates or losses on
projects in progress are recorded in the period such revisions or losses become
likely and estimable.
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
March 31,
2005 2004
----- -----
Net income $ 418 $ 418
Currency translation adjustment (20) 24
----- -----
Total comprehensive income $ 398 $ 442
===== =====
6
2. BASIC AND DILUTED INCOME 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 into common shares.
As of March 31, 2005, options to purchase 1,995,000 shares of the Company's
common stock were outstanding, with options to purchase approximately 1,361,000
shares exercisable. Listed below are the basic and diluted share calculations.
Three Months Ended
March 31,
2005 2004
---------- ----------
Average common shares outstanding 19,458,182 19,211,292
SHARES USED IN COMPUTING BASIC
NET INCOME PER SHARE 19,458,182 19,211,292
========== ==========
Stock options
155,603 529,607
Warrants
1,040 1,040
---------- ----------
SHARES USED IN COMPUTING DILUTED
NET INCOME PER SHARE 19,614,825 19,741,939
========== ==========
3. STOCK-BASED COMPENSATION
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, at that date, 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 director 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 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
March 31,
2005 2004
------- -------
Net income, as reported $ 418 $ 418
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (163) (238)
------- -------
Net income - as adjusted $ 255 $ 180
======= =======
Earnings per share:
Basic--as reported $ 0.02 $ 0.02
======= =======
Basic--as adjusted $ 0.01 $ 0.01
======= =======
Diluted--as reported $ 0.02 $ 0.02
======= =======
Diluted--as adjusted $ 0.01 $ 0.01
======= =======
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, 2005 and December
31, 2004, inventories consisted of the following:
March 31, 2005 December 31, 2004
-------------- -----------------
Raw materials $1,503 $1,410
Work in progress 457 505
Finished goods 1,190 1,175
- ----------------------------------------------------------------------
$3,150 $3,090
======================================================================
5. INTANGIBLE ASSETS:
At March 31, 2005 and December 31, 2004, intangible assets consisted of the
following:
March 31, 2005 December 31, 2004
-------------- -----------------
Goodwill $ 5,168 $ 5,168
Other 3,017 3,000
Less - accumulated amortization (1,229) (1,172)
- ----------------------------------------------------------------------
Net intangible assets $ 6,956 $ 6,996
======================================================================
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 up to a $5,000 revolving line of credit,
none of which was outstanding and approximately $2,637 of which was available at
March 31, 2005, 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 4.42% at March 31, 2005.
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, $931 of which
was outstanding at March 31, 2005, 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, as defined. 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, 2005 was approximately
4.67%.
Under the terms of the above financing, the Company was required to meet certain
quarterly financial covenants that included for the first three quarters of 2003
a minimum quick ratio of 2.25 and a minimum tangible net worth ratio of $22,500,
which the Company met. Beginning with the fourth quarter of 2003, the original
provisions of the loan agreement regarding financial covenants were 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 amended the terms
of the EBITDA covenants with the lender 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 met all of its financial covenants with respect to
this indebtedness at March 31, 2005 and expects that it will be able to meet all
of its financial covenants with respect to this indebtedness for 2005.
At of March 31, 2005 and December 31, 2004, the outstanding balance on all of
the Company's commercial bank debt was $931 and $984, respectively. This
indebtedness is secured by substantially all of the Company's assets.
9
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" or "SDI"). These statements include, among others, statements
regarding: the Company's intentions with respect to future spending on research
and development; the development, market acceptance and sales of tests for
food-borne pathogens and related growth media; the size and nature of demand in
the markets for the Company's products and related effects on operating results;
the need for water quality and toxicity tests; approval and validation by third
parties of the Company's food pathogen tests; the performance of the Company's
testing products; sales of the Company's antibodies; timing of new product
introductions and other information that may be predictive of future operating
results; the Company's ability to reduce operating expenses; and the Company's
ability to improve operating results thus enabling it to meet future loan
covenants. 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, inability to obtain or delays in
obtaining third party approvals, 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.
BACKGROUND
The Company develops, manufactures and markets biotechnology-based detection
solutions for a broad range of food, water, agricultural, industrial,
environmental and scientific applications.
The Company believes its core competency is in the development and manufacture
of custom antibodies embedded in commercialized products offered by the Company
itself and leading diagnostic and pharmaceutical companies and research
institutions.
By leveraging its expertise in immunology, proteomics, bio-luminescence and
other bio-reactive technologies with innovative application and production
capabilities, the Company is able to provide biotechnology-based detection
solutions to a diverse customer base serving multiple vertical markets.
The immunoassay technology used by the Company relies on the specific binding
characteristics of antibodies. An immunoassay is an analytical test that uses
antibodies to detect the presence of a target compound in a complex sample
matrix with high degrees of precision. The Company has applied immunoassay
technology to a variety of industrial and agricultural applications.
10
The Company's food safety product group includes tests to detect targeted traits
in genetically engineered plants, tests to detect Genetically Modified (GM)
traits in food ingredients and food fractions, tests to detect naturally
occurring fungi in grains (mycotoxins) and tests for food pathogens.
The Company's water quality product group includes analytical tests for drinking
water, industrial process water and wastewater analysis, and analytical tests
for soil and other waste matrices for use at environmental remediation projects,
hazardous waste operations and other applications.
The Company's antibody product group provides a wide array of custom antibodies
and antibody services, including hybridoma development, calibrators, antigens
and reagents and the production of monoclonal and polyclonal antibodies, which
are embedded in commercialized diagnostic and therapeutic products and are used
in clinical research.
The Company sells products in the food safety, water quality and antibody market
categories through its U.S. direct sales force, a network of over 50
distributors in Canada, Mexico, and Latin America, Europe and Asia and its
corporate partners.
These products are sold to a wide range of customers including water utilities,
food processors, pharmaceutical, biotechnology and diagnostic companies, and
major biomedical research centers. The Company also supplies custom antibody
products and services to the in-vitro diagnostic, academic and medical research
industries.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2005 versus March 31, 2004
- -------------------------------------------------------
Revenues for the first quarter of 2005 increased 3.2% to $6.56 million, compared
to $6.35 million for the first quarter of 2004. Included in revenues in the
first quarter of 2004 was $156,000 of revenue associated with the Company's sale
of certain "catalog" antibody inventories that were written-off in the fourth
quarter of 2003. Revenues for the first quarter of 2005 continued to be impacted
by anticipated reductions in StarLink(TM) test kit sales, which decreased to
$172,000 in the first quarter of 2005, compared to $236,000 in the first quarter
of 2004. Sales of the Company's test kits used in Monsanto's Value Capture
Program, which totaled $425,000 in the first quarter of 2004, decreased to
$294,000 in the first quarter of 2005 due to order pattern and court decisions
in Brazil that resulted in the temporary ban of the Value Capture Program as
well as decisions to allow the planting of GM soy in certain Brazilian states.
In the first quarter of 2005, the Company began to make payments associated with
royalties on sales of test kits that used certain technologies in their
manufacture. These payments, totaling $69,000, will be a component of the cost
of such products sold going forward.
Consequently, for the quarter ended March 31, 2005, gross profit (defined as
total revenues less manufacturing costs) decreased 2.0% to $3.65 million,
compared to $3.73 million in the prior year quarter and gross margins decreased
from 58.7% in the first quarter of 2004 to 55.7% in the first quarter of 2005.
11
Operating expenses for the first quarter of 2005 increased 4.3% to $5.99
million, compared to $5.74 million for the first quarter of 2004. The increase
was primarily due to the Company's investment in the commercialization of new
technologies for the research and high throughput production of antibodies,
totaling $132,000, the royalty obligation noted above and a bad debt reserve for
a financially troubled customer, totaling $45,000, all incurred during the
quarter ended March 31, 2005.
Research and development spending was $642,000, or 9.8% of net revenues, in the
first quarter of 2005, compared to $587,000, or 9.2% of net revenues, in the
first quarter of 2004.
Selling, general and administrative expenses were $2.44 million in the first
quarter of 2005, compared to $2.53 million in the same quarter in the prior
year. Included in selling, general and administrative expenses in the first
quarter of 2004 was $100,000 associated with the termination of a distribution
reseller agreement for an instrument that electronically interprets strip test
lines, which the Company determined was not going to be marketable.
The Company recorded interest income of $27,000 in the first quarter of 2005
compared to $4,000 in the prior year first quarter. The increase was primarily
due to higher levels of invested cash and increased interest rates received on
invested cash during the 2005 period.
Pre-tax income totaled $597,000 for the three months ended March 31, 2005
compared to pre-tax income of $617,000 for the same period in 2004. Net income
in the first quarter of 2005 and 2004 was $418,000 or $0.02 per diluted share.
The Company's effective tax rate of 30% for the first quarter of 2005 is below
the federal and state statutory rates primarily due to research and development
credits and foreign net operating losses not previously benefited.
FOOD SAFETY PRODUCTS
- --------------------
Food safety revenues were $2.50 million in the first quarter of 2005, compared
to $2.23 million in the first quarter of 2004, an increase of 12.1%. Food
pathogen test sales in the first quarter of 2005 were up over 108% compared to
the same quarter of 2004. These increases are a continuation of the positive
trend that saw such sales increase 125.0%, 91.0% and 46.0% for the fourth, third
and second quarters of 2004, respectively, compared to the corresponding 2003
periods.
WATER AND ENVIRONMENTAL PRODUCTS
- --------------------------------
Revenue decreased 16.4% to $1.22 million for the first quarter of 2005, compared
to $1.46 million for the same quarter in the prior year. The decline relates
primarily to a continued decrease in the number of remediation projects and
correlated use of on-site testing in the United States. Pricing pressure from
direct competitors and lab-based testing services also contributed to the
decline.
Water quality monitoring continues to be an emerging but unproven opportunity
for the Company and it is an area of focus for the management team. The Company
has active development programs with a variety of well-known, brand-name food
manufacturers and continues to gain momentum in this area. The quality of the
water which comprises a key ingredient in food preparation is of paramount
importance, and we believe this fact is just beginning to be recognized by
the industry.
12
ANTIBODY PRODUCTS
- -----------------
Antibody revenues increased 7% to $2.84 million for the first quarter of 2005
compared to $2.66 million for the same quarter in the prior year. The increase
in the first quarter of 2005 over the same quarter in the prior year, in
addition to a 10% increase in the fourth quarter of 2004, compared to the fourth
quarter of 2003, is an extension of a continuing improvement in business, which
saw a steep decline in revenues in the first half of 2004. The 2004 decline was
associated with several large, one-time customer projects in that year, and the
discontinuation of low margin business. Included in antibody revenues in the
first quarter of 2004 was $156,000 associated with inventories that were
written-off during 2003. Custom and made-to-order antibody services and products
are a core competency of the Company and management is encouraged by the
continued improvement in this key business area. In 2005, the Company began
investing in a new research and production facility to commercialize important
new technologies for high throughput production of antibodies and has hired two
expert scientists to drive this effort. This technology is specifically targeted
at the rapidly developing proteomics market and the enablement of customer
research, development and commercialization in the diagnostics, pharmaceutical
and research markets.
LIQUIDITY AND CAPITAL RESOURCES
The net cash used in operating activities of $233,000 for the first quarter of
2005 was primarily the result of increases in current assets, and decreases in
accounts payable levels. The increase in current assets was primarily the result
of the purchase of insurance for the 2005 business year, while the decrease in
accounts payable is primarily attributable to the purchasing pattern used by the
Company in the current three month cycle.
Net cash used in investing activities of $251,000 for the first quarter of 2005
was driven by the capital expenditures for the period of $234,000 and $17,000
for the purchase of technology licenses. This compares to net cash used in
investing activities of $71,000 for the same period in 2004, which was driven by
the capital expenditures for the period. The capital expenditures for 2005 and
2004 are primarily related to purchases of laboratory and manufacturing
equipment.
Net cash provided by financing activities of $355,000 for the first quarter of
2005 was primarily driven by proceeds from the exercise of stock options, which
was partially offset by net repayments of outstanding debt. The $414,000
provided by financing activities for the same quarter in 2004 was primarily the
result of acquiring a $551,000 loan to finance the Company's 2004 business
insurance program.
The Company's working capital, current assets less current liabilities,
increased $797,000 to $14.64 million at March 31, 2005 from $13.85 million at
December 31, 2004, primarily due to the increase in current assets and reduction
in accounts payable as described above. Outstanding debt decreased $53,000 from
$984,000 at December 31, 2004 to $931,000 on March 31, 2005, due to scheduled
repayments.
13
On May 5, 2000, the Company entered into a financing agreement with a commercial
bank. This agreement provides for a $4.00 million term loan, all of which had
been paid on or before December 31, 2002, and for up to a $5.00 million
revolving line of credit, none of which was outstanding and approximately $2.64
million of which was available at March 31, 2005, 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 4.42% at March 31, 2005.
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 $1.5 million in financing, $931,000
of which was outstanding at March 31, 2005, 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 March 31, 2005, was approximately 4.67%.
Under the terms of the above financing, the Company is required to meet certain
quarterly financial covenants that include 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 met all of its
financial covenants with respect to this indebtedness at March 31, 2005 and
expects that it will be able to meet all of its financial covenants with respect
to this indebtedness for 2005.
For the quarter ended March 31, 2005, the Company satisfied all of its cash
requirements from cash provided by operating activities, cash available and
on-hand and from the financing agreements described above. At March 31, 2005,
the Company had $720,000 in long-term debt and stockholders' equity of $32.69
million. Although the Company has no material commitments for capital
expenditures at March 31, 2005, it does anticipate that it may spend
approximately $1 million in 2005 to upgrade or expand certain manufacturing,
research & development and office equipment and systems that will drive
productivity or generate cost savings, and also to introduce automation into
certain manufacturing processes that are currently labor intensive.
Based upon its cash on hand, credit facilities, current product sales and the
anticipated sales of new products, the Company believes it has, or has access
to, sufficient resources to meet its operating requirements at least through
April 2006. The Company's ability to meet its long-term capital needs 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 programs, competitive and
technological advances, future relationships with corporate partners, government
regulation, the Company's marketing and distribution strategy, its successful
sale of additional common stock and/or the Company successfully locating and
obtaining other financing, 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.
14
Non-GAAP Financial Measures
- ---------------------------
The Company presents an EBITDA measure as the Company believes this provides
investors and the Company's management with additional information to measure
the Company's liquidity. EBITDA measures are not a measure of performance under
GAAP, and therefore should not be considered in isolation or as a substitute for
net income or cash flows from operations. Additionally, the Company's EBITDA
calculations may differ from the EBITDA calculations for other companies.
The calculation of the Company's EBITDA measure (as discussed above), and the
reconciliation of the Company's EBITDA measure to net cash provided by operating
activities for the three months ended March 31, 2005 and 2004, respectively, is
as follows (amounts in thousands):
Three Months Ended March 31,
----------------------------
2005 2004
- --------------------------------------------------------------------------------
Net cash (used in) provided by operating activities $(233) $ 425
Changes in assets and liabilities:
Receivables 107 400
Inventories 60 (32)
Other current assets 668 237
Other assets 3 --
Accounts payable 416 156
Accrued expenses (126) (342)
Stock compensation expense (35) (8)
Interest income, net (27) (4)
- --------------------------------------------------------------------------------
EBITDA $ 833 $ 832
================================================================================
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 $1.00 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 $9,000 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.
16
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures, as defined in Rule 13a-15(e) under the Securities Act
of 1934, as amended, as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures as of the end of the
period covered by this report are functioning effectively to provide reasonable
assurance that the information required to be disclosed by us in reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934, as amended, is
accumulated and communicated to our management, including our principal
executive and financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. A controls
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
(b) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
31.1 Certifications of the Chief Executive Officer of Strategic
Diagnostics Inc. required by Rule 13a-14(a) under the
Securities Exchange Act of 1934
31.2 Certifications of the Chief Financial Officer of Strategic
Diagnostics Inc. required by Rule 13a-14(a) under the
Securities Exchange Act of 1934
32.1 Certification of the Chief Executive Officer of Strategic
Diagnostics Inc. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of Sarbanes-Oxley Act of
2002
32.2 Certification of the Chief Financial Officer of Strategic
Diagnostics Inc. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of Sarbanes-Oxley Act of
2002
18
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 16, 2005 /s/ Matthew H. Knight
------------ ----------------------------------------------------
Matthew H. Knight
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 16, 2005 /s/ Anthony J. Simonetta
------------ ----------------------------------------------------
Anthony J. Simonetta
Vice President - Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
19