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SDIX > SEC Filings for SDIX > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for STRATEGIC DIAGNOSTICS INC/DE/

Form 10-Q for STRATEGIC DIAGNOSTICS INC/DE/


14-Nov-2012

Quarterly Report


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 and Windham, Maine for the manufacture of antibodies.

The Company believes that by applying its core competency of creating custom antibodies, it produces sophisticated antibodiesand reagents that are responsive to customer 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. 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 where the Company believes significant progress is being made. In 2011, the Company sold its Water Quality assets, and in 2012 the Company sold its Food and Ag/GMO assets, as part of its overall strategy to focus on its core Life Science operations. Financial information of the Water Quality, Food and Ag/GMO products 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.

Results of Operations

Three Months Ended September 30, 2012 versus Three Months Ended September 30, 2011

Revenues

Revenues for the three months ended September 30, 2012 decreased 2% to $4.0 million, compared to $4.1 million for the same period in 2011.


This decrease was primarily the result of decreased sales to the Company's content/reseller customer category. Sales to the Company's biopharma customers increased 36% to $0.8 million and sales to the Company's in-vitro diagnostic customers increased 7% to $2.6 million. These increases were more than offset by a decline in sales to the Company's content/reseller customers of 39% to $0.5 million and a decrease of 51% in sales to the Company's academic/government customers to $0.1 million. Included in the in-vitro diagnostic sales is $0.1 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 a change in the business strategy of the Company's largest content customer that has reduced its use of the Company's polyclonal services. The Company believes revenue from this customer will continue at reduced levels.

Gross profit

Gross profit for the three months ended September 30, 2012 was $1.9 million compared to $2.3 million for the same period in 2011. Gross margins were 48% and 56% for the three month periods ended September 30, 2012 and 2011, respectively. The decreases in gross profit and gross margin were primarily attributable to the lower level of sales and change in product mix in the 2012 period.

Research and development

Research and development expenses were $987,000, or 25% of revenues, for the three-month period ended September 30, 2012, compared to $930,000, or 23% of revenues, for the three-month period ended September 30, 2011. This increase was primarily the result of increased spending related to the development of the Company's advanced technologies.

Selling, general and administrative

Selling, general and administrative expenses were $2.6 million for the three-month period ended September 30, 2012 and $2.9 million for the three-month period ended September 30, 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 $5,000 for the three-month period ended September 30, 2012 compared to net interest expense of $10,000 for the three-month period ended September 30, 2011. This decrease was primarily due to the borrowings against the equipment financing revolving line of credit the Company secured in March 2012.

Income taxes

The Company recorded no income tax provision for the three-month period ended September 30, 2012 compared to a tax expense of $27,000 for the three-month period ended September 30, 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 September 30, 2012 was $1.7 million, or $0.08 per diluted share, compared to a loss from continuing operations of $1.6 million, or $0.08 per diluted share, for the three-month period ended September 30, 2011. Diluted shares utilized in these computations were 20.5 million for both the 2012 and 2011 three-month periods.

Income from discontinued operations

Income from the Company's discontinued operations of its food and Ag/GMO assets was $690,000 for the three-month period ended September 30, 2012. Income from the Company's discontinued operations of its water and environmental, food and Ag/GMO assets was $863,000 for the three-month period ended September 30, 2011. Income per share from discontinued operations was $0.03 per diluted share for the three-month period ended September 30, 2012, and $0.04 per diluted share for the three-month period ended September 30, 2011. Diluted shares utilized in these computations were 20.5 million for both the 2012 and 2011 three-month periods.


Net loss

Net loss was $1.0 million, or $0.05 per diluted share, for the three-month period ended September 30, 2012, compared to a net loss of $694,000, or $0.03 per diluted share, for the same period in 2011. Diluted shares utilized were 20.5 million for both the 2012 and 2011 three-month periods.

Nine Months Ended September 30, 2012 versus Nine Months Ended September 30, 2011

Revenues

Revenues for the nine months ended September 30, 2012 decreased 9% to $11.6 million, compared to $12.7 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 in-vitro diagnostic. Sales to the Company's in-vitro diagnostic customers increased 4% to $7.6 million, sales to biopharma customers decreased 23% to $1.8 million, sales to content/resellers decreased 28% to $1.8 million and sales to academic/government customers decreased 27% to $0.4 million. Included in the in-vitro diagnostic sales is $1.1 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, a softening biopharmaceutical market and a change in the business strategy of the Company's largest content customer that has reduced its use of the Company's polyclonal services. The Company believes revenue from this customer will continue at reduced levels.

Gross profit

Gross profit for the nine months ended September 30, 2012 was $5.9 million compared to $7.0 million for the same period in 2011. Gross margins were 51% and 55% for the nine-month periods ended September 30, 2012 and 2011, respectively. The decreases in gross profit and gross margin were primarily attributable to the lower level of sales and change in product mix in the 2012 period.

Research and development

Research and development expenses were $2.8 million, or 24% of revenues, for the nine-month period ended September 30, 2012, compared to $2.4 million, or 19% of revenues for the nine-month period ended September 30, 2011. This increase was primarily the result of increased spending related to the development of the Company's advanced technologies.

Selling, general and administrative

Selling, general and administrative expenses were $8.4 million for the nine-month period ended September 30, 2012 and $9.2 million for the nine-month period ended September 30, 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 $22,000 for the nine-month periods ended September 30, 2012 and $27,000 for the nine-month period ended September 30, 2011. This decrease was primarily attributable to the lower levels of debt in the 2012 period.

Income taxes

The Company recorded no income tax provision for the nine-month period ended September 30, 2012 compared to a tax expense of $29,000 for the nine month period ended September 30, 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 nine-month period ended September 30, 2012 was $5.3 million, or $0.26 per diluted share, compared to a loss from continuing operations of $4.7 million, or $0.23 per diluted share, for the nine-month period ended September 30, 2011. Diluted shares utilized in these computations were 20.5 million and 20.4 million for the 2012 and 2011 nine-month periods, respectively.


Income from discontinued operations

Income from the Company's discontinued operations of its food and Ag/GMO assets was $1.7 million for the nine-month period ended September 30, 2012. Income from the Company's discontinued operations of its water and environmental, food and Ag/GMO assets was $2.7 million for the nine-month period ended September 30, 2011. Income per share from discontinued operations was $0.08 per diluted share for the nine-month period ended September 30, 2012 and $0.13 per diluted share for the nine-month period ended September 30, 2011. Diluted shares utilized in these computations were 20.5 million and 20.4 million for the 2012 and 2011 nine month periods, respectively.

Net loss

Net loss was $3.7 million, or $0.18 per diluted share, for the nine-month period ended September 30, 2012, compared to a net loss of $2.0 million, or $0.10 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.

Liquidity and Capital Resources

The net cash used in operating activities was $2.2 million for the first nine months of 2012 compared to net cash used in operating activities of $456,000 for the first nine 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 inventories, partially offset by an increase in accrued expenses and deferred revenue. The net cash used in operating activities for the 2011 period was primarily the result of the net loss incurred for the period, partially offset by an increase in accrued expenses.

Net cash used in investing activities of $1.5 million for the first nine months of 2012 related to the capital expenditures for the period. This compares to net cash used in investing activities of $641,000 for the first nine 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 leasehold improvements and computer equipment.

Net cash used in financing activities of $11,000 for the first nine months of 2012 was attributable to a reduction in the Company's restricted cash requirement offset by scheduled debt repayments. Net cash provided by financing activities of $77,000 for the first nine months of 2011 was the result of a reduction in the Company's restricted cash requirement, proceeds for the exercise of stock options and payments into the Company's Employee Stock Purchase Plan, offset by scheduled debt repayments. The Company's working capital (current assets less current liabilities) was $10.9 million at September 30, 2012 compared to $14.9 million at December 31, 2011.

On March 26, 2012, the Company entered into a Master Equipment Lease agreement with a commercial bank. The agreement is for a $500,000 revolving line of credit to purchase equipment. The equipment purchased has a distinct schedule under the agreement and provides for specific terms of payment related to that particular equipment lease. For accounting purposes, the leases are considered capital leases and accordingly are recorded as debt and amortized with an imputed interest rate according to the terms of the applicable equipment lease. All leases carry a one dollar buyout at lease end.

To date, the Company has borrowed $271,000 against this Master Lease agreement, which includes three separate leases, of which $250,000 is outstanding as of September 30, 2012. Each of three leases contains a 60 month term with an imputed interest rate of approximately 4.3%.

The Company has certain financial covenants to meet related to this Master Equipment Lease, including a debt coverage ratio of not less than 1.25 to 1 based upon a trailing 12 months basis, tangible net worth of not less than $15.0 million, minimum liquidity of $2.0 million and a requirement to maintain its primary banking accounts with the Commercial Bank. As of September 30, 2012, the Company was not in compliance with all applicable loan covenants and received a waiver of any action for non-compliance from the commercial bank for the quarter ended September 30, 2012.


For the nine months ended September 30, 2012, the Company satisfied all of its cash requirements from cash available and on-hand, and the above noted Master Equipment Lease agreement. At September 30, 2012, the Company had $250,000 of debt and $16.8 million of stockholders' equity.

Based upon its cash and cash equivalents on hand, cash to be received from the sale of its food and Ag/GMO product assets, 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 and into 2013 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 advanced 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.

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