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SDIX > SEC Filings for SDIX > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for STRATEGIC DIAGNOSTICS INC/DE/


15-May-2013

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, 2012.

Introductory Note

On April 5, 2013, Strategic Diagnostics Inc., a Delaware corporation ("SDIX Inc."), SDIX, LLC, a Delaware limited liability company (the "Purchaser") and OriGene Technologies, Inc., a Delaware corporation and the ultimate parent of the Purchaser ("Parent" or "OriGene") entered into an Asset Purchase Agreement (the "Asset Purchase Agreement").

Pursuant to the terms and conditions of the Asset Purchase Agreement, the Purchaser will acquire all of SDIX Inc.'s right, title, and interest in substantially all of the assets, equipment, inventory, and intellectual property (the "Purchased Assets") related exclusively to SDIX Inc.'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 "Asset Sale"). 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 million, which is subject to a post-closing working capital adjustment. SDIX Inc. will retain the cash from the purchase price, less the escrow amount (described below) until such amount, if any, is released from escrow.

SDIX Inc. and Purchaser each made customary representations, warranties and covenants in the Asset Purchase Agreement. At closing, $1.3 million 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 SDIX Inc. 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 SDIX Inc. 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 SDIX Inc. and Purchaser. The Asset Purchase Agreement may be terminated (i) by mutual written consent of SDIX Inc. and the Purchaser, (ii) if closing does not occur on or before August 31, 2013, (iii) if stockholder approval is not obtained by SDIX Inc., (iv) if SDIX Inc. 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. SDIX Inc. has agreed to pay the Purchaser a termination fee of $480,000 if, among other things, (i) stockholder approval is not obtained by SDIX Inc., (ii) SDIX Inc. changes its recommendation to the stockholders or (iii) SDIX Inc. 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.


Following the asset sale transaction, the Company's Board plans to explore strategic alternatives to deploy the proceeds of the asset sale transaction and the Company's other assets, which may include future acquisitions, a merger with another company, or other actions to redeploy capital, including without limitation, distribution of cash to SDIX shareholders.

Except as otherwise indicated, the disclosure set forth in this Form 10-Q 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 assets in 2011 and its Food Pathogen and AG-GMO assets in 2012, as part of its overall strategy to focus on its core Life Science operations. Financial information of the Food/AG-GMO product groups has been separately reclassified within the consolidated financial statements as a discontinued operation. See Note 4 of the Notes to the Consolidated Financial Statements for further information.

Results of Operations

Three Months Ended March 31, 2013 versus Three Months Ended March 31, 2012

Due to the previously mentioned agreement with Origene to purchase substantially all of the non-cash assets of the Company, discussion concerning revenues, costs of sales and operating expenses are more fully explained in the discontinued operations portion of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Selling, general and administrative

Selling, general and administrative expenses were $454,000 for the three-month period ended March 31, 2013 and $441,000 for the three months ended March 31, 2012. These costs reflect the levels of personnel and professional fees related to the minimal operations that the Company expects to continue following the consummation of the Asset Sale.


Income taxes

The Company recorded no income tax provision for the three-month periods ended March 31, 2013 and March 31, 2012. The Company has full valuation allowances placed against U.S. federal and state deferred tax assets.

Loss from continuing operations

Loss from continuing operations was $454,000, or $0.02 per diluted share for the three-month period ended March 31, 2013, and $441,000, or $0.02 per diluted share for the three-month period ended March 31, 2012. Diluted shares utilized in these computations were 20.6 million and 20.5 million for the 2013 and 2012 three-month periods respectively.

Loss from discontinued operations

Loss from discontinued operations of the Company's life sciences assets was $1.1 million in the three-month period ended March 31, 2013, compared to losses from discontinued operations of the Company's life sciences, food pathogen and AG-GMO assets of $756,000 for the three-month period ended March 31, 2012. Loss per diluted share from discontinued operations was $0.06 for the three-month period ended March 31, 2013 and $0.04 for the three-month period ended March 31, 2012. Diluted shares utilized in this computation were 20.6 million and 20.5 million for the 2013 and 2012 three-month periods, respectively.

Revenues - discontinued operations

Revenues for the three months ended March 31, 2013 decreased 40% to $3.4 million, compared to $5.6 million for the same period in 2012. This decrease was primarily the result of the sale of the Food Pathogens - Ag products assets in 2012, which had revenue of $1.6 million in the 2012 three-month period. The remaining difference is the result of decreases in sales to the Company's Life Sciences customers of 15%, from $3.9 million to $3.4 million. This decrease was primarily the result of lower sales to academic customers of 52%, from $0.2 million to $0.1 million, content/resellers of 31%, from $0.7 million to $0.4 million and IVD customers of 17% from $2.7 million to $2.3 million. The Company recorded an increase in sales of 33% to its biopharma customers from $0.4 million to $0.6 million. Included in IVD sales for 2012 was $0.9 million recognized pursuant to the BD Diagnostics multiple-element arrangement as described in Note 2, Revenue Recognition.

Gross profit - discontinued operations

Gross profit for the three months ended March 31, 2013 was $1.7 million compared to $3.2 million for the same period in 2012. Gross margins were 50% and 57% for the three month periods ended March 31, 2013 and 2012, respectively. The decrease in gross profit was primarily attributable to the lower level of sales in the 2013 period; the decrease in gross margin was primarily attributable to the technology access fees recognized in the 2012 period as revenue pursuant to the BD Diagnostics multiple-element arrangement.

Research and development - discontinued operations

Research and development expenses were $486,000, or 14% of revenues, for the three-month period ended March 31, 2013, compared to $1.1 million, or 19% of revenues, for the three-month period ended March 31, 2012. This decrease was primarily the result of decreased levels of personnel and their related costs in the 2013 period.

Selling, general and administrative - discontinued operations

Selling, general and administrative expenses were $2.3 million, or 69% of revenues, for the three-month period ended March 31, 2013, compared to $2.8 million, or 50% of revenues, for the three-month period ended March 31, 2012. This decrease was primarily the result of lower levels of personnel and their related cost.


Interest expense, net - discontinued operations

The Company had net interest expense of $5,000 for the three-month period ended March 31, 2013 compared to net interest expense of $7,000 for the three-month period ended March 31, 2012. The decrease was primarily due to lower levels of debt in the 2013 period.

Net loss

Net loss was $1.6 million, or $0.08 per diluted share, for the three-month period ended March 31, 2013, compared to a net loss of $1.2 million, or $0.06 per diluted share, for the same period in 2012. Diluted shares utilized were 20.6 million and 20.5 million for the 2013 and 2012 periods, respectively.

Liquidity and Capital Resources

The net cash used in operating activities was $1.8 million for the first three months of 2013 compared to net cash used in operating activities of $306,000 for the first three months of 2012. The net cash used in operating activities for the 2013 period was primarily the result of the net loss incurred and the use of cash by discontinued operations. The net cash used in operating activities for the 2012 period was primarily the result of the net loss incurred and partially offset by the cash provided by discontinued operations.

Net cash used in investing activities of $277,000 for the first three months of 2013 related to the capital expenditures for the period. This compares to net cash used in investing activities of $585,000 for the first three months of 2012. The capital expenditures for the 2013 and 2012 periods were primarily related to purchases of manufacturing and laboratory equipment, as well as leasehold improvements.

Net cash used in financing activities of $11,000 for the first three months of 2013 was attributable to scheduled debt repayments. Net cash provided by financing activities of $2,000 for the first three months of 2012 was the result of a reduction in the Company's restricted cash requirement 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 $18.9 million at March 31, 2013 compared to $20.6 million at December 31, 2012.

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 $316,000 against this Master Equipment Lease agreement, which includes four separate leases, of which $270,000 is outstanding as of March 31, 2013. 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 agreement, 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 March 31, 2013, the Company was in compliance with all applicable loan covenants.

For the three months ended March 31, 2013, the Company satisfied all of its cash requirements from cash available and on-hand. At March 31, 2013, the Company had $270,000 of debt and $23.6 million of stockholders' equity. This debt is included in both current liabilities held for sale ($55,000) and non-current liabilities held for sale ($215,000). (Note 4, Discontinued Operations)


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 decreased needs for liquidity based upon the pending Asset Purchase Agreement (see Note 1, Subsequent Events).

The Company's ability to meet its long-term capital needs will depend on a number of factors, including compliance with new loan covenants, future relationships with corporate partners, government regulation, 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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