Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SDIX > SEC Filings for SDIX > Form 10-K on 15-Apr-2013All Recent SEC Filings

Show all filings for STRATEGIC DIAGNOSTICS INC/DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-K for STRATEGIC DIAGNOSTICS INC/DE/


15-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This annual report 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 annual 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 U.S. Securities and Exchange Commission.

Introductory Note

On April 5, 2013, SDIX, the Purchaser and OriGene entered into the Asset Purchase Agreement.

Pursuant to the terms and conditions of the Asset Purchase Agreement, the Purchaser will acquire all of the Company's right, title, and interest in the Purchased Assets related exclusively to the Company's life sciences business, the product portfolio in respect of which includes a full suite of integrated capabilities, including antibody and assay design, development and production and the Advanced Technologies Business. The Purchaser will also assume and agree to discharge the Assumed Liabilities, as defined in the Asset Purchase Agreement. Parent unconditionally guarantees Purchaser's obligations in the Asset Purchase Agreement. The purchase price for the Purchased Assets is $16,000,000, which is subject to a post-closing working capital adjustment. The Company will retain the cash from the purchase price, less the escrow amount (described below) until such amount, if any, is released from escrow.

The Company and Purchaser each made customary representations, warranties and covenants in the Asset Purchase Agreement. At closing, $1,300,000 of the purchase price will be placed in escrow to be governed by the terms of a separate escrow agreement. The Asset Purchase Agreement contains indemnification provisions pursuant to which the Company and the Purchaser have agreed to indemnify the other for certain losses, including with respect to environmental, litigation, tax and other matters.

Customary covenants govern the time between the date of the Asset Purchase Agreement and the closing regarding conduct of the Business, access to information pertaining to the Business, confidentiality, publicity, and notification of certain events. The Asset Purchase Agreement also contains restrictive covenants, including, that the Company not (i) engage in a competing business for a period of five years after the closing date, (ii) directly or indirectly solicit Purchaser's employees for a period of two years after the closing date, (iii) directly or indirectly solicit the Purchaser's customers for a period of five years after the closing date and (iv) disparage the Purchaser at any time.

The closing will occur by August 31, 2013, unless otherwise agreed by the Company and Purchaser. The Asset Purchase Agreement may be terminated (i) by mutual written consent of the Company and the Purchaser, (ii) if closing does not occur on or before August 31, 2013, (iii) if stockholder approval is not obtained by the Company, (iv) if the Company receives a Superior Proposal, as defined in the Agreement, (v) by Purchaser if there has been a Material Adverse Effect, as defined in the Asset Purchase Agreement, and in other circumstances. The Company has agreed to pay the Purchaser a termination fee of $480,000 if, among other things, (i) stockholder approval is not obtained by the Company, (ii) the Company changes its recommendation to the stockholders or
(iii) the Company accepts an Acquisition Proposal, as defined in the Asset Purchase Agreement, and a transaction is consummated within 12 months of termination of the Asset Purchase Agreement.

Except as otherwise indicated, the disclosure set forth in this Form 10-K does not give effect to the closing of the Asset Sale, which is subject to conditions as described above. Should the Asset Sale be consummated, the Company will no longer own its historical operating assets, and its past business operations will be discontinued.

Overview

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 has achieved meaningful economies of scale for the products it offers through the utilization of its consolidated 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 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 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 2011, 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 Company sold its Water Quality and Environmental products assets in 2011 and its Food Pathogen and AG-GMO products assets in 2012, as part of its overall strategy to focus on its core Life Science operations. Financial information of the Water Quality and Food/AG-GMO product groups 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 continued to develop multiple channels to market worldwide through an approach that includes direct sales, inside sales, distributors and agents.

Results of Operations

Year ended December 31, 2012 versus year ended December 31, 2011

Revenues

Revenues for the year ended December 31, 2012 decreased 9% to $15.1 million compared to $16.5 million for the year ended December 31, 2011. The decrease in revenues was primarily the result of a 32% decrease in sales to content/reseller customers as described below.

Sales to the Company's content/reseller customers decreased 32% to $2.3 million. This decrease was 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. Sales to the Company's biopharma customers decreased 22% to $2.2 million. This decrease was primarily attributable to recent consolidation within the biopharma industry. Sales to the Company's academic/government customers decreased 22% to $541,000. These decreases were offset by an increase in sales to the Company's IVD customers of 5% to $10.1 million. Included in in-vitro diagnostics sales is $1.25 million related to the Becton Dickinson (BD) Diagnostics multiple-element arrangement as described in Note 2 to the accompanying financial statements, Revenue Recognition.

Gross profit

Gross profit decreased to $7.5 million for the year ended December 31, 2012 from $8.6 million for the year ended December 31, 2011. Gross margins decreased to 50% in 2012 compared to 52% in 2011. The decrease in margin was primarily attributable to the decreased level of sales in 2012.

Research and development

Research and development expenses were $3.5 million for the year ended December 31, 2012, compared to $3.3 million for the year ended December 31, 2011. This increase was primarily due to increased spending and third party collaboration efforts related to the Company's proprietary GAT technology. Research and development expenses were 23% of revenues for the year ended December 31, 2012 versus 20% of revenues for the year ended December 31, 2011.

Selling, general and administrative

Selling, general and administrative expenses were $11.2 million for the year ended December 31, 2012, compared to $12.1 million for the year ended December 31, 2011. This decrease was primarily the result of reduced levels of personnel and related costs in the selling and marketing groups.

Interest expense, net

The Company recorded $25,000 in net interest expense for the year ended December 31, 2012 compared to $33,000 for the year ended December 31, 2011, due to lower levels of debt in 2012.


Income taxes

The Company recorded an income tax expense of $3,000 for the year ended December 31, 2012 compared to an income tax expense of $29,000 for the year ended December 31, 2011. The Company continues to have a full valuation allowance placed against all of its deferred tax assets.

Loss from continuing operations

Loss from continuing operations for the year ended December 31, 2012 was $7.2 million, or $0.35 per diluted share, compared to a loss from continuing operations of $6.8 million, or $0.33 per diluted share, for the year ended December 31, 2011. Diluted shares utilized in these computations were 20.5 million and 20.4 million for the 2012 and 2011 periods, respectively.

Income from discontinued operations

Income from the Company's discontinued operations of its water and environmental, food pathogen and Ag-GMO products assets were $11.5 million for the year ended December 31, 2012, and included a $9.9 million gain on the sale of the food pathogen and Ag-GMO assets, compared to $6.5 million for the year ended December 31, 2011, which included a $3.0 million gain on the sale of the water and environmental products assets.. Income per share from discontinued operations was $0.56 per diluted share in the year ended December 31, 2012 compared to $0.32 per diluted share in the year ended December 31, 2011. Diluted shares utilized in these computations were 20.5 million and 20.4 million for the 2012 and 2011 periods, respectively.

Net Income (loss)

Net income was $4.3 million for the year ended December 31, 2012, or $0.21 per diluted share, compared to a net loss of $298,000, or $0.01 per diluted share, for the year ended December 31, 2011. Diluted shares utilized in these computations were 20.5 million and 20.4 million for 2012 and 2011, respectively.

Year ended December 31, 2011 versus year ended December 31, 2010

Revenues

Revenues for the year ended December 31, 2011 increased 7% to $16.5 million compared to $15.4 million for the year ended December 31, 2010. The increase in revenue was the result of a 13% increase in sales to IVD customers as described below.

Sales to the Company's IVD customers increased 13% to $9.5 million for the year ended December 31, 2011. This increase was primarily due to one large customer purchasing in quantity to build a safety supply of material. Sales to the Company's content/resellers customers increased 7% to $3.4 million, and sales to the Company's biopharma customers increased 3% to $2.9 million. These increases were partially offset by a 26% decrease in sales to academic/government customers to $697,000. These changes continue to reflect the refocusing of the Company's sales efforts on in-vitro diagnostics and biopharma customers and away from academic and government related customers.

Gross profit

Gross profit increased to $8.6 million for the year ended December 31, 2011 from $8.4 million for the year ended December 31, 2010. Gross margins decreased to 52% in 2011 compared to 54% in 2010. The decrease in margin was primarily attributable to higher levels of both personnel and materials cost.

Research and development

Research and development expenses were $3.3 million, or 20% of revenues, for the year ended December 31, 2011, compared to $2.6 million, or 17% of revenues, for the year ended December 31, 2010. This increase was primarily due to increased spending and third party collaboration efforts related to the Company's proprietary GAT technology.

Selling, general and administrative

Selling, general and administrative expenses were $12.1 million for both years ended December 31, 2011 and 2010.

Interest expense, net

The Company recorded $33,000 in net interest expense for the year ended December 31, 2011 compared to net interest expense of $42,000 for the year ended December 31, 2010. This decrease is due primarily to lower levels of debt in the 2012 period.


Income taxes

The Company recorded an income tax expense of $29,000 for the year ended December 31, 2011 compared to an income tax benefit of $8,000 for the year ended December 31, 2010. The Company continues to have a full valuation allowance placed against all of its deferred tax assets.

Loss from continuing operations

Loss from continuing operations for the year ended December 31, 2011 was $6.8 million, or $0.33 per diluted share, compared to a loss from continuing operations of $6.4 million, or $0.32 per diluted share, for the year ended December 31, 2010. Diluted shares utilized in these computations were 20.4 million and 20.3 million for the 2011 and 2010 periods, respectively.

Income from discontinued operations

Income from the Company's discontinued operations of its water and environmental, food pathogen and Ag-GMO product assets were $6.5 million for the year ended December 31, 2011, including a $3.0 million gain on sale of the water and environmental product assets, compared to $5.4 million for the year ended December 31, 2010. Income per share from discontinued operations was $0.32 per diluted share in the year ended December 31, 2011 compared to $0.27 per diluted share in the year ended December 31, 2010. Diluted shares utilized in these computations were 20.4 million and 20.3 million for 2011 and 2010, respectively.

Net loss

Net loss was $298,000 for the year ended December 31, 2011, or $0.01 per diluted share, compared to a net loss of $963,000, or $0.05 per diluted share, for the year ended December 31, 2010. Diluted shares utilized in these computations were 20.4 million and 20.3 million for 2011 and 2010, respectively.

Liquidity and Capital Resources

Liquidity is our ability to generate sufficient cash flows from operating activities to meet the Company's obligations and commitments, or obtain appropriate financing. Currently our liquidity needs arise primarily from debt service on indebtedness, working capital requirements and capital expenditures.

                                                             Year Ended
                                                            December 31,
                                                 2012                 2011          2010
                                                           (in thousands)
 Net cash provided by (used in) operating
 activities                                 $  (2,980 )   $           (692 )   $     425
 Net cash provided by (used in) investing
 activities                                    10,447                3,226          (522 )
 Net cash provided by (used in) financing
 activities                                       (20 )                 80           236
 Effect of exchange rate changes on cash           33                   (5 )         (20 )
 Net increase in cash and cash
 equivalents                                $   7,480     $          2,609     $     119

Net cash used in operating activities in 2012 was primarily the result of the net loss for the year (exclusive of the gain on sale of the Food/Ag-GMO products asset sale), partially offset by non cash charges for depreciation, amortization and stock based compensation. For 2011, net cash used in operating activities primarily related to the net loss for the year, partially offset by non cash charges for depreciation, amortization and stock based compensation. For 2010, net cash provided by operating activities primarily related to non cash charges for depreciation, amortization and stock based compensation charges, which more than offset the net loss incurred for the year.

Net cash provided by investing activities for 2012 was $10.5 million compared to net cash provided by investing activities of $3.2 million for 2011 and net cash used in investing activities of $522,000 in 2010. The 2012 cash inflows were primarily the result of the sale of the Food/AG-GMO products assets to Romer Labs, the net proceeds of which were $12.1 million, partially offset by $1.6 million in cash outflows for capital expenditures. The 2011 cash inflows were primarily the result of the sale of the Water and Environmental products assets to Modern Water PLC, the net proceeds of which were $4.2 million, partially offset by $991,000 in cash outflows for capital expenditures. The cash outflows for investing in 2010 was primarily the result of capital asset purchases which were $532,000. The capital expenditures in 2012 and 2011 were primarily related to leasehold improvements made to the Company's Delaware facilities and for the purchases of laboratory and manufacturing equipment. The capital expenditures in 2010 were primarily related to the purchase of computer and lab equipment.


Net cash used in financing activities was $20,000 in 2012, primarily related to the repayment of Company debt, partially offset by a reduction in the Company's restricted cash requirement. Net cash provided by financing activities was $80,000 in 2011, primarily related to the exercise of stock options during the year. Net cash provided by financing activities was $236,000 for 2010, primarily related to a $550,000 reduction in the restricted cash requirement from the Company's lender, partially offset by $400,000 in debt repayments.

The Company's working capital (current assets less current liabilities) increased to $20.6 million at December 31, 2012, from $14.9 million at December 31, 2011. The increase was primarily due to increased cash and cash equivalents, primarily as the result of the sale of the Company's Food/AG-GMO products assets. Outstanding debt decreased to $238,000 at December 31, 2012 from $300,000 at December 31, 2011, due to scheduled debt payments and the use of an equipment lease facility under which the Company financed $271,000 during the year. Outstanding debt decreased to $300,000 at December 31, 2011 from $700,000 at December 31, 2010 due to scheduled debt payments.

On March 26, 2012, the Company entered into a Master Equipment Lease agreement with a commercial bank (as amended November 14, 2012). The agreement is for a $500,000 revolving line of credit to lease equipment. The equipment leased has a distinct lease 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 $238,000 is outstanding as of December 31, 2012. Each of the 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 tangible net worth of not less than $15 million, minimum liquidity of $2 million and a requirement to maintain its primary banking accounts with the commercial bank. As of December 31, 2012, the Company was in compliance with all applicable loan covenants.

For the year ended December 31, 2012, the Company satisfied all of its cash requirements from cash and cash equivalents on-hand. At December 31, 2012, the Company had $238,000 in debt and stockholders' equity of $25.1 million.

Based upon its cash and cash equivalents on hand, 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 the next 12 months. However, the Company believes that it would ultimately need to become profitable on an operating basis in order to continue to have such sufficient resources.

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 program, 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 long-term liquidity requirements that may arise from these inherent and similar uncertainties.

Off-Balance Sheet Arrangements

As of December 31, 2012, the Company did not have any off-balance sheet arrangements as defined in Item 304(a) (4) (ii) of Regulation S-K.


Contractual Obligations

The Company is committed to making cash payments in the future on two types of
contracts: its long-term indebtedness and leases. The Company has no off-balance
sheet debt or other such unrecorded obligations. Below is a schedule of the
future payments that the Company was obligated to make based on agreements in
place as of December 31, 2012.

                                          Payments Due by Year
                                                                               2018 and
                        2013    2014          2015            2016    2017      Beyond        Total
                                     (in thousands)
Long-term debt (1)     $  47      53            56              58      24             -        238
Operating leases (2)   $ 859     879           590             177       -             -      2,505
Total contractual
cash obligations       $ 906     932           646             235      24             -      2,743

(1) See Note 7 to the Consolidated Financial Statements for a discussion of long-term debt
(2) See Note 10 to the Consolidated Financial Statements for a discussion of operating leases

Critical Accounting Policies

The Company's accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements. The Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles ("GAAP"), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, inventories, deferred taxes, long-lived assets and stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. The Company considers the following policies to be most critical in understanding the judgments that are involved in preparing the Consolidated Financial Statements and the uncertainties that could impact the consolidated results of operations, financial condition and cash flows.

Valuation of Accounts Receivable - Accounts receivable as of December 31, 2012 and December 31, 2011, were net of an allowance for doubtful accounts of $63,000 and $141,000, respectively. The recorded allowance is continually evaluated based on current market conditions, an analysis of customer-specific facts and circumstances, and the size and composition of the overall portfolio. The current state of the economy could cause longer sales cycles resulting in increased risk that outstanding balances could become uncollectible. If receivables are in dispute with the customer or otherwise deemed uncollectible, the corresponding amounts are written off and are charged against the allowance.

Valuation of Inventories - Inventories are valued at the lower of cost or market.

For inventories that consist primarily of lab supplies, bulk antibody serum and antibody products, cost is determined using the first in, first out method. Realization of inventories is dependent upon the successful marketing of our products. Judgments are made regarding the carrying value of inventory based on current market conditions. Market conditions may change depending upon competitive product introductions and customer demand. If market conditions change or if the introduction of new products by the Company impacts the market for previously released products, the Company may be required to write-down the cost of its inventory.

For inventories that consist of costs associated with the production of custom antibodies, cost is determined using the specific identification method. Realization of such inventories is dependent upon the successful completion of a project in accordance with customer specifications. Losses on projects in progress are recorded in the period such losses become probable and estimable.

Deferred Taxes - In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of . . .

  Add SDIX to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SDIX - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.