June 30, 2005
Mr. John Cash
Accounting Branch Chief
Securities and Exchange Commission
Division of Corporation Finance
Washington, DC 20549
Re: Strategic Diagnostics Inc.
Form 10-K for the year ended December 31, 2004
Filed March 30, 2005
File No. 000-22400
Dear Mr. Cash:
This letter is in response to comments of the Staff contained in your letter to
Anthony J. Simonetta, Vice President -- Finance and Chief Financial Officer of
Strategic Diagnostics Inc. ("management", "we", "our", "us" or the "Company"),
dated June 10, 2005. The comments in the Staff's letter have been set forth
below, along with the Company's responses thereto.
The information contained herein is being furnished by the Company on a
supplemental basis. As set forth in the various responses below, the Company
proposes to include, where appropriate, revisions to its disclosures in future
filings under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). In this respect, as appropriate, the Company will include a number of
such disclosures in its Quarterly Report on Form 10-Q for the quarter ended June
30, 2005, to be filed on or about August 15, 2005. The Company proposes to
include any other appropriate additional disclosures in its Annual Report on
Form 10-K for the year ending December 31, 2005 (the "2005 Annual Report").
FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 2004
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Year Ended December 31, 2003 versus year ended December 31, 2002 -- Non-GAAP
Financial Measures, page 30
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Mr. John Cash
Securities and Exchange Commission
June 30, 2005
Page 2
1. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT TWO. HOWEVER, WE BELIEVE THAT
SINCE YOU CHOSE TO REPRESENT THE MEASURE "ADJUSTED NET INCOME" FOR THE
TWELVE MONTHS ENDED DECEMBER 3L, 2003 TO HIGHLIGHT THE ONE TIME EVENT OF
INVENTORY WRITE DOWNS YOU SHOULD ALSO PROVIDE SIMILAR DISCLOSURE FOR THE
TWELVE MONTHS ENDED DECEMBER 31, 2004 SO THAT READERS HAVE TRANSPARENT
DISCLOSURES WITH REGARD TO HOW YOUR INVENTORY WRITE DOWN IN 2003 IMPACTED
YOUR RESULTS OF OPERATIONS IN 2004. PLEASE REVISE YOUR DISCLOSURES AS
NECESSARY.
The Company will expand its disclosure of non-GAAP financial measures in
future filings in accordance with the Staff's comment.
Critical Accounting Policies -- Deferred Taxes, page 34
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2. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT THREE. HOWEVER, GIVEN THAT YOUR
DEFERRED TAX ASSETS ARE A SIGNIFICANT PORTION OF YOUR TOTAL ASSETS, WE
BELIEVE THAT IT IS IMPORTANT TO FULLY DISCUSS THE IMPACT OF YOUR
ASSUMPTIONS AND JUDGMENTS RELATING TO THE REALIZABLITY OF THIS ASSET WITHIN
YOUR CRITICAL ACCOUNTING POLICY SECTION. THEREFORE, AS PREVIOUSLY
REQUESTED, EXPAND YOUR DISCLOSURES TO ADDRESS THE AMOUNT AND TIMING OF YOUR
PROJECTED FUTURE TAXABLE INCOME NECESSARY TO FULLY UTILIZE YOUR NET
OPERATING LOSS CARRY FORWARDS.
The Company advises that, in future filings where providing such
information is required, the critical accounting policies discussion of
"Deferred Taxes" will be expanded to include the following:
o A table presenting by year the amount of net operating loss carry
forwards (NOLs) that expire in a given year.
o A statement to accompany the table that will read as follows: "Based on
the best information available to the Company today, the Company
expects to have sufficient future taxable income to utilize such NOLs
prior to the expiration of the net operating loss carry forwards."
o The positive and negative indicators we considered in reviewing the
recoverability of our deferred tax assets.
o The positive and negative indicators management considered in
concluding that a valuation allowance was necessary in certain state
jurisdictions and for foreign deferred tax assets.
Mr. John Cash
Securities and Exchange Commission
June 30, 2005
Page 3
Also, please refer to the Company's response to comment # 3 in our letter
to Mr. John Cash, Accounting Branch Chief, dated May 20, 2005.
Summary of Significant Accounting Policies, page F-6
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Revenue Recognition, page F-8
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3. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT SIX. GIVEN THAT THE SALE OF
IMMUNOASSAY-BASED TEST KITS AND THE SALE OF CERTAIN ANTIBODIES AND
IMMUNOCHEMICAL REAGENTS CAN IN SOME INSTANCES INCLUDE BOTH PRODUCTS AND
SERVICES, IT IS UNCLEAR TO US WHY MORE THAN ONE DELIVERABLE DOES NOT EXIST.
IN THIS REGARD, WE NOTE IN YOUR RESPONSE TO OUR PRIOR COMMENT EIGHT THAT
YOU OCCASIONALLY PROVIDE SERVICES RELATED TO THE HOUSING OF ANIMALS. PLEASE
PROVIDE US WITH A MORE COMPREHENSIVE DESCRIPTION OF THE NATURE OF YOUR
ARRANGEMENTS SO THAT WE MAY BETTER UNDERSTAND WHY YOU DO NOT BELIEVE THE
GUIDANCE IN EITF 00-21 DOES NOT APPLY.
The Company advises that sales of immunoassay-based test kits and certain
antibodies and immunochemical reagents do not include any instances where
both services and products are included in our deliverables.
Also, with regard to housing animals at the request of customers at the end
of a custom antibody project, such arrangements are typified by the
following characteristics:
o The initial arrangement with a customer for the production of
antibodies does not include the housing of animals.
o The payment of the fee for the delivery of the antibody in the initial
arrangement is not contingent upon the housing of the animals.
o The Company is not obligated to comply with a customers request to
house animals at the end of a project.
o The housing of animals only has value to a customer if the antibody
produced in the initial arrangement is successful.
o The customer does not make any commitment to buy additional antibodies
upon a request to house animals.
o The payment terms of the initial and subsequent arrangements do not
coincide with the housing of animals.
Mr. John Cash
Securities and Exchange Commission
June 30, 2005
Page 4
o The fee charged to the customer for housing animals is the same whether
or not subsequent arrangements for the production of antibodies are
entered into.
Based on the above, Management believes that the presumption that the
separate contracts entered into with the same entity have been negotiated
as a package is overcome, and therefore, do not fall within the scope of
EITF Issue 00-21 and should not be evaluated as a single arrangement.
4. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT SEVEN. IT REMAINS UNCLEAR TO US
WHY IT IS APPROPRIATE TO RECOGNIZE REVENUES RELATED TO THE SALE OF CERTAIN
ANTIBODIES AND IMMUNOCHEMICAL REAGENTS UNDER THE PERCENTAGE OF COMPLETION
METHOD OF ACCOUNTING.
o SPECIFICALLY ADDRESS FOR US HOW THE NATURE OF YOUR CONTRACTS FALLS
WITHIN THE SCOPE OF STATEMENT OF POSITION (SOP) 81-1. PLEASE TELL US
HOW YOU HAVE CONSIDERED FOOTNOTE 1 IN PARAGRAPH 11 AND PARAGRAPHS 13
AND 14 OF THIS GUIDANCE IN DETERMINING WHETHER YOUR CONTRACTS FALL
WITHIN THE SCOPE OF SOP 81-1.
The Company has considered the provisions of SOP 81-1, specifically
paragraphs 11 (including footnote 1), 13 and 14 as follows;
The Financial Accounting Standards Board (FASB) October 23, 1978
Invitation to Comment, Accounting for Certain Service Transactions
defines a service transaction as one that "may involve a tangible
product that is sold or consumed as an incidental part of the
transaction or is clearly identifiable as secondary or subordinate to
the rendering of the service."
In the case of the Company's contracts related to the production of
custom antibodies or reagents it is the antibody or reagent developed
from the buyers specifications that represents the deliverable of the
contract. Consequently, the product delivered to the buyer is not
incidental to the project and, accordingly, our contracts do not meet
the definition of a service transaction above.
Management believes that since these contracts (i) provide for the
performance of defined tasks for a fixed price, with delivery of the
antibody or reagent upon completion of production, (ii) are binding
agreements between the Company and the customer in which the Company
agrees, for compensation, to produce an antibody or reagent to the
customer's specifications, and (iii) require a time period to complete
that is typically longer than 30 days but less than 12 months, with
effort expended over the life of the project, and the Company having
the ability to
Mr. John Cash
Securities and Exchange Commission
June 30, 2005
Page 5
reasonably estimate the hours and costs to be incurred throughout the
contract term, they are not dissimilar to contracts to design, develop,
manufacture, or modify complex aerospace equipment to a buyer's
specifications as described in paragraph 13 of SOP 81-1.
Also, since these antibodies or reagents are (a) customized to meet a
customer's specific needs and not produced in a standard manufacturing
operation and (b) sold through a consultative selling process as
opposed to the marketing channels used for standard antibodies and
reagents, Management does not believe these contracts are similar to
those described in paragraph 14 of SOP 81-1.
o IN ADDITION, SPECIFICALLY TELL US (I) THE NATURE OF THE DELIVERABLES IN
THESE CONTRACTS, (II) WHETHER THESE CONTRACTS CALL FOR THE COMPLETION
OF CERTAIN TASKS OR SIMPLY THE DELIVERY OF THE ANTIBODIES OR
IMMUNOCHEMICAL REAGENTS, (III) WHETHER THESE CONTRACTS ARE BEST-EFFORTS
TYPE CONTRACTS AND (IV) WHETHER YOUR RIGHT TO RECEIVE PAYMENTS DEPEND
ON THE SUCCESSFUL PRODUCTION OF THE CUSTOM ANTIBODIES AND REAGENTS.
Additionally, the Company advises that (i) the nature of the
deliverable in these contacts is an antibody or reagent, (ii)
antibodies or reagents are developed and produced using animals or cell
culture methods and include specific tasks to achieve the desired end
result, (iii) these projects do not include a guarantee as to the
usefulness of the antibody or reagent produced and represent a best
efforts arrangement, and (iv) the Company's right to receive payment is
dependent on the successful production of antibodies or reagents to a
customer's specifications, but not whether those antibodies or reagents
will be able to be used in the project for which they were produced.
Any comments or questions with respect to the foregoing should be addressed to
Anthony J. Simonetta of the Company at 302-456-6789 ext. 305.
Very truly yours,
/s/ Anthony J. Simonetta
Anthony J. Simonetta, Vice President - Finance and CFO
cc: Ellen Goitia, KPMG
Justin Chairman, Morgan Lewis
Patricia Armelin, SEC
Jeanne Baker, SEC