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, 2010, the weighted average remaining term of non-vested restricted stock was 1.7 years.
At March 31, 2010 and December 31, 2009, intangible assets consisted of the following:
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, $1,000 of which was outstanding at March 31, 2010, 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.
7. 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, 2009. During the three month period ended March 31, 2010, 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 2010 have not changed 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, 2010, the Company had no interest or penalties accrued related to uncertain tax positions due to the available NOLs.
As of January 1, 2010, the Company provided a liability for approximately $510 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, 2010, unrecognized tax benefits increased by $1 to $511, which if recognized in a period where there was not a full valuation allowance, would affect the effective tax rate.
For federal purposes, post-1993 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.
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, 2009.
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 has achieved meaningful economies of scale for the products it offers through the utilization of its consolidated facilities in Newark, Delaware for the manufacture of test kits and antibodies, and its facility 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, bio-luminescence 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.
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.
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, the Company received a patent 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. The patent also makes claims for the application of the technology in large scale bio-production/bio-fermentation processes, such as those used in the production of amino acids, ethanol, enzymes and other processes using microbiological production methods.
The Company continued 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 many 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 pathogen product lines to be its primary growth drivers in the future, and that the Company’s competencies and competitive positions in these two areas will remain strong.
Results of Operations
Three Months Ended March 31, 2010 versus Three Months Ended March 31, 2009
Revenues for the three months ended March 31, 2010 decreased 3% to $6.7 million, compared to $6.9 million for the same period in 2009. The decrease in revenues in the first quarter of 2010 was primarily the result of a 7% decrease in sales of kit products, partially offset by a 3% increase in sales of Life Science products.
| | | | Three Months Ended | | | | | | | |
| | | | March 31, | | | Increase | | | Percent | |
| | | | 2010 | | | 2009 | | | (Decrease) | | | Change | |
| | | | (in thousands, except percentages) | | | | |
| | Life sciences | | $ | 3,788 | | | $ | 3,678 | | | $ | 110 | | | | 3 | % |
| | Kit products | | | 2,903 | | | | 3,129 | | | | (226 | ) | | | (7 | %) |
| | Contract | | | - | | | | 95 | | | | (95 | ) | | | (100 | %) |
| | Revenues | | $ | 6,691 | | | $ | 6,902 | | | $ | (211 | ) | | | (3 | %) |
Life Science Products
Life Science revenues increased 3% to $3.8 million for the three month period ended March 31, 2010, compared to $3.7 million for the same period in 2009. Sales of custom monoclonal products increased 61% to $1.1 million and custom polyclonal product sales increased 7% to $1.5 million. These increases were partially offset by decreases in sales of bulk antibody products of 22% to $0.9 million and sales of products utilizing the GAT TM platform of 32% to $0.2 million. This increase in Life Science revenues was primarily the result of increased sales to the Company’s largest Life Science customer and increased sales to the Company’s customers in the biopharma industry.
Kit Products
Kit product revenues decreased 7% to $2.9 million for the three months ended March 31, 2010 as compared to $3.1 million in the same period of 2009. Sales of food pathogen products remained the same at $1.4 million in the three month periods ended March 31, 2010 and 2009. Ag-GMO product sales decreased 6%, to $0.6 million in the first three months of 2010 as compared to the same period of 2009. Water and environmental products revenue decreased 17%, to $0.9 million in the three month period ended March 31, 2010 as compared to the same period of 2009, which was primarily attributable to lower sales of water testing equipment.
Gross profit (defined as total revenues less manufacturing costs) for the three months ended March 31, 2010 was $3.9 million compared to $3.8 million for the same period in 2009. Gross margins were 59% and 55% for the three month periods ended March 31, 2010 and 2009, respectively. The increase in gross margins is primarily attributable to effective cost control and more efficient manufacturing in kit products production.
Research and development expenses were $676,000 or 10% of revenues for the three month period ended March 31, 2010, compared to $663,000 or 10% of revenues in the three month period ended March 31, 2009.
Selling, general and administrative expenses were $3.7 million in both of the three month periods ended March 31, 2010 and 2009.
The Company had net interest expense of $12,000 for the three month period ended March 31, 2010 compared to net interest income of $5,000 in the three month period ended March 31, 2009. The decrease was primarily due to lower interest rates received on decreased levels of invested cash and cash equivalents during the 2010 period.
The Company has full valuation allowances placed against U.S. federal and state deferred tax assets.
Net loss was $459,000, or $0.02 per diluted share, for the three month period ended March 31, 2010, compared to a net loss of $561,000, or $0.03 per diluted share, for the same period in 2009. Diluted shares utilized in these computations were 20.2 million and 20.0 million for the 2010 and 2009 periods, respectively.
Liquidity and Capital Resources
The net cash provided by operating activities was $275,000 for the first three months of 2010 compared to net cash used in operating activities of $564,000 for the first three months of 2009. The net cash provided by operating activities for the 2010 period was primarily the result of the net loss recorded in the period, increases in accrued expenses and decreases in accounts receivable. The net cash used in operating activities for the 2009 period was primarily the result of the net loss recorded in the period, an increase in other current assets and a decrease in accrued expenses.
Net cash used in investing activities of $27,000 for the first three months of 2010 related primarily to the capital expenditures for the period. This compares to net cash used in investing activities of $193,000 for the first three months of 2009. Capital expenditures for 2010 and 2009 were primarily related to purchases of computer and electronic equipment.
Net cash used in financing activities of $86,000 for the first three months of 2010 was primarily attributable to scheduled debt repayments. Net cash used in financing activities of $149,000 for the first three months of 2009 was primarily the result of scheduled debt repayments.
The Company’s working capital (current assets less current liabilities) was $14.4 million at March 31, 2010 compared to $14.7 million at December 31, 2009.
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, $1.0 million of which was outstanding at March 31, 2010, 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 $1.25 million in restricted cash as required by the Credit Agreement.
For the three months ended March 31, 2010, the Company satisfied all of its cash requirements from cash available and on-hand. At March 31, 2010, the Company had $1 million in debt and $19.7 million in 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. 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.
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, 2010, 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.
PART II – OTHER INFORMATION
Item 6. Exhibits
| 31.1 | | Certifications of the Chief Executive Officer of Strategic Diagnostics Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 1934 |
| | | |
| 31.2 | | Certifications of the Chief Financial Officer of Strategic Diagnostics Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 1934 |
| | | |
| 32.1 | | Certification of the Chief Executive Officer of Strategic Diagnostics Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
| | | |
| 32.2 | | Certification of the Chief Financial Officer of Strategic Diagnostics Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
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 7, 2010 | | /s/ Francis M. DiNuzzo |
| | | Francis M. DiNuzzo President, Chief Executive Officer (Principal Executive Officer) |
| Date: May 7, 2010 | | /s/ Kevin J. Bratton |
| | | Kevin J. Bratton Vice President – Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |
