XNAS:SDIX Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2012
 
o
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
(State or other jurisdiction of
incorporation or organization)
    56-1581761
(I.R.S. employer
identification no.)
     
111 Pencader Drive
Newark, Delaware
(Address of principal executive offices)
   19702
(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: o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes: x          No: o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated filer o
     
Non-accelerated filer o
 
Smaller reporting company x
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
 
Yes: o          No: x
 
As of April 30, 2012, there were 20,667,905 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, 2012 and December 31, 2011
 
2
Consolidated Statements of Operations – Three months ended March 31, 2012 and 2011
 
3
Consolidated Statements of Comprehensive Loss – Three months ended March 31, 2012 and 2011
 
4
          Consolidated Statements of Cash Flows – Three months ended March 31, 2012 and 2011
 
5
Notes to Consolidated Interim Financial Statements
 
6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 
18
ITEM 4. Controls and Procedures
 
18
PART II OTHER INFORMATION
 
19
ITEM 6. Exhibits
 
19
SIGNATURES
 
20
 
 
1

 

PART I – FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
 ASSETS
           
 Current Assets :
           
Cash and cash equivalents
  $ 9,798     $ 10,665  
Restricted cash
    200       300  
Receivables, net
    3,313       3,758  
Inventories
    2,254       2,142  
Other current assets
    1,159       618  
Total current assets
    16,724       17,483  
                 
 Property and equipment, net
    4,244       3,890  
 Other assets
    32       6  
 Deferred tax asset
    37       36  
 Intangible assets, net
    1,178       1,207  
Total assets
  $ 22,215     $ 22,622  
                 
 LIABILITIES AND STOCKHOLDERS EQUITY
               
 Current Liabilities :
               
Current portion of debt
  $ 200     $ 300  
Accounts payable
    581       556  
Accrued expenses
    2,139       1,769  
Deferred revenue
    334       -  
Total current liabilities
    3,254       2,625  
                 
 Stockholders’ Equity:
               
Preferred stock, $.01 par value, 20,920,648 shares authorized,
         
no shares issued or outstanding
    -       -  
Common stock, $.01 par value, 50,000,000 shares authorized,
         
at March 31, 2012 and December 31, 2011,
               
21,073,256 and 21,000,960 issued
               
at March 31, 2012 and December 31, 2011, respectively
    210       210  
 Additional paid-in capital
    42,285       42,146  
 Treasury stock, 406,627 common shares at cost
               
at March 31, 2012 and December 31, 2011
    (555 )     (555 )
 Accumulated deficit
    (22,734 )     (21,537 )
 Cumulative translation adjustments
    (245 )     (267 )
Total stockholders’ equity
    18,961       19,997  
Total liabilities and stockholders’ equity
  $ 22,215     $ 22,622  
 
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,
 
   
2012
   
2011
 
             
Revenues
  $ 5,637     $ 6,558  
                 
Cost of sales
    2,442       2,912  
                 
Gross profit
    3,195       3,646  
                 
Operating expenses:
               
Research and development
    1,098       863  
Selling, general and administrative
    3,287       3,825  
Total operating expenses
    4,385       4,688  
                 
Operating loss
    (1,190 )     (1,042 )
                 
Interest expense, net
    (7 )     (9 )
                 
Loss from continuing operations before taxes
    (1,197 )     (1,051 )
                 
Income tax benefit
    -       (5 )
                 
Loss from continuing operations, net of taxes
  $ (1,197 )   $ (1,046 )
                 
Income from discontinued operations
    -       388  
                 
Net loss
  $ (1,197 )   $ (658 )
                 
Basic loss per share from continuing operations
  $ (0.06 )   $ (0.05 )
Basic income per share from discontinued operations
    0.00       0.02  
                 
Basic net loss per share
  $ (0.06 )   $ (0.03 )
                 
Shares used in computing basic net loss per share
    20,488,242       20,384,041  
                 
Diluted loss per share from continuing operations
  $ (0.06 )   $ (0.05 )
Diluted income per share from discontinued operations
    0.00       0.02  
                 
Diluted net loss per share
  $ (0.06 )   $ (0.03 )
                 
Shares used in computing diluted net loss per share
    20,488,242       20,384,041  
 
The accompanying notes are an integral part of these statements.

 
3

 

STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
             
Net loss
  $ (1,197 )   $ (658 )
                 
Foreign currency translation adjustment
    22       19  
                 
Comprehensive loss
  $ (1,175 )   $ (639 )
 
The accompanying notes are an integral part of these statements
 
 
4

 
 
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
   
Three Months
 
   
Ended March 31,
 
   
2012
   
2011
 
             
 Cash Flows from Operating Activities :
           
 Net loss
  $ (1,197 )   $ (658 )
 Add: Income from discontinued operations
    -       388  
 Loss from continuing operations
    (1,197 )     (1,046 )
Adjustments to reconcile net loss to net
               
cash provided by (used in) operating activities :
               
Depreciation and amortization
    259       307  
Share-based compensation expense
    134       129  
 (Increase) decrease in :
               
 Receivables
    445       509  
 Inventories
    (112 )     131  
 Other current assets
    (541 )     (569 )
 Other assets
    (23 )     27  
 Increase (decrease) in :
               
 Accounts payable
    25       (26 )
 Accrued expenses
    370       587  
 Deferred revenue
    334       58  
 Net cash provided by (used in) operating activities
    (306 )     495  
                 
 Cash Flows from Investing Activities :
               
 Purchase of property and equipment
    (585 )     (83 )
 Net cash used in investing activities
    (585 )     (83 )
                 
 Cash Flows from Financing Activities :
               
 Proceeds from employee stock purchase plan
    2       3  
 Restricted cash requirement
    100       100  
 Repayments on financing obligations
    (100 )     (100 )
 Net cash provided by financing activities
    2       3  
                 
 Effect of exchange rate changes on cash
    22       19  
                 
 Net increase (decrease) in Cash and Cash Equivalents
    (867 )     434  
                 
 Cash and Cash Equivalents, Beginning of Period
    10,665       8,056  
                 
 Cash and Cash Equivalents, End of Period
  $ 9,798     $ 8,490  
                 
 Supplemental Cash Flow Disclosure :
               
                 
 Cash paid for taxes, net of tax refunds
    14       15  
                 
 Cash paid for interest
    9       14  
 
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.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Business
 
Strategic Diagnostics Inc. and its subsidiaries (“SDIX,” the “Company,” “we,” “our” or “us”), is a biotechnology company with a core mission of developing, commercializing and marketing innovative, effective products and solutions, many of which are proprietary, that preserve and enhance the quality of human health and wellness. The Company serves the pharmaceutical, biotechnology, diagnostics and food safety markets.
 
SDIX is a customer-centric organization. Our goals are to consistently deliver increased value to our customers through products and services that facilitate business results, reduce costs and help manage risk. SDIX sales professionals focus among other things on delivering a quantifiable “return on investment” to our customers, demonstrating to them how to reduce time and total costs associated with applications for which the Company’s products are used. In addition, the Company believes its tests and solutions provide high levels of accuracy and reliability, delivering more actionable results to the customer compared to alternative products.
 
The Company is focused on leveraging its expertise in antibodies and immuno-technologies to successfully develop proprietary products and services that enhance the competitive advantage of our customers and drive profitable growth.
 
The Company believes that our competitive position has been enhanced through the combination of talent, technology, and resources resulting from the business development activities we have pursued since our inception. The Company utilizes its facilities in Newark, Delaware for the manufacture of test kits and antibodies and its facilities located in Windham, Maine for the manufacture of antibodies.
 
The Company’s Life Sciences product portfolio includes a full suite of integrated capabilities including antibody and assay design, development and production. These capabilities, combined with our proprietary Genomic Antibody Technology™ (“GAT™”), are being used today to help discover the mechanisms of disease, facilitate the development of new drugs, and provide the means for rapid diagnosis.
 
The Company’s Food Safety portfolio, which is included in the Kit Products portfolio, includes immunoassays and proprietary media formulations that represent advanced technology for rapid, cost-effective, easy-to-use and accurate detection of food pathogens. SDIX’s RapidChek® and SELECT ™ test kits are reliable, cost effective solutions for the detection of pathogens such as E. coli, Salmonella and Listeria in the production, processing, and manufacturing of food.
 
SDIX has been developing antibodies which have advanced our customers’ immuno-based work for 20 years. By applying its core competencies of creating proprietary, high-quality antibodies and assay development solutions, the Company has produced sophisticated testing and reagent systems that are responsive to our customers’ analytical information needs.
 
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 (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) 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, 2011.  In the opinion of management, the accompanying consolidated interim financial statements include all adjustments (all of which are of a normal recurring nature) necessary for a fair presentation of the results of operations.  The interim operating results are not necessarily indicative of the results to be expected for the entire year.
 
 
6

 
 
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
 
Revenue Recognition
 
Revenues composed of 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. Revenues 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 collectability is reasonably assured. Management is required to make judgments based on actual experience about whether or not collectability is reasonably assured.
 
The Company enters into contracts related to the production of custom antibodies, 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, and effort is expended over the life of the project. Revenues related to sales of custom antibody projects are recognized when a project’s specifications have been met and the related materials have been shipped.
 
Fees associated with products and services added on to a custom antibody project subsequent to delivery of the initial project are billed monthly and recognized as revenue as the services and other deliverables are provided.  Sales taxes collected from customers are presented net in the consolidated statement of operations.
 
The Company follows Accounting Standards Codification, (ASC) 605-25 “Revenue Recognition – Multiple-Element Arrangements” to determine the recognition of revenue under collaboration agreements that include multiple elements.  The deliverables under these agreements are evaluated to determine if they have stand-alone value and revenue is allocated to the elements based upon their relative selling prices.  Since the adoption of this standard, the Company has entered into one agreement with multiple-elements.  During the first three months of 2012 the Company recognized approximately $920 in revenue related to this $1,250 agreement.  The amount recognized was comprised of $95 for materials supplied, $9 in consulting services provided and $816 in technology access fees.
 
Use of Estimates
 
The preparation of the consolidated interim financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated interim 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 long lived assets. Actual results could differ from these estimates.
 
New and Recently Adopted Accounting Standards
 
In June 2011, the Financial Accounting Standards Board, (FASB) issued Accounting Standards Update (ASU) 2011-05 Comprehensive Income (Topic 220), Presentation of Comprehensive Income, which amends current comprehensive income guidance.  This ASU increases the prominence of other comprehensive income in financial statements.  Under this ASU, the Company has chosen to present the components of net loss and comprehensive loss in consecutive financial statements.  The Company adopted the provisions of this guidance January 1, 2012, which resulted in adding the Consolidated Statements of Comprehensive Loss to our Consolidated Financial Statements.
 
 
7

 
 
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
 
2.         BASIC AND DILUTED LOSS PER SHARE
 
Basic loss per share (EPS) is computed by dividing net loss available for common stockholders 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 such as stock options and restricted stock units. Basic loss per share excludes potentially dilutive securities.  For the three month periods ended March 31, 2012 and 2011, conversion of stock options and unvested restricted shares totaling 349,398 and 461,583, respectively, into common share equivalents were excluded from this calculation because they were anti-dilutive, due to the net loss incurred in each of the periods.
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
Weighted average common shares outstanding
    20,488,242       20,384,041  
                 
Shares used in computing basic loss per share
    20,488,242       20,384,041  
                 
Dilutive effect of stock options and unvested restricted stock units
    -       -  
                 
Shares used in computing diluted loss per share
    20,488,242       20,384,041  
 
3.        DISCONTINUED OPERATIONS
 
On December 8, 2011, the Company completed the sale of its water and environmental products assets to Modern Water PLC for approximately $4,217, net of transaction fees.  These assets included intellectual property, inventory, commercial contracts and equipment.  The Company recognized a gain during the fourth quarter of 2011 on the sale of these assets, after transaction fees, of $3,033.
 
In accordance with Accounting Standards Codification (ASC) 360, Property, Plant and Equipment, the results of operations and cash flow activity of the water and environmental products were reclassified separately as a discontinued operation within the consolidated financial statements for all periods presented.  The following table presents key information associated with the operating results of the discontinued operation for the reporting periods included in the Company’s consolidated statements of operations:
 
 
8

 
 
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
 
Results of Operations of Discontinued Operations
 
       
   
Three Months Ended March 31,
 
   
2012
   
2011
 
             
Revenues
  $ -     $ 918  
                 
Cost of sales
    -       401  
                 
            Gross profit     -       517  
                 
Operating expenses:
               
            Research and development     -       -  
            Selling, general and administrative     -       129  
            Total operating expenses     -       129  
                 
Operating income
    -       388  
                 
Income tax expense
    -       -  
                 
Income from discontinued operations
  $ -     $ 388  
 
           For comparative purposes, items from discontinued operations in the Company’s March 31, 2011 Consolidated Balance Sheet included approximately $661 of accounts receivable, $1,025 of inventory and $110 of net property and equipment.
 
4.
SHARE-BASED COMPENSATION
 
Under various plans, executives, key employees and outside directors receive awards of options to purchase common stock. The Company has a stock option plan (the “2000 Plan”) which authorizes the granting of incentive and nonqualified stock options and restricted stock units. Incentive stock options are granted at not less than 100% of fair market value at the date of grant (110% for stockholders owning more than 10% of the Company’s common stock). Nonqualified stock options are granted at not less than 85% of fair market value at the date of grant. A maximum of 8,000,000 shares of common stock are issuable under the 2000 Plan. Certain additional options have been granted outside the 2000 Plan. These options generally follow the provisions of the 2000 Plan.  The Company issues new shares to satisfy option exercises and the vesting of restricted stock awards.
 
The Company also has an Employee Stock Purchase Plan (the “ESPP”). The ESPP allows eligible full-time employees to purchase shares of common stock at 90 percent of the lower of the fair market value of a share of common stock on the first or last day of the quarter. Eligible employees are provided the opportunity to acquire Company common stock during each quarter. No more than 661,157 shares of common stock may be issued under the ESPP. Such stock may be unissued shares or treasury shares of the Company or may be outstanding shares purchased in the open market or otherwise on behalf of the ESPP.  The Company’s ESPP is compensatory and therefore, the Company is required to recognize compensation expense related to the discount from market value of shares sold under the ESPP.  The Company issues new shares to satisfy shares purchased under the ESPP.
 
 
9

 
 
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
 
Share-based compensation expense recorded in the three month periods ended March 31, 2012 and 2011 is summarized as follows:
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
             
Stock options
  $ 106     $ 90  
Employee stock purchase plan
    1       1  
Restricted stock awards
    27       38  
                 
Total share-based compensation expense
  $ 134     $ 129  
 
Share-based compensation expense is a component of selling, general and administrative expense, and is recorded as a non-cash expense in the operating activities section of the Company’s consolidated statements of cash flows.
 
No options were exercised in the three month periods ended March 31, 2012 and 2011.  Proceeds received from employee payments into the ESPP in the three month periods ended March 31, 2012 and 2011, were $2 and $3, respectively.  These amounts are recorded in the cash flows from financing activities section of the Company’s consolidated statements of cash flows.
 
Information with respect to the activity of outstanding stock options granted under the 2000 Plan and options granted separately from the 2000 Plan for the three months ended March 31, 2012 is summarized as follows:
 
                   
Weighted
 
Aggregate
 
   
Number
             
Average Remaining
 
Instrinsic
 
   
of Shares
   
Price Range
 
Contractual term
 
Value
 
                           
Balance, January 1, 2012
    2,425,794     $ 1.49 -   $ 4.65          
                                 
Granted
    354,500     $ 2.00 -   $ 2.00          
Cancelled / Forfeited
    (103,791 )   $ 1.50 -   $ 4.56          
                                 
Balance, March 31, 2012
    2,676,503     $ 1.49 -   $ 4.65  
 6.9 years
  $ 271  
                                   
Vested and excercisable at
                                 
March 31, 2012
    1,259,193     $ 1.49 -   $ 4.65  
 5.0 years
  $ 166  
                                   
Expected to vest as of
                                 
March 31, 2012
    2,555,066     $ 1.49 -   $ 4.65  
 6.8 years
  $ 261  
 
 
10

 
 
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
 
During the three month period ended March 31, 2012, there were 354,500 options granted with a weighted average grant date fair value, based on a Black-Scholes option pricing model, of $0.98 per share.  Of the options granted, 60,000 were granted to nonemployees.  The assumptions used in the Black-Scholes model are as follows: dividend yield 0%, expected volatility 47.62%, risk-free interest rate 1.28% and expected life of 6.87 years.  The Company uses the Simplified Method for determining the expected life of options granted to employees which is computed using the sum of the average vesting period and the contractual life of the option and dividing by two, for all periods presented.  The Company uses the contractual life of the option to determine the expected life of the option for nonemployees.
 
The following table provides additional information about the Company’s stock options outstanding and exercisable at March 31, 2012:
 
                 
Options Outstanding
   
Options Exercisable
 
                       
Weighted Average
         
Wtd. Average
 
 
Range of
   
Number of
   
Remaining
 
Exercise
   
Number of
   
Exercise
 
 
Exercise Prices
   
Shares
   
Contractual Life
 
Price
   
Shares
   
Price
 
                                             
$
   1.49
  -     $ 2.51       2,126,952       8.0
 Years
  $ 1.89       709,642     $ 1.71  
$
 3.05
  -     $ 3.57       134,700       1.6
 Years
  $ 3.39       134,700     $ 3.39  
$
 3.69
  -     $ 4.65       414,851       3.0
 Years
  $ 4.16       414,851     $ 4.16  
$
 1.49
  -     $ 4.65       2,676,503       6.9
 Years
  $ 2.32       1,259,193     $ 2.70  
 
A summary of the status of the Company’s unvested restricted stock as of December 31, 2011 and changes during the three month period ended March 31, 2012 is presented below.
 
         
Weighted Average
       
         
Grant Date
   
Aggregate
 
   
Shares
   
Fair Value
   
Intrinsic Value
 
                   
                   
Non-vested RSA’s at January 1, 2012
    116,250     $ 1.78        
Granted
    85,000     $ 2.10        
Vested
    (12,500 )   $ 1.82        
Cancelled / forfeited
    (15,000 )   $ 1.56        
                       
Non-vested RSA’s at March 31, 2012
    173,750     $ 1.95     $ 325  
                         
Expected to vest at March 31, 2012
    167,500     $ 1.96     $ 313  
 
Restricted stock granted is generally scheduled to vest over periods of two to four years. The cost of the grant is charged to operations over the vesting period.  At March 31, 2012, the weighted average remaining term of non-vested restricted stock was 1.9 years.
 
 The Company also issued 410,000 performance-based Restricted Stock Units (“RSUs”) during the three months ended March 31, 2012.  The fair value of an RSU is equal to the market value of a share of stock on the date of grant.  The performance-based RSUs vest based upon the achievement of certain goals related to the Company’s senior management team, for periods ranging from June 30, 2012 through December 31, 2015.  Unless forfeited, the performance-based RSUs will be paid out in the form of stock, if the Company meets the performance targets.  If the designated performance targets are not met, no payout will be made.
 
 
11

 
 
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
 
The Company also issued 315,000 performance-based RSUs during the three months ended March 31, 2011.  The performance-based RSUs vest based upon the achievement of certain revenue targets.  50% of the RSUs vest upon the achievement of certain revenue growth targets during any 12-month period prior to December 31, 2012, and any remaining unvested RSUs vest upon the achievement of certain revenue growth targets during any 12-month period prior to December 31, 2014.  Unless forfeited, the performance-based RSUs will be paid out in the form of stock, if the Company meets the performance targets.  If the designated performance targets are not met during any 12-month period prior to December 31, 2014, no payout will be made.  No expense has been recognized for these performance-based RSUs, as the probability of achieving the targets is currently assessed at not probable.
 
5.        INVENTORIES
 
The Company’s inventories are valued at the lower of cost or market. For inventories that consist primarily of test kit components, bulk serum and antibody products, cost is determined using the first in, first out method. For inventories that consist of costs associated with the production of custom antibodies, cost is determined using the specific identification method. At March 31, 2012 and December 31, 2011, inventories consisted of the following:
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
             
Raw materials
  $ 715     $ 706  
Work in progress
    904       717  
Finished goods
    635       719  
Inventories
  $ 2,254     $ 2,142  
 
6.        INTANGIBLE ASSETS
 
At March 31, 2012 and December 31, 2011, intangible assets consisted of the following:
 
   
March 31,
   
December 31,
       
   
2012
   
2011
   
Lives
 
Intangible assets
    2,614       2,614       2-20  
Accumulated amortization
    (1,436 )     (1,407 )        
Net intangible assets
  $ 1,178     $ 1,207          
 
 
12

 
 
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
 
7.        DEBT
 
On May 5, 2000, the Company entered into a financing agreement with a commercial bank which was amended on August 12, 2009 (as amended, the “Credit Agreement”).
 
On August 21, 2007, the Company received a term loan under the Credit Agreement to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $2,000 in financing, $200 of which was outstanding at March 31, 2012, and is repayable over five years, with principal payments that began on October 1, 2007. The loan bears a fixed interest rate of 5.96% with equal amortization of principal payments plus interest.
 
This indebtedness is secured by $200 in restricted cash as required by the Credit Agreement.
 
8.        INCOME TAXES
 
The Company evaluates its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required.  The Company had a full valuation allowance offsetting its U.S. federal and state net deferred tax assets which primarily represent net operating loss carryforwards (“NOLs”) at December 31, 2011.  During the three month period ended March 31, 2012, the Company’s management concluded that the full valuation allowance for U.S. federal and state net deferred tax assets is appropriate as the facts and circumstances during the first three months of 2012 did not change management’s conclusion that a full valuation allowance is necessary.
 
The Company is subject to U.S. federal and UK income tax, as well as income taxes of multiple state jurisdictions.   The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.  At March 31, 2012, the Company had no interest or penalties accrued related to uncertain tax positions due to the available NOLs.
 
           As of January 1, 2012, the Company provided a liability for approximately $554 of unrecognized tax benefits, which if recognized in a period where there was not a full valuation allowance, would affect the effective tax rate.  For the three months ended March 31, 2012, unrecognized tax benefits increased by $6 to $560, which if recognized in a period where there was not a full valuation allowance, would affect the effective tax rate.
 
          For federal purposes, post-1992 tax years remain open to examination as a result of earlier net operating losses being utilized in recent years. For state purposes, the statute of limitations remains open in a similar manner for states that have generated net operating losses. The Company does not expect that the total amount of unrecognized tax benefits related to positions taken in prior periods will change significantly during the next 12 months.
 
 
13

 
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 “SDIX”). In addition, when used in this quarterly report, 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 SEC including, without limitation, the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
Background
 
SDIX is a biotechnology company with a core mission of developing, commercializing and marketing innovative and proprietary products, services and solutions that preserve and enhance the quality of human health and wellness.
 
The Company believes that its competitive position has been enhanced through the combination of talent, technology and resources resulting from the business development activities it has pursued since its inception. The Company utilizes its facilities in Newark, Delaware for the manufacture of test kits and antibodies, and its facilities located in Windham, Maine for the manufacture of antibodies.
 
The Company believes that by applying its core competency of creating custom antibodies to assay development, it produces sophisticated diagnostic testing and reagent systems that are responsive to customer diagnostic and information needs. Customers benefit from a quantifiable “return on investment” by reducing time, labor and/or material costs associated with applications for which the Company’s products are used. In addition, the Company believes its tests provide high levels of accuracy, reliability and actionability of essential test results as compared to alternative products. The Company is focused on sustaining this competitive advantage by leveraging its expertise in immunology, proteomics, and other bio-reactive technologies to continue its successful customer-focused research and development efforts. The Company believes that an established product base, quality manufacturing expertise, experienced sales and marketing organization, established network of distributors, corporate partner relationships and proven research and development expertise will be critical elements of its potential future success.
 
The Company’s Life Sciences product portfolio includes a full suite of integrated capabilities including antibody and assay design, development and production. These capabilities, combined with our proprietary Genomic Antibody Technology™ (“GAT™”), are being used today to help discover the mechanisms of disease, facilitate the development of new drugs, and provide the means for rapid diagnosis. In 2009, the Company continued the transition from a fragmented product offering and marketing strategy to becoming a focused organization, with proven, proprietary technologies tied directly to its customers’ needs. The transition is most evident in the Life Science immuno-solutions initiative and food pathogen detection products, where the Company believes significant progress is being made.  In 2011, the Company sold its Water Quality assets as part of its overall strategy to focus on its core Life Science and Food Safety operations.  Financial information of the Water Quality division has been separately reclassified within the consolidated financial statements as a discontinued operation.  See Note 3 of the Notes to the Consolidated Financial Statements for further information.
 
The Company continues to develop and introduce new methods for the detection of food pathogens that deliver a strong competitive advantage to its customers. In 2009, a patent was issued to the Company for new technology to be used in proprietary enrichments of its food pathogen testing methods. The patent covers technology for increasing the specificity and sensitivity of the Company’s immunoassay test methods.
 
 
14

 
 
The Company continues to develop multiple channels to market worldwide through an approach that includes direct sales, inside sales, distributors and agents. The Company increased distribution for its food pathogen products in Europe and Asia where there is growing demand for the Company’s product line.
 
The Company believes it is making progress in most of its business efforts. As the deployment of new initiatives is accelerated, building on the Company’s leadership position in food pathogens and expanding its strong positioning in the emerging area of genomic antibodies, the Company anticipates that the revenue lost to market changes in its legacy businesses will be replaced and the Company will develop a stronger, more predictable revenue base.
 
The Company expects the Life Science and Food Safety products to be its primary growth drivers in the future, and that the Company’s competencies and competitive positions in these two areas are strong.
 
Results of Operations
 
Three Months Ended March 31, 2012 versus Three Months Ended March 31, 2011
 
Revenues for the three months ended March 31, 2012 decreased 14% to $5.6 million, compared to $6.6 million for the same period in 2011. The decrease in revenues in the first quarter of 2012 was the result of a 20% decrease in sales of Kit Products and a 12% decrease in the sale of Life Sciences products and services as discussed below in more detail.

   
Three Months Ended
             
   
March 31,
         
Percent
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(in thousands, except percentages)
       
Life Sciences
  $ 3,980     $ 4,498     $ (518 )     (12 %)
Kit Products
    1,657       2,060       (403 )     (20 %)
Revenues
  $ 5,637     $ 6,558     $ (921 )     (14 %)
 
Life Sciences Products and Services
 
Life Sciences revenues decreased 12% to $4.0 million for the three month period ended March 31, 2012, compared to $4.5 million for the same period in 2011.  This decrease was primarily the result of decreased sales to all of the Company’s customer categories, except invitro-diagnostic.  Sales to the Company’s in-vitro diagnostic customers increased 6% to approximately $2.7 million, sales to biopharma customers decreased 53% to $0.4 million, sales to content/resellers decreased 14% to $0.7 million and sales to academic/government customers decreased 24% to $0.2 million.  Included in the in-vitro diagnostic sales is $0.9 million recognized pursuant to the Becton Dickinson (BD) Diagnostics multiple-element arrangement as described in Note 1, Revenue Recognition.  These decreases were primarily related to the timing of IVD sales and a softening biopharmaceutical market.
 
Kit Products
 
Kit Products revenues decreased 20% to $1.7 million for the three months ended March 31, 2012 as compared to $2.1 million for the same period of 2011.  Sales of food pathogen products decreased 18% to $1.5 million for the three months ended March 31, 2012 from $1.8 million for the three month periods ended March 31, 2011.  This decrease was primarily the result of decreased sales of tests to detect the pathogen E. Coli, as USDA regulations for the testing of this pathogen in beef and beef products have changed, requiring many of the Company’s customers to change to a new method for testing (a technology different than the Company’s).  Ag-GMO product sales decreased 31%, to $0.2 million, in the first three months of 2012 as compared to the same period of 2011.  This decrease was primarily attributable to lower sales of seed testing products in Brazil, where sales have declined over the past few years due to reduced demand for the testing of Genetically Modified Organisms (GMO’s).
 
 
15

 
 
Gross profit
 
Gross profit for the three months ended March 31, 2012 was $3.2 million compared to $3.6 million for the same period in 2011. Gross margins were 57% and 56% for the three month periods ended March 31, 2012 and 2011, respectively.  The decrease in gross profit was primarily attributable to the lower level of sales in the 2012 period; the increase in gross margin was primarily attributable to the technology access fees recognized as revenue pursuant to the previously announced Beckton Dickinson (BD) Diagnostics multiple-element arrangement.
 
Research and development
 
Research and development expenses were $1.1 million, or 19% of revenues for the three month period ended March 31, 2012, compared to $863,000, or 13% of revenues for the three month period ended March 31, 2011.  This increase was primarily the result of increased spending related to the development of the Company’s advanced GATTM technology.
 
Selling, general and administrative
 
Selling, general and administrative expenses were $3.3 million for the three month period ended March 31, 2012 and $3.8 million for the three month period ended March 31, 2011.  This decrease was primarily the result of lower levels of personnel and their related cost.
 
Interest expense, net
 
The Company had net interest expense of $7,000 for the three month period ended March 31, 2012 compared to net interest expense of $9,000 for the three month period ended March 31, 2011. The decrease was primarily due to lower levels of debt in the 2012 period.
 
Income taxes
 
The Company recorded no income tax provision for the three month period ended March 31, 2012 compared to a tax benefit of $5,000 for the three month period ended March 31, 2011.  The Company has full valuation allowances placed against U.S. federal and state deferred tax assets.
 
Loss from continuing operations
 
Loss from continuing operations for the three month period ended March 31, 2012 was $1.2 million, or $0.06 per diluted share, compared to a loss from continuing operations of $1.0 million, or $0.05 per diluted share, for the three month period ended March 31, 2011.  Diluted shares utilized in these computations were 20.5 million and 20.4 million for the 2012 and 2011 three month periods respectively.
 
Income from discontinued operations
 
Income from the Company’s discontinued operations of its water and environmental assets were $388,000 for the three month period ended March 31, 2011.  Income per share from discontinued operations was $0.02 per diluted share for the three month period ended March 31, 2011.  Diluted shares utilized in this computation were 20.4 million.
 
Net loss
 
Net loss was $1.2 million, or $0.06 per diluted share, for the three month period ended March 31, 2012, compared to a net loss of $658,000, or $0.03 per diluted share, for the same period in 2011. Diluted shares utilized were 20.5 million and 20.4 million for the 2012 and 2011 periods, respectively.
 
 
16

 
 
Liquidity and Capital Resources
 
The net cash used in operating activities was $306,000 for the first three months of 2012 compared to net cash provided by operating activities of $495,000 for the first three months of 2011.  The net cash used in operating activities for the 2012 period was primarily the result of the net loss incurred and an increase in other current assets, partially offset by an increase in accrued expenses and deferred revenue.  The net cash provided by operating activities for the 2011 period was primarily the result of a decrease in accounts receivable and an increase in accrued expenses, partially offset by the net loss incurred for the period.
 
Net cash used in investing activities of $585,000 for the first three months of 2012 related to the capital expenditures for the period. This compares to net cash used in investing activities of $83,000 for the first three months of 2011. The capital expenditures for the 2012 period were primarily related to purchases of manufacturing and laboratory equipment, as well as leasehold improvements.  The capital expenditures for the 2011 period were primarily related to computer equipment.
 
Net cash provided by financing activities of $2,000 for the first three months of 2012 was attributable to a reduction in the Company’s restricted cash requirement offset by scheduled debt repayments and payments into the Company’s Employee Stock Purchase Plan.  Net cash provided by financing activities of $3,000 for the first three months of 2011 was the result of a reduction in the Company’s restricted cash requirement offset by scheduled debt repayments and payments into the Company’s Employee Stock Purchase Plan.
 
The Company’s working capital (current assets less current liabilities) was $13.5 million at March 31, 2012 compared to $14.9 million at December 31, 2011.
 
On May 5, 2000, the Company entered into a financing agreement with a commercial bank which was amended on August 12, 2009 (as amended, the “Credit Agreement”).
 
On August 21, 2007, the Company received a term loan under the Credit Agreement to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $2 million in financing, $200,000 of which was outstanding at March 31, 2012, and is repayable over five years, with principal payments that began on October 1, 2007. The loan bears a fixed interest rate of 5.96% with equal amortization of principal payments plus interest.
 
This indebtedness is secured by $200,000 in restricted cash as required by the Credit Agreement.
 
For the three months ended March 31, 2012, the Company satisfied all of its cash requirements from cash available and on-hand.  At March 31, 2012, the Company had $200,000 of debt and $19.0 million of stockholders’ equity.
 
Based upon its cash and cash equivalents 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 through at least the next 12 months.  In reaching this conclusion, the Company has taken into account its expectation of increased capital expenditures in 2012 with respect to certain renovations and modifications to its facilities in Newark, Delaware.  These renovations are designed to provide for larger and improved R&D laboratory space to accommodate the GATTM technology development efforts and also to modernize the animal facility and ensure that biosecurity measures are aligned with current industry practices and all for the Company to minimize and ameliorate the effects of animal diseases.
 
The Company’s ability to meet its long-term capital needs will depend on a number of factors, including compliance with 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.
 
 
17

 
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
The Company conducts operations in the 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
 
(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 Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2012, our disclosure controls and procedures were effective 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.
 
(b)
Change in Internal Control over Financial Reporting
 
No change in the Company’s internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting

 
18

 
 
PART II – OTHER INFORMATION
 
Item 6. Exhibits
 
10.1
Collaboration, License and Supply Agreement, dated as of February 2, 2012, between Beckton Dickinson and Company, through its BD diagnostics – diagnostics Systems business unit, and Strategic Diagnostics Inc., d/b/a/ SDIX.*
 
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
 
101.INS
XBRL Instance document
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
* Confidential treatment has been granted as to certain portions of this exhibit pursuant to rule 24b-2 under the    Securities Exchange Act of 1934, as amended.
 
 
19

 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
STRATEGIC DIAGNOSTICS INC.
     
Date: May 14, 2012
 
/s/ Francis M. DiNuzzo
   
Francis M. DiNuzzo
President, Chief Executive Officer
(Principal Executive Officer)
 
Date: May 14, 2012
 
/s/ Kevin J. Bratton
   
Kevin J. Bratton
Vice President – Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
20

XNAS:SDIX Quarterly Report 10-Q Filling

XNAS:SDIX Stock - Get Quarterly Report SEC Filing of XNAS:SDIX stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:SDIX Quarterly Report 10-Q Filing - 3/31/2012
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