Strategic Diagnostics 10-K 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2007
For the Transition Period From ____________ to ____________
Commission File No. 000-22400
STRATEGIC DIAGNOSTICS INC.
(Exact name of Registrant as specified in its charter)
Registrant’s telephone number, including area code: (302) 456-6789
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes o No x
The aggregate market value of the common stock held by non-affiliates of the Registrant was $70,504,684, calculated by using the number of shares outstanding and the closing price of the common stock on June 29, 2007 (the last business day of the Registrant’s most recently completed second fiscal quarter).
As of March 20, 2008 there were 20,483,061 shares outstanding of the Registrant’s common stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed no later than April 29, 2008 with the Securities and Exchange Commission relative to the Company’s 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.
Item 1. Business
Strategic Diagnostics Inc. ("SDI" or the "Company") is an antibody technology company with a core mission of developing, commercializing and marketing innovative and proprietary biotechnology that preserves and enhances the quality of human health.
SDI’s bio-services division supplies critical reagents used in the diagnosis of disease. The Company’s new Genomic Antibody Technology™ is gaining wide adoption in proteomic research, and drug/biomarker discovery among academic, biotech, in-vitro diagnostic and large pharmaceutical customers.
SDI’s industrial immunoassays represent state of the art technology for rapid, cost effective detection of food and water contaminants. SDI’s RapidChek® kits are experiencing fast growing adoption for the detection of pathogens such as E. coli, Salmonella and Listeria in the processing and manufacturing of food and beverages.
SDI technology is also finding new applications in strategic emerging markets such as renewable fuel, where the application of its patent pending phage technology is being developed to increase corn-to-ethanol profits through improvments in plant efficiency that generate higher yields at a lower operational cost.
By applying its core competencies of creating proprietary antibodies and assay development, the Company has produced unique, sophisticated testing and reagent systems that are responsive to customer diagnostic and information needs.
Beginning in the fourth quarter of 2004, the Company undertook a deliberate shift in its activities to address the rapidly emerging opportunities for proteomics. The analysis of the expression, localizations, functions, and interactions of proteins is one of the most rapidly growing areas of the life sciences industry. SDI’s proprietary antibody technology has growing acceptance as a game-changing innovation for drug research, development, in-vitro diagnostics, and bio-marker discovery. In addition to supporting customer based initiatives, SDI continues to build its own, high throughput discovery platforms and will pursue its own bio-marker candidates.
SDI is customer focused. The Company’s goals are to consistently deliver more value to our customers and reduce the costs and risks of doing business. SDI sales professionals focus on delivering a quantifiable “return on investment” to their customers 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 profitable growth by leveraging its expertise in immunology, proteomics, bio-luminescence and other bio-reactive technologies to successfully develop proprietary products and services that enhance the competitive advantage of its customers.
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 unique products it offers through the utilization of its consolidated facilities in Newark, Delaware, for the manufacture of test kits and antibodies, and its facilities located in Dallas, Texas and Windham, Maine for the manufacture of antibodies.
The Company currently meets its customers’ needs and generates revenues through two divisions, bio-services and industrial bio-detection services, which are described as follows:
SDI is a leader in providing a wide array of products and services, including custom antibodies, catalog antibodies, bulk antibodies and associated bio-processing services, SDI is an outsourcing partner for production of monoclonal and polyclonal antibodies embedded in commercialized products offered by leading diagnostic and pharmaceutical companies. SDI serves the research, bio-technology, human diagnostic, animal diagnostic and pharmaceutical industries. SDI’s many customers benefit from the Company’s proficiency and expertise in four areas:
The use of antibodies is a proven methodology used in research and diagnostics, and is of particular importance in proteomics, a rapidly growing segment of the Life Sciences market which involves the large-scale study of proteins, particularly as they relate to human conditions such as, among others, cancer, cardiovascular disease and neurological disorders.
Industrial Bio-Detection Tests
SDI’s detection technologies allow industrial customers to rapidly and cost-effectively identify the presence of adulterants, such as chemical toxins, biological pathogens and other contaminants, that can compromise human or environmental safety, and/or financially impact efficiencies of production processes. Many of SDI’s products are in the form of single use test devices, sample prep materials and reagents, thus creating recurring revenue opportunities. Specific industry applications include:
By leveraging its expertise in immunology, proteomics, bio-luminescence and other bio-reactive technologies with innovative application and production capabilities, the Company is able to provide sophisticated diagnostic testing and reagent systems to a diverse customer base serving multiple vertical markets.
In addition to this annual report on Form 10-K, the Company files periodic and current reports, proxy statements and other information with the SEC. The Company will provide these documents, free of charge, if interested parties request copies by sending a letter to the Company’s Investor Relations Department at the address set forth on the cover of this report. The Company can also be contacted through its Internet home page, www.sdix.com. Interested parties may also read and copy any document the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system (“EDGAR”) via electronic means, including the SEC’s home page on the Internet, www.sec.gov.
The Company has adopted a Code of Ethics, within the meaning of applicable SEC rules, applicable to its Chief Executive Officer, Chief Financial Officer, Controller other corporate officers and directors. The Code of Ethics is available on the Company’s internet home page and is further available, free of charge, by sending a written request to the Company’s Investor Relations Department. If the Company makes any amendments to this Code (other than technical, administrative, or other non-substantive amendments), or waives (explicitly or implicitly) any provision of the Code of Ethics to the benefit of our Chief Executive Officer, Chief Financial Officer, Controller other corporate officers or directors, it intends to disclose the nature of the amendment or waiver, its effective date and to whom it applies in the investor relations portion of the website, or in a report on Form 8-K that filed with the SEC.
Genomic Antibody™ Technology
Innovation is a key element of SDI’s strategy for establishing and maintaining sustainable, competitive differentiation in our key markets. In 2006, SDI introduced its initial commercial offering based on a new, proprietary platform for antibody generation called Genomic Antibody Technology™ (GAT). Based on the technical success of its first product, the Company introduced more commercially attractive products in May 2007. The new Genomic Antibody Technology™ products and services utilize proprietary, technically sophisticated methods to produce high value antibody reagents.
GAT was developed to take advantage of SDI’s leading capabilites for high volume production of unique antibodies and the growing need for high quality reagents in biomarker and drug discovery. Antibodies are essential research and discovery tools and have a growing role in the diagnosis and treatment of disease. The demand for high quality antibodies is growing, and it is estimated that today, a commercially available antibody exists to less than 10% of the human proteome. Furthermore, the historical production of high quality antibodies has not changed in more than 20 years and is generally characterized as time consuming, complex and of low efficacy; particularly with deficiencies in sensitivity and specificity.
In contrast, SDI’s new GAT is characterized by a high throughput production process that is robust, reproducible, high performance and low cost. Numerous propretary innovations produce a quality antibody product that is allowing SDI to pursue new revenues through a leadership position in providing the research, biomarker discovery and therapeutic development community with next generation antibody tools. The Company is also pursuing its own proteomic research. SDI’s application of powerful proprietary computer algorithms gives the GAT system a genome-wide perspective of proteins across medically important systems and organisms.
Advances in biomedical science are focused on bringing clarity to the complexity of biological systems and the mechanisms of disease. Over the past 20 years, science has moved through a rational progression of genetic sequencing and analysis, profiling the behavior of genes and their expression patterns, and understanding the implications of human genetic diversity governing these processes. Ultimately, however, all disease occurs within the proteome or the realm of protein activity and subsequent interaction. The intricacies within the sequence-structure-function relationship between DNA and protein are the key to understanding and elucidating the next advances in human health. Protein presence, absence, or modification is the ultimate reporter of diagnostic, prognostic, and analytic information.
The scope and scale of modern protein research demands new technologies to increase productivity and precision. Throughout proteomic research, the antibody remains a widely used tool to understand the dynamics of proteins. Antibodies are used in numerous platforms and assays each designed to measure the profile of the targeted protein. However, lack of pertinent antibody content is currently acknowledged as a significant impediment to breakthroughs in the discovery and development of new biomarkers and bio-therapeutic agents.
At the heart of the GAT system is its ability to take a gene or protein sequence and produce a recombinant protein inside the host animal, thereby activating an immune response to the encoded protein. This allows the production of antibodies generated against the protein’s native structure, rather than traditional methods that must first produce an artificial protein or immunogen which is then used as a vaccine to produce an antibody. Among the many advantages of the GAT is its ability to enable the development of reagents against traditionally difficult cellular targets, such as highly conserved and transmembrane proteins. The system is highly efficient and scaleable, allowing the generation of custom libraries consisting of hundreds of antibodies for use in the drug discovery, diagnostic, and research markets.
In both internal research projects and collaboration with academic and commercial customers, GAT has produced reagents that have consistently demonstrated superior performance in the recognition and targeting of native protein targets in experimental models and clinical samples as compared to reagents made with traditional methods. SDI’s collaboration with MD Anderson Cancer Center has shown significant utility of GAT derived antibodies in the search for breast cancer biomarkers. The Human Protein Atlas has accepted many of SDI’s GAT antibodies as reference reagents in their extensive tissue staining initiative. Many other collaborations are underway to demonstrate performance of SDI's GAT antibodies across a number of biomedical endeavors.
In 2007 the performance, clear financial benefit and dependability of this system have been validated by hundreds of customers across all biomedical markets. SDI is currently utilizing this platform to generate a significant number of these innovative reagents as products sold under the SEQer brand via SDI’s web-based catalog.
SDI’s SEQer oncology-focused portfolio is comprised of antibody tools that target proteins associated with cancer pathogenesis and progression. The antibodies in the SEQer portfolio succeed in delivering usable data with more proteins and in more applications than traditional reagents; better antibodies for better results. Too often with traditional antibody development, the inability to structurally replicate the design of the synthetic antigen defeats the underlying goals of antibody production. In contrast, SEQer antibodies are unmatched in target specificity and reactivity. This performance is grounded in the core performance advantages of Genomic Antibody Technology™. The portfolio continues to grow in content scope with over 100 new products commercialized per month; far faster then any other antibody product provider. Moreover, SDI's high throughout processes for GAT permit easy scale-up of production to high levels as demand grows.
An immunoassay is an analytical test that uses antibodies to detect the presence of a target substance in a complex sample matrix such as blood or other tissue with high degrees of sensitivity, precision and accuracy.
The technology was first developed more than 40 years ago and is a cornerstone of laboratory diagnostic testing in the medical industry. Therapeutic drug monitoring, drugs of abuse testing, hormone tests, infectious disease testing (e.g., AIDS and hepatitis) and pregnancy testing are all based on immunoassay and employ antibodies as critical reagents. In the burgeoning fields of proteomics and biomarker discovery, immunoassays play a central role in the detection and quantification of proteins associated with disease diagnosis, prognosis and progression, and therapeutic toxicity, efficacy and outcome. The Company’s scientists are expert in the development of antibodies and immunoassays in all fields of use including medical diagnostics and human healthcare. Recent activities by Company scientists have been focused on developing multiplexed immunoassay tests employing the Company’s Genomic Antibodies for commercial sale and biomarker discovery in the field of proteomics, especially cancer.
In addition, the Company has taken this same technology that has developed in the medical diagnostics arena and applied it to a variety of industrial and agricultural applications. As with medical applications, immunoassay technology has demonstrated its value in these markets by virtue of its ability to yield reliable, accurate, cost-effective and timely results in a manner previously unavailable.
The major attributes of immunoassay technology can be summarized as follows:
Immunoassay technology relies on the specific binding characteristics of antibodies. Antibodies are proteins made by cells within the bodies of animals as part of the immune system response to invasion by foreign substances such as foreign proteins, bacteria and viruses. The attributes of antibodies that are useful in diagnostic tests are that they physically bind only to the substance that elicited their production and that the binding is very strong. This characteristic of specific binding (specificity) makes antibodies useful tools for detecting substances in complex samples such as blood serum and plasma, tissue biopsies, urine, saliva, cerebral spinal fluid and other human samples, plant tissue, soil and water. Strong binding enables detection of substances at very low concentrations (sensitivity). Immunoassay technology has advanced to the point that antibodies can be made to a wide variety of substances including proteins, microorganisms, drugs, hormones, polymers, environmental pollutants and other chemicals.
Once an antibody reagent that has the desired performance characteristics (sensitivity and specificity) has been identified, it can be incorporated into a test format that is appropriate for the intended application. In the human clinical diagnostic market, antibodies are employed as reagents on large, automated instruments that can analyze hundreds of samples per hour. In contrast, antibodies also can be packaged into single use, disposable formats such as home pregnancy tests. Immunoassays can be designed to be highly quantitative or yield a simple yes/no result. The type of test format chosen for any given application depends on the needs of the customer or application, and may include factors such as ease-of-use, cost-per-test and number of samples to be tested. The Company’s expertise with multiple immunoassay formats, coupled with a thorough understanding of the needs of a market and specific customer applications, has allowed the Company to develop a diverse array of immunoassay products designed to meet the analytical needs of multiple, sizable markets. This same expertise is core to the Company’s ongoing proteomics research and discovery initiatives.
Bacteriophage, or phage, are viruses that infect bacteria. They are highly specific for the type of bacteria that they infect and do not infect any other living cell from any other organism including animal, plant, fungus or yeast. The specificity of phage is so high that a given phage will only infect certain types of bacteria. A specific type of bacteriophage (lytic) can be used to reduce contaminating bacteria in many processes. Lytic phage is introduced to a cell, kills the targeted bacteria and in the process replicated to create additional phage viruses that can seek out and kill additional bacteria. Subsequent rounds of replication result in an exponential increase in the number of infectious phage and a very rapid and dramatic decline in contaminating bacteria.
Because lytic bacteriophage specifically kill their bacterial hosts and not other living cells, purified preparations of phage have been used medicinally to treat bacterial infections of plants and animals, including humans. The use of bacteriophage as a human therapeutic attests to the biological specificity and safety of these viruses. In the last two years, the U.S. FDA has approved the use of bacteriophage products for direct application to ready-to-eat foods for reduction of Listeria bacteria based on the determination that phage are “generally recognized as safe” (GRAS).
The Company has filed patent applications claiming the use of specific lytic bacteriophage to control contaminating bacteria in large scale industrial fermentation processes such as ethanol and lysine production. In these processes, a production organism, such as yeast in the case of ethanol production, is used to convert sugar derived feedstocks such as ground corn into ethanol. Normal soil bacteria contaminating the corn also thrive in these conditions, compete for nutrients, and reduce process efficiency and yield. Traditionally, antibiotics were used to control harmful bacteria. They can, however, have a negative effect on the production organism. The Company believes that the use of bacteriophage is a significant improvement over use of antibiotics and will have an impact on yield and cost associated with the production of ethanol from feedstocks. SDI’s scientists are actively engaged in the development of specific bacteriophage reagents together with industry-leading producers of ethanol products.
The Company is also applying its bacteriophage technology in its test kit products for the detection of bacterial food pathogens, including its Salmonella SELECT product, and an E. coli SELECT product that is currently in development. When present, pathogenic bacteria often occur in very low numbers in food in comparison to a much greater number of non-pathogenic bacteria. In such instances, the non-pathogenic bacteria can “out-compete” the pathogenic bacteria, rendering the pathogens undetectable by the analytical method and giving rise to falsely negative results. In other cases, the analytical method may “crossreact” with non-pathogenic bacteria giving rise to false positive results. The Company has filed patent applications claiming the use of bacteriophage to control competing and crossreacting bacteria, thereby reducing false positive and negative results and improving analytical test performance.
The company’s Microtox® and Deltatox® tests use certain strains of luminescent bacteria as biosensors of toxicity, especially in water samples. These bacteria, when exposed to certain chemicals, undergo a chemical reaction resulting in the emission of visible light.
Toxicity testing using the Company’s bioluminescence technology is based on exposing the luminescent bacteria to a test sample and determining light output as a measure of toxicity. The products employing the technology are used primarily for testing water and are largely viewed as a “gold standard” in the industry. SDI’s solutions include the instrumentation, reagents and software necessary to employ testing. The Company has developed and sells proprietary software to analyze the results and calculate toxicity according to industry standard and regulatory methods. These solutions are highly reliable and offer significantly greater precision than other commonly applied measures of toxicity employing small numbers of living organisms (e.g., fish). The Company’s products, reagent kits, instruments and software provide for rapid and inexpensive assessment of toxicity in multiple applications including official regulatory methods in many countries worldwide.
The major attributes of the Company’s bioluminescence bacteria toxicity technology can be summarized as follows:
Antibody Products & Services
The Company, develops, manufactures and markets a broad range of monoclonal and polyclonal antibody products and services. SDI is the preferred antibody supplier to a number of leading pharmaceutical companies and supplies all major manufacturers of in-vitro diagnostics. SDI is the production partner for numerous catalog antibody providers, peptide/protein antibody providers and a large number of academic and government investigators. Specific expertise includes hybridoma development, cell culture techniques, large-scale ascites and antisera production, large-scale antibody purification, chemical modification of immunogens and antibodies, characterization of antibodies and a complete array of related services. The Company also manufactures a line of human-serum-based calibrators that are assayed for many serum protein markers for which the Company manufactures and markets the corresponding antisera products.
These products are sold to a wide range of customers including pharmaceutical, biotechnology and diagnostic companies, and major biomedical research centers in the United States, European Union and Pacific Rim. The Company believes it is one of the largest independent custom antibody service providers in the world. The Company has many significant commercial antibody supply agreements with major clients in each market segment. The proprietary nature of the subjects of these agreements precludes public disclosure. Such agreements are typically limited to only a portion of the customers’ needs for such services, and the Company believes there is significant upside potential to expand supply services within customer organizations, as well as add new customers for the products and services provided. The Company believes the size of the custom antibody service market is approximately $150 million on an annual basis, and it is highly fragmented. The Company expects to garner more business from companies that currently employ in-house production sources through its continuously improving quality manufacturing methods.
The human genome project carried out over the past 15 years has been a major driving factor in the emergence of the study of proteomics. With a new knowledge of genomes (human and other species), the biomedical research community is exploring many new proteins, their functions and the clues they reveal about human and animal health. The study of gene and protein functionality often requires the use of antibodies, which naturally bind to proteins. The Company believes that proteomics research, and products developed out of the proteomics effort, offer the Company an attractive opportunity to explore new initiatives to build revenues in the antibody product group around proteomics. Antibodies are used by customers as tools on the path to discovery as well as the key component in some products.
Service and expertise are the foundation to our competitive advantage, and there are four distinct capabilities that are the basis of differentiation between SDI and its competitors:
Strategic Diagnostics is the largest custom antibody provider in the United States with over 75,000 animals dedicated to antibody production. Facilities are accredited by AAALAC, the highest standard in laboratory animal care. SDI is licensed by the USDA and registered with the NIH Office of Laboratory Animal Welfare.
The Company’s food safety product line includes enrichment media and rapid tests to detect food pathogens, including E. coli O157:H7, Listeria and Salmonella. The Company has also acquired rights to exclusive US distribution of a hand held hygiene monitoring system. The Company is a leader in tests for targeted traits in genetically engineered plants, tests to detect Genetically Modified (GM) traits in food ingredients and food fractions, tests to detect naturally occurring fungi in grains (mycotoxins) and tests for and products to detect prohibited animal proteins in animal feed (ruminant feed testing).
Food Pathogen Testing
Pathogen specific testing is an increasingly important part of microbiology testing performed in the global food industry. The world-wide market for rapid method pathogen tests is estimated to be between $200 and $300 million according to independent studies and the Company’s own market research. The market for proprietary enrichment media is estimated to be between $50 and $100 million. According to several independent studies, the market for pathogen tests grew at an average rate of 6% in 2007 and this growth rate is expected for the next three years. However, market research also suggests that annual growth has slowed in this segment. Growth in pathogen testing is driven primarily by regulatory changes, customer testing trends, industry consolidation, and globalization of the world’s food supply.
Since 2001, the Company has invested in the development and market introduction of products for the detection of pathogenic microorganisms in food. In 2002, the Company introduced its first test method for the pathogen E. coli O157:H7. This product has received ongoing market acceptance in the United States. In 2005, the Company was notified that its RapidChek E. coli O157:H7 assay had been selected as the assay method of choice for the National School Lunch Program for screening raw and frozen beef for the organism. The National School Lunch Program is a federally-assisted meal program that operates in over 97,000 public and non-profit private schools and residential childcare institutions. The United States Department of Agriculture (USDA) is responsible for determining that the meat produced for the National School Lunch Program is safe. In addition, the RapidChek test for detection of E. coli O157:H7 was selected by the Food Safety Inspection Service (FSIS) as an approved methodology for screening of the organism in raw beef samples. The FSIS section of the USDA conducted a rigorous evaluation of rapid methods that are currently on the market for screening pathogens, including polymerase chain reaction (PCR), and automated/manual immunoassays and benchmarked kit performance against the current USDA traditional cultural method. The RapidChek E. coli O157:H7 method was evaluated and determined to be the “best in class” against the other immunological methods tested. RapidChek has been included in the USDA Microbiological Laboratory Guidelines (MLG) as one of only two immunoassays that is recognized for use for screening raw beef for E. coli O157:H7. The Company believes that the acceptance of its method by the agencies regulating Food Safety will increase sales as producers seek to use methods that have been evaluated by the regulatory agencies. The RapidChek E. coli O157:H7 test system has also received international recognition with regulatory approvals in both Canada (CFIA) and Australia (AQIS).
In June 2004, the Company launched its test for detection of Listeria. This test system received AOAC Research Institute (AOAC, AOAC-RI) approval for both food and environmental samples, as opposed to several competitive methods on the market that have AOAC approval for food samples only. As a result of new regulations enacted by the USDA in 2003, environmental samples account for approximately 80% of all Listeria testing. The Listeria test incorporates the use of a proprietary enrichment procedure that provides results in 40 hours, 8-12 hours faster than most other methods on the market. In addition, the proprietary enrichment system does not require a transfer step, providing significant labor savings compared to other methods on the market. As with all pathogen systems, food companies require internal evaluations prior to adoption. In these evaluations, the Company’s Listeria test system demonstrated superior performance, and improvements in efficiency and productivity compared to most competitive methods on the market. As a result of improvements in performance and cost-in-use, the Company has had the Listeria product adopted by a number of very large food processors. When larger food companies adopt a particular method, it usually gains credibility in the marketplace.
In August 2006, the Company launched its new RapidChek SELECT Salmonella test with AOAC-RI approval at the International Association of Food Protection Meeting (IAFP) in Calgary, Canada. This novel test is based on a patent pending phage technology combined with SDI’s next generation lateral flow technology and has revolutionized the Salmonella testing arena. The RapidChek SELECT test was developed to meet some of the challenges faced in Salmonella testing, including high false positive and negative rates, which can be particularly prevalent in high burden samples. The patent claims technology that increases both the specificity and sensitivity of rapid pathogen tests. In September 2006, the RapidChek SELECT Salmonella test was the first lateral flow test approved for the National Poultry Improvement Plan (NPIP), and will provide an attractive alternative to current methods used such as labor intensive cultural methodologies. The Salmonella SELECT test was evaluated and adopted by several of the top poultry and beef processors in 2007. The launch and acceptability of RapidChek SELECT in the market has also facilitated the increase in sales of the RapidChek Listeria system, as most processors prefer to utilize one platform for multiple testing needs. Customers have cited the use of SELECT contributing to improved laboratory efficiencies and significant savings as compared to what they were previously using to test. This same patent also makes important claims for composition and methodology associated with the enrichment and control of production organisms in large scale industrial bio-processing applications. The Company intends to develop these applications for licensing purposes during early 2008.
In July 2007, the Company acquired exclusive U.S. distribution rights for the Lumitester® PD-10N/LuciPac™ W system from Kikkoman. The Lumitester/LuciPac test system is a unique patented platform with a proprietary enzyme recycling technology that enables detection of both AMP and ATP. It offers advantages over other hygiene monitoring systems in the marketplace, which due to the source, and unstable nature of ATP, may not give a true indication of cleaning efficiencies. AMP is a stable molecule, present in high quantities in biofilms and gives users a more precise, reproducible indication of both cleaning and sanitation effectiveness. Rapid ATP tests are widely accepted in the food and beverage industry as a practical way to ascertain only the sanitation or hygiene status of food production lines and surfaces. It is estimated that about 12 million tests are conducted annually in the U.S., with an average growth rate of approximately 5% per year. This offering allows the Company to extend its complete risk management solution to the food industry.
Genetically Modified (“GM”) Crops
Tests for GM traits are generally used to determine whether the sample tested contains the protein associated with the genetic modification. Seeds, grain or leaf tissue are typically tested. The tests may be employed by users desiring to ensure that seed or grain lots are either GM-free or, in other cases, that they contain a specified amount of the GM material in order to meet certain GM requirements. Among the commodities typically tested with the Company’s products are corn, soybeans, rice and cotton. The Company estimates that the worldwide demand for protein based testing of genetically modified crops is $12 million per year. To address this market, the Company maintains a small U.S. sales force and distribution in the five principal countries that, in addition to the U.S., are responsible for 96% of the GM crop area.
The Company has developed a simple “one-step” test that is used at the point of testing to determine if an individual plant contains the targeted genetic trait. Commercial seed producers use these products to ensure the quality of their products. This type of test also can be used in crops for enforcement purposes to expose unlicensed application of the genetic technology.
Acceptance of GM crops has increased and as the development of new traits has risen, some countries have adopted regulations on biotech crops. In 2004, the European Union adopted regulations regarding labeling and traceability of GM food and feed with enforcement beginning in April 2004. The regulatory tolerance for EU-authorized GM traits is 0.9%, and 0.5% for unauthorized GM traits that have already received a favorable risk assessment from various U.S. regulatory agencies. However, traceability systems must be in place and must demonstrate that any traces of GM traits are adventitious and are technically avoidable. The Company no longer believes that the impact of regulations will result in stricter testing of grain and grain exports from countries growing GM crops, or increases in testing to meet these new regulations. Conversely, widespread acceptance of GM crops is generally reducing the practice of grain testing as genetically modified traits are increasingly ubiquitous in the environment.
During 2000, a genetic trait used in corn, known as Cry9C, or StarLink®, which had been approved by the U.S. Environmental Protection Agency (USEPA) only for non-food uses, was discovered in food products. StarLink® was the first, and only, genetic trait to have been introduced for animal, but not human, consumption. The impact was a regulatory response that resulted in the Company selling more than 2 million Cry9C tests in 2001, making it the Company’s largest selling product at the time. With the removal of StarLink® corn from the U.S. grain supply during 2000 and 2001, the Company’s sales of tests to detect StarLink® corn diminished significantly over the period from 2002 through 2006.
Due to the StarLink® incident described above there was a moratorium on the introduction of new GM traits. However, beginning in 2003, new traits did find their way to market. The Company has continued to provide new tests in response to market introductions. In 2005, the Company introduced the first multi-trait corn test strip that can detect both the Cry1Ab and Cry3Bb insecticidal proteins and the CP4EPSPS protein for resistance to the herbicide Roundup®. During 2006, the Company introduced tests for the detection of an unapproved LibertyLink (“LL”) trait in rice found in the U.S. The TraitChek LL Bulk Rice test kit was the first lateral flow test strip certified by the USDA Grain Inspection, Packers & Stockyards Administration (GIPSA) for the detection of the LL trait in rice. In 2007, the Company also introduced a rapid lateral flow test strip for the detection of aflatoxin in corn grain. Aflatoxin is a naturally occurring mycotoxin produced by mold fungi which can be detrimental to humans and fatal to animals when consumed in feed. The MycoChek Aflatoxin test strip can be used at grain elevators as a complementary test to the GMO test strips.
The Company has had strong sales efforts in Brazil since 2000. Brazil is a major agricultural country and the leading exporter of soybeans in the world, surpassing the U.S. in 2006 with over 25 million tons exported. Brazil has temporary laws in place making it legal to grow GM crops. Due to the previous GM ban, countries importing non-GM soy products such as China and those from the European Union have increased their imports from Brazil. To assure that their raw commodities are free of GM, testing is done at many grain elevators and crushing facilities throughout Brazil. Brazil is now the leading customer for the Company’s GM soybean test for Roundup Ready® herbicide tolerance.
The Company believes that it continues to be well positioned to provide the analytical tools to allow food companies to purchase such premium products with confidence, due to its existing relationships with large agricultural biotechnology companies and the current success of its technology, particularly in the area of GM traits.
The Company’s water quality product line includes analytical tests for drinking water, industrial process water and wastewater analysis, along with toxicity tests for personal care and household products and eco-toxicological studies. The product line also includes analytical tests for soil and other waste matrices for use at environmental remediation projects, hazardous waste operations, brownfields and other applications.
Microtox® is a unique rapid acute toxicity test that detects a broad range of toxins and chemical agents in water. Microtox® makes toxicity analysis simple and easy to perform and results can be generated in as little as 30 minutes. Microtox® toxicity testing technology is used in drinking water, wastewater, environmental remediation, research and industrial applications around the world. With over 700 peer-reviewed scientific articles and more than 2,300 instruments sold worldwide, the Company believes that the Microtox® toxicity test system is the standard for rapid toxicity screening and analysis.
The Company is currently working with drinking water utilities, food and beverage processors and other customers as they develop and implement monitoring processes to reduce their risk from contamination of water supplies. In the U.S., approximately 130 drinking water utilities and food processors are currently using the Microtox® toxicity testing technology as part of their early warning or emergency response programs to detect contamination of their water supplies. The rapid response of the Microtox® toxicity assay allows users to rapidly detect—and quickly respond to—any changes in water quality. It is for this reason that the technology is viewed by many national and international experts as an effective means for detecting toxins in water applications.
The Company also markets a portable version of the Microtox® technology known as DeltaTox®. Departments of Health in a number of states, the largest private water utility in the country and the United States Environmental Protection Agency (USEPA) emergency response teams are using DeltaTox® technology as part of their emergency response programs.
Microtox® has been widely accepted by all segments of the wastewater treatment industry where managing and controlling costs by accurately assessing the mechanical, operational and chemical performance of these facilities is critical. Microtox® delivers value by helping to improve operating efficiency, reduce and prevent damage and disruption to biological treatment systems, reduce unscheduled shutdowns and helps facilities stay in compliance with their discharge permits.
The Company believes that, although there are new entrants in this market space, no other companies have meaningful delivery processes for rapid, bioluminescence-based, toxicity testing. There are only a few other companies who market a rapid toxicity test that the Company considers to be competitive with Microtox®.
In February 2006, the Company announced that its Microtox® bioassay technology was awarded the Designation and Certification as an “Approved Product for Homeland Security” under the Support Anti-Terrorism by Fostering Effective Technologies Act of 2002 (the SAFETY Act), by the Department of Homeland Security, or DHS. The SAFETY Act legislation was designed to encourage the development and rapid deployment of life-saving anti-terrorism technologies by providing manufacturers or sellers with limited risk of legal liability. As a biosensor-based method for the detection of toxic compounds, which include toxic industrial chemicals and heavy metals, in water and other matrices, the Microtox® bioassay technology is ideally suited to meet the anti-terrorism initiative objectives of DHS. DHS Safety Act Designation and Certification, means that end users of Microtox technology have liability protection in the unfortunate event of an act of terrorism at their facility or operation. The Company believes that having this DHS Designation and Certification has added significant value to the Company’s Microtox® offering by virtue of increasing its customer base and facilitating additional penetration into the drinking water utility market.
In December 2007, the Company was awarded a Federal Supply Schedule GSA contract. The contract further expands our reach into federal, state and local agencies, in addition to making it easier for these agencies to do business with the Company.
The entrance of pesticides into the water supply is a result of agricultural and residential runoff. In areas of substantial agricultural activity, drinking water is tested for pesticides to protect drinking water supplies and to comply with federal and state regulations. The Company’s pesticide test kits are used in situations where field testing, or the testing of one specific pesticide gives the SDI test kit much greater utility than a lab-based mechanical analyzer. Users include water quality researchers, resource managers, drinking water system operators, federal agencies such as the U.S. Geological Survey and Department of Agriculture, state environmental and health departments, drinking water utilities and environmental engineering companies for surface and groundwater monitoring, drinking water source and supply management, soil analysis and chemical fate and transport studies.
The Company’s RaPID Assay® test format for Atrazine has been validated by the USEPA, and is one of only two immunoassay products validated as showing acceptable performance under the Environmental Technology Verification Program.
Environmental Contaminant Test Products
The Company also sells immunoassay products into the environmental market. The Company offers four different test formats, each with performance characteristics that make them more or less suited for a particular customer application. All of the Company’s environmental test kits are capable of analyzing multiple samples in parallel. The Company currently estimates the market for these products at $50MM worldwide.
The USEPA and U.S. Army Corps of Engineers are jointly promoting what they call the “Triad Approach,” which uses immunoassay and other field analytical systems to increase the accuracy and reduce costs on environmental projects. Typical contaminants of concern at contaminated sites include petroleum and fuel-derived products, polycyclic aromatic hydrocarbons (PAHs), polychlorinated biphenyls (PCBs), dioxins, explosives, pesticides, and chlorinated solvents. The Company is currently marketing test kits for all of these contaminant classes, and has been able to expand its product offering through distribution agreements to accommodate new technologies.
The environmental testing market is large, and primarily dominated by hundreds of laboratory companies providing testing services on a regional basis. The Company believes the overall market for remediation products has continued to decline due to lower levels of Federal funding to support remediation projects in this area, and that the testing market is very competitive due to under utilized capacity in the laboratory services sector.
In April 2006, the Company began distributing Colitag for E. coli and coliform testing in drinking water through a distributor agreement with CPI International. Testing for total coliform by water utilities is regulated by the Safe Drinking Water Act. Colitag is EPA approved for Total Rule Coliform (TCR) compliance monitoring, both Presence/Absence and Most Probable Number (MPN) enumerations. The inclusion of Colitag in the Company’s portfolio of products for water utilities better positions the Company to fully meet the needs of these utilities for reliable testing products that deliver confident results.
In December 2004, the Company began distributing Microbiotests (MBT). Under the terms of the agreement, the Company now markets MBT’s line of rapid, maintenance-free bioassays in North America. The agreement continues to position SDI as the single source solution for rapid, on-site toxicity and environmental tests. The product line offers customers requiring cultural methods an alternative to expensive and labor intensive protocols, allowing users to save both time and money while maintaining quality test results.
In February 2003, the Company introduced its screening test for the detection of meat and bone meal in animal feed, which is linked to the transmission of BSE, commonly known as mad cow disease. Meat and bone meal made from cattle has been banned for use in cattle feed since 1997 in both Canada and the U.S., but it can be used legally in feed for poultry, swine and household pets, none of which are known to contract mad cow disease.
Since 2003, publicized cases of “mad cow” have been found in countries including the United States, Canada and Japan. Although feed testing is the only definitive means to certify compliance, the current industry practice is to rely solely on paper certification. The Company is not making a significant sales effort or investing in additional development given the current regulatory environment.
Sales and Marketing Strategy
The Company markets and sells products in the food safety, water quality and life science antibody market categories through a U.S. direct sales force, Internet presence and a network of over 50 distributors in Canada, Mexico, Latin America, Europe and Asia and its corporate partners. The Company also has a European office and sales operation near London, England.
In the U.S., the primary sales channel is through a direct sales force comprised of geographically based field sales professionals, key segment managers, and inside sales associates. The sales force is augmented by customer service and project management organizations, and applied marketing specialists which assure that all elements of the customer’s buying experience meet and exceed their performance expectations.
On the basis of its strengthening proprietary position, the Company is focused on developing channels to market, and accelerating predictability and sustainability of revenues. SDI is investing in its direct sales force through both the addition of new sales representatives and increased sales and technical training. The Company continually measures sales performance and maintains discipline in the balance between the addition of new sales resources and ongoing efforts to continually improve sales efficiency and effectiveness of existing resources.
The Company is also focusing on its network of quality distributors. In 2006, the Company added its first distributor for its custom Genomic Antibody Technology™ offering. The Company is working to add additional distributors for both its custom and catalog offerings across the European, Asian, and Latin American markets.
In 2005, the Company signed an exclusive distribution agreement with DuPont Qualicon for the representation of the Company’s immunoassays for food pathogen detection. This agreement was predicated on achievement of specific sales goals that were not met. The Company has now begun to add new distribution partners for this product line and will take a much more aggressive role in marketing these methods. In 2007, the Company expanded its international distribution network for food safety pathogen products. Outside the U.S., conventional cultural methods have historically been utilized for pathogen testing, however, currently there is a paradigm shift towards more rapid assays, as factors such as time to result become increasingly important in the globalized marketplace. A total of 15 independent distributors were trained last year to sell the RapidChek product line in high growth markets globally, including Southeast Asia, Europe and Latin America. It is anticipated that additional distributors will be signed by the end of 2008 and international expansions of promotion/sales of the products will increase revenues as they gain acceptability.
The Company has invested in providing additional support to distributors, which participate in annual global training seminars. The Company evaluates various sales and service models that can contribute to the profitable growth of business. In addition, identifying the most effective channels to market will allow the Company to better allocate resources to both new and existing growth opportunities.
Many of the Company’s potential competitors are large companies with substantially greater financial and other resources than the Company. To the extent that any such companies enter into one or more of the Company’s markets, the Company’s operations could be materially adversely affected. The Company anticipates increased competition as potential competitors perceive that the Company’s markets have become commercially proven, or if the Company cannot maintain competitive differentiation.
Companies may be developing additional products for one or more of the Company’s markets that could be competitive with the Company’s products. In the Ag/GMO market, the Company competes with several small, privately held companies (Agdia, Envirologix) that market very similar, if not identical products.
In food pathogen testing, the Company is among the more recent entrants to the market and faces a broad base of competition. The worldwide market for pathogen tests is estimated to be between $200 and $300 million annually and as such has drawn competitive products. The Company’s RapidChek® E. coli O157 including H7, Salmonella and Listeria tests compete globally with numerous competitive rapid testing systems. Instrument-based tests are offered by bioMerieux SA and DuPont Qualicon among others. Competitive lateral flow tests are offered by Neogen Corp., BioControl Systems, Inc., and others. In addition, traditional lab culture methods offer indirect competition. The Company hopes to gain market share from competitive methods and with new users due to key product advantages such as speed of result, ease-of-use, accuracy and an overall lower cost-in-use.
In the hygiene monitoring market in the U.S., potential competitors include Charm, Hygiena, Neogen and Biotrace, and BioControl. Most have established market positions in tests for ATP, and enzyme found in viable cells and used as a proxy for surface sanitation in food production and food service applications. All of these ATP methods are not detergent tolerant and/or have other technical deficiencies that influence their value in use. Therefore, it is anticipated that the lumitester/lucipac system will quickly establish market share due to its ability to provide a better risk management tool by detecting AMP, a more stable molecule and an indicator of both cleanliness and environmental sanitation.
The Company believes there are no meaningful direct competitors for the Company’s Microtox® product line in the United States. In Europe and other parts of the world, the Company competes against Checklight, Ltd., which is an Israeli-based company, and one other instrument based test method produced by Dr. Bruno Lange GmbH & CO, an affiliate of The Danaher Corporation, which has greater technical and marketing resources than the Company. The Company believes its products have a number of competitive advantages including the comprehensive screening for general toxicity and competes effectively on superior features and functions. With the addition of the Toxkit Microbiotests, the Company believes that there is no other company that can provide the complete solution offering of the Company.
With respect to the environmental contaminant test products, the Company currently receives the greatest competition from fixed site environmental laboratories. Traditional analytical methods for environmental contamination are often utilized for confirmation and closure of environmental sites.
In the antibody product line, the competitive landscape is rapidly changing as the Company continues to shift its emphasis to earlier activities in drug and biomarker discovery. The Company will increasingly compete with technology companies that offer technology for the discovery and advancement of novel antibodies. The Company believes that its proprietary GAT platform coupled with its expertise in assay development, provides unique access to the high value applications it is targeting.
The Company continues to compete in its traditional markets. Here, competitors include large pharmaceutical, research and diagnostics organizations, some which have significantly greater revenues than the Company. These companies may produce products internally and/or purchase similar products from SDI. Additionally, there are a number of smaller companies that offer competing products. The Company believes that the scale of its operations and the breadth of its product lines, among other things, are significant competitive advantages.
Competitors in the market as third party providers of custom, large scale antibody reagent production include Covance (public), Harlan (private), Lampire (private) and Scantibodies (private). In the catalog antibody space there are over 130 companies competing for this $800 million dollar market. In the custom research reagent market, the Company has identified 49 companies offering some form of traditional antibody production from customer-provided antigens.
Markets and Products
The Company sells products in the food safety, water quality and antibody market categories through its U.S. direct sales force, a network of over 50 distributors in Canada, Mexico, Latin America, Europe and Asia and its corporate partners. This section describes the Company’s current markets, products and competition.
Geographic and Customer Information
The following table sets forth sales by geographic region:
The Company’s basis for identifying sales by country is the ship-to location. There were no individual countries outside of the United States that represented more than 10% of the total revenues of the Company. There are no significant long-lived assets located outside the United States.
Among other things, the Company is engaged in the development of antibody and immunoassay products for use in the medical and human healthcare fields. Its current products in this market are intended for “research use only”. Tests for bacterial food pathogens, mycotoxins, genetically engineered traits in plants and water treatment polymers are currently unregulated. However, agencies such as the EPA, the FDA and the FSIS of the U.S. Department of Agriculture are engaged in testing and, together with organizations like the AOAC, maintain compilations of official methods for use in testing in certain market segments. Some of these organizations also issue procedures and guidelines for validating new methods. Although not required, official methods adopted by these agencies sometimes have the commercial impact of regulations because industry and the company’s customers tend to follow the practice of regulatory agencies.
The Company believes that the validation and acceptance of its products by regulatory agencies, though not required for the use of its products in most cases, is a significant factor in market acceptance. The EPA and some state agencies have evaluated certain of the Company’s analytical methods for environmental sample analysis and accepted their use for certain remediation and monitoring activities. EPA SW-846 is the compendium of analytical and test methods published by the EPA’s Office of Solid Waste (OSW). SW-846 is a guidance document listing those analytical methods that have been validated by the EPA for a stated purpose. Some states also recognize the use of SW-846 methods under their hazardous waste programs. SW-846 methods are technically only applicable to regulatory programs under RCRA, however, other federal, state and local environmental programs, including CERCLA and TSCA, often refer to and rely on SW-846 methods for purposes of remediation and monitoring.
The environmental legislation and regulations that the Company believes are most applicable to its current business are the Research Conservation and Recovery Act (RCRA), Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), Toxic Substances Control Act (TSCA), Federal Insecticide, Fungicide and Rodenticide Act (FIFRA) and the Pure Food and Drug Act. For analysis of water and wastewater, the Safe Drinking Water Act, the Clean Water Act and the NPDES permitting program acceptance under the Clean Water Act also will be significant to the Company’s business. As the utility of the Company’s Microtox® products continues to be widely recognized in drinking water security applications, regulations and mandates associated with Homeland Security programs may also have an impact on the Company’s business. Collectively, these programs regulate the management, disposal and clean-up of hazardous substances and protect the nation’s ground and surface water and drinking water supplies.
The Company received AAALAC (Association for the Assessment and Accreditation of Laboratory Animal Care) accreditation at its Delaware facility in 2008 and at its Maine facility in 2006. The Company volunteers to participate in the AAALAC’s program, in addition to complying with the local, state and federal laws that regulate animal research. In order to maintain these accreditations, the Company undergoes regular inspections and reviews. The Company also holds approval from the OLAW (Office of Laboratory Animal Welfare) and the National Institutes of Health, further validating the stewardship of the Company in proper laboratory animal care.
The Company manufactures test kits for the detection of a wide array of analytes in five immunoassay formats and one bioluminescence format. The five formats are: one step lateral flow tests; coated tubes; latex particles; magnetic particles; and micro-titer plates. The Company manufactures a biological supplement that enhances the detection of certain analytes and improves overall performance of certain assay formats. In addition to test kits, the Company supplies ancillary equipment and supplies including test evaluation instruments, reagents, sample media, spectrophotometers, pipettes, balances and timers.
The key critical reagent manufacturing technologies are conjugation chemistries, antibody formulations, calibrator preparation, lateral flow strip production, microbiological and immunoassay processes. Kit production processes include filling and dispensing liquids, subcomponent and finished goods assembly, in-process testing, quality control, packaging and shipping. The critical reagents and production assembly groups produce test kits in the Newark, Delaware laboratories. Biological materials are primarily developed and produced in-house; however, some reagents are licensed from third parties or purchased from commercial sources. A crucial step in the Company’s manufacturing process is the stabilization of the immunoreagents utilizing proprietary lyophilization techniques. In general, raw materials used by the Company in its products are obtainable from multiple sources. The Company purchases instruments and ancillary equipment from outside vendors. A number of the instruments sold by the Company were developed to be used exclusively with the Company’s products and are subject to specific supply agreements. The Company believes that the raw materials, instruments and equipment used in the manufacture of its products are sufficiently available for the Company’s current and foreseeable manufacturing needs.
The Company manufactures its products in accordance with the FDA’s Good Manufacturing Practices guidelines and has implemented data-driven problem solving, measurement and statistical process controls to troubleshoot and continuously improve quality and output performance. Capital investment and equipment automation within the lateral flow test strip and bioluminescence bacteria processes have reduced key parameter variation, improved production efficiencies and lowered manufacturing costs. The Company utilizes a formal sales and operations planning process (S&OP) and an integrated Manufacturing Resource Planning (MRP) tool to control all elements of the supply chain and manufacturing processes; including raw material procurement, inventory management, capacity planning and production scheduling, work-in-process tracking, order processing and fulfillment, shipping and customer invoicing. The Company believes the existing facilities and equipment are sufficient to support a significantly larger manufacturing base. Industrial bio-detection services manufacturing operations are currently running one shift.
The Company also supplies a wide array of custom antibody products and services to the in-vitro diagnostic, academic and medical research industries. Antibodies are developed and produced using animals or cell culture methods. Laboratories are maintained to prepare immunogens, perform chemical conjugations, purify antibodies, fragment antibodies, and perform a range of quality control procedures. The cell culture laboratories support the development of hybridomas and manufacture of monoclonal antibodies. The cell culture laboratories also provide services to enhance the productivity of cell lines, establish FDA-compliant Master Cell Banks, and store cell lines in secure fail-safe cryogenic systems.
Animal facilities house specific-pathogen-free animals that are tested routinely to assure they are maintained under the highest health standards. Current capacity utilization in antibody production is approximately 70%, and there is additional land and zoning clearance on the 64-acre site in Windham, Maine to expand operations. After outgrowing 2006 capacity levels in 2007, both facilities were expanded. In late 2006 capacity in the Newark, Delaware animal facility capacity was tripled by better utilizing existing square footage. Modifications were made to the design of the facility and operations were expanded from a five day work week to a seven day work week. This capacity was quickly utilized in 2007. This Delaware facility ran between 70% and 95% of maximum capacity in 2007. In October 2007, a new building was completed at the Windham, Maine facility. This expansion increased capacity by one third as capacity was 95+% utilized. There are no plans for more expansion in the near future. Growth is expected in areas that require less animal capacity.
Capacity for bioprocessing services was also expanded in Maine. Operational capacity was required to meet service offering growth for phoso-specific purification. This specialized purification processed was developed to meet customer needs and grew rapidly in 2007.
In 2005, the Company established a research and manufacturing center in Dallas, Texas. This facility is designed for gene building and protein chemistry. The Dallas operation houses the technical elements of the Genomic Antibody Technology™ product offering. The GAT offering is supported by a robust high throughput operation that is initiated in Dallas and completed in either Maine or Delaware, depending upon the end product.
In 2007, the Company established a web channel to market that focused on selling antibody products developed and produced using GAT. These SEQer antibodies form a cancer focused antibody catalog. The processes and systems to produce the SEQer antibodies were established in 2007. Processes for this production system are established and executed in three operating locations: Dallas, Texas; Windham, Maine; and Newark, Delaware. A sophisticated electronic operations management system was established that links the operations seamlessly. Resulting products and information are managed by the companies MRP system.
Research and Development
The Company engages in substantial research and development activities (R&D) involving development of products and services for its target markets. In the three years ended December 31, 2007, 2006 and 2005, the Company incurred approximately $2.9 million, $2.6 million, and $3.0 million, respectively, in research and development expenditures. Research and development on the Company’s proprietary GAT and bacteriophage technology platforms and Food Safety products accounted for 82% of the total R&D effort for the year.
The Company’s primary laboratory facilities located in Newark, Delaware were designed and built specifically for conducting research and development relating to antibody and immunoassay technology. These facilities include state-of-the art, cGMP antibody development and large-scale production facilities. The Company has assembled a scientific staff with extensive experience in the development, production and purification of monoclonal and polyclonal antibodies. The Company also has extensive expertise in the development and production of reagents from the antibodies it produces, as well as commercial immunoassays employing those reagents.
In 2007, the Company completed the development of the core processes in its Genomic Antibody Technology™, high throughput, antibody development technology platform, and undertook the development of over 1,000 novel SEQer antibodies, focusing primarily on cancer, for inclusion in a web-based product catalog. The launch of its GAT development platform, coupled with its large scale animal facilities, state-of-the-art purification and reagent production capabilities, extensive assay development expertise, established commercial manufacturing, and industry-leading process control has transformed the Company into one of the world’s premier antibody development, characterization and production companies. At the end of the year, consistent with the vision of applying its core technology to the field of proteomics and biomarker discovery, the Company purchased a number of large pieces of capital equipment for development of multiplex immunoassays employing the novel antibodies developed using the GAT platform.
In addition to developing its GAT platform, the Company spent significant effort in 2007 developing its proprietary bacteriophage technology including effort to extend the use of its SELECT technology in its products for the detection of E. coli O157 in food. The use of bacteriophage to improve the specificity and sensitivity of testing methods is unique to the Company and the subject of published U.S. and world-wide patent applications.
The Company also has patents pending for the use of bacteriophage to control the growth of harmful bacteria in large scale industrial fermentation production processes including ethanol production. In the third quarter of 2006, the Company announced an agreement with Broin Companies, since renamed Poet, to develop commercial bacteriophage reagents and protocols for controlling bacteria contaminating Poet’s proprietary BPX ethanol production process. Significant progress was achieved on the program in 2007; however, Poet opted to discontinue its involvement. Based on positive findings and progress establishing control of contaminating organisms, reduction in lactic acid production and elevated ethanol production in laboratory simulations of commercial fermentation reactors, the Company has continued to aggressively develop the technology and is working with industry experts to advance the technology to pilot scale.
The Company’s research and development personnel are experts in many advanced research disciplines in the life sciences including immunology, immunochemistry, molecular biology, protein chemistry, biochemistry, microbiology, and synthetic organic chemistry. In addition to the technical expertise resident within the research and development organization, the Company’s technical manufacturing organization is expert in large-scale cGMP production, bioprocessing, purification and quality control of antibodies and reagents. The Company’s core expertise is in antibody and immunoassay development and it is a major developer and producer of monoclonal antibodies.
Research and development activities are focused on developing proprietary technology and products to expand the Company’s manufacturing base and leverage its sales and marketing organizations. The Company is a recognized leader in the field of contract antibody and assay development services primarily for large chemical, diagnostic and pharmaceutical companies, and the development of rapid test kits in the food, water quality and agricultural sectors based on immunoassay technology. In addition, the Company has extensive expertise, facilities and equipment relating to the development and manufacture of one-step lateral flow tests.
The Company’s research and development organization consists of approximately 16 individuals, nine of whom hold advanced academic degrees. In addition, approximately one-third of the Company’s employees are involved in technical job functions.
Proprietary Technology and Patents
The Company’s products are based on the use of proprietary reagents, technology and test systems developed by Company scientists or acquired externally. Accordingly, the Company has implemented a number of procedures to safeguard the proprietary nature of its technology. The Company requires its employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting relationship with the Company and all employees are required to assign to the Company all rights to any inventions made during their employment or relating to the Company’s activities. Additionally, the Company seeks to protect its technology and processes through the patent process. The Company currently holds 27 issued U.S. patents, as well as three U.S. patents licensed for exclusive use by the Company. Three U.S. patent applications are pending.
The Company believes that low-cost, easy-to-use, rapid tests have the potential to be significant products in multiple large markets and, therefore, has licensed rights to patents relating to immunochromatographic devices. The Company has one pending U.S. patent application for the detection of animal proteins in animal feed. One application deals with the use of bacteriophage as selective agents and one relates to detection and control of water treatment polymers. There can be no assurance that the Company’s patent applications will result in the issuance of any patent or that any patents issued to the Company would provide protection that is sufficiently broad to protect the Company’s technology and products. In addition, the Company cannot be certain that it was the first creator of inventions covered by pending patent applications or that it was the first to file patent applications for such inventions. In addition to seeking patent protection for the Company’s proprietary information, the Company also relies upon trade secrets, know-how and continuing technical innovation to maintain competitiveness for its products and services. The Company has developed a number of proprietary technologies which it has chosen not to patent, including stabilization systems for reagents, chemical syntheses for conjugates, immunogens and analyte analogs, and strategies relating to antibody development. Regarding the latter, the Company’s extensive expertise has enabled it to develop antibodies and products that are unique to the industry including antibodies to human proteins, pathogenic food microorganisms, transgenic plant proteins, mycotoxins, water treatment polymers and environmental contaminates. In addition, the Company has developed and continues to develop proprietary media formulations designed to enrich the selective growth of pathogenic food microorganisms.
As of December 31, 2007, the Company employed 156 full time and three part time employees. The workforce was supplemented by five agency-provided contractors. All of the Company’s employees have executed agreements with the Company agreeing not to disclose the Company’s proprietary information and assigning to the Company all rights to inventions made during their employment. Key personnel have signed agreements prohibiting them from competing with the Company. None of the Company’s employees are covered by collective bargaining agreements. The Company believes that its relations with its employees are good.
Strategic Diagnostics Inc. is a Delaware corporation formed in 1990.
Item 1A. Risk Factors
The following is a discussion of certain significant risk factors that could have an adverse impact our financial condition, performance and prospects.
Our products must gain market acceptance for us to increase revenue.
Any product that we sell or develop must compete for market acceptance and market share. An important factor will be the timing of market introduction of competitive products. Accordingly, the relative speed with which we and competing companies can develop products, complete any required approval processes, and supply commercial quantities of the products to the market will be an important element of market success.
Significant competitive factors include:
Our research, development and commercialization efforts may not succeed or our competitors may develop and commercialize more effective or successful diagnostic products.
In order to remain competitive, we must regularly commit substantial resources to research and development and the commercialization of new products and/or antibody services.
The research and development process generally takes a significant amount of time from inception to commercial product launch. This process is conducted in various stages. During each stage there is a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a product or technology platform in which we have invested substantial amounts.
Other companies have products that compete with our products, and also may develop effective and commercially successful products. Our competitors may succeed in developing or commercializing products that are either more effective than ours, or that they market before we market new products that we may develop.
There may be additional competitive products about which we are not aware. If our competitors are able to reach the commercial market before we are, this could have a material adverse effect on our ability to reach the commercial market and sell our products.
Many of the organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, greater experience in product development and in obtaining regulatory approvals, and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to license proprietary technology.
If we fail to obtain or maintain the regulatory approvals necessary to sell our products, sales could be negatively impacted.
Generally, at this time, our test kits do not require pre-market approval by the U.S. Food and Drug Administration (the “FDA”) or any other regulatory agency. However, agencies such as the EPA, FDA and the FSIS of the U.S. Department of Agriculture are engaged in testing environmental samples and, together with the AOAC, maintain compilations of official methods for use in testing for environmental contaminants in certain market segments, along with procedures and guidelines for validating new methods. The failure of these programs to accept the Company’s products could have an adverse impact on our business. The environmental legislation and regulations that the Company believes are most applicable to its current business are RCRA, CERCLA, TSCA, FIFRA and the Pure Food and Drug Act. For analysis of water and wastewater, the Safe Drinking Water Act, the Clean Water Act and the NPDES permitting program under the Clean Water Act also will be significant to the Company’s business. As the utility of the Company’s Microtox® products continues to be widely recognized in drinking water security applications, regulations and mandates associated with Homeland Security programs may also have an impact on the Company’s business.
Although the Company’s products may not be regulated, the industry segments into which its products are sold may be regulated, and demand for the Company’s products may be driven by these regulations or the lack thereof. These regulations vary from country to country. The regulatory environments in which we compete could change dramatically, which may require us to incur significant costs in obtaining or maintaining regulatory approvals. If we do not obtain or maintain regulatory approvals to enable us to market our products in the United States or elsewhere, or if the approvals are subject to significant restrictions, the demand for our products maybe negatively impacted.
If we do not match our product manufacturing capability to customer demand in a cost-effective manner, our product sales may suffer.
Our product sales depend upon, among other things, our ability to manufacture our products in commercial quantities and in a cost-effective manner. To the extent there is a dramatic increase in demand for our products, we may not be able to manufacture the products in a quick and cost-effective manner. Our manufacturing success also depends, in part, on our ability to transition products from research and development into commercial scale manufacturing. If we are not successful in this transition, our ability to produce products may suffer.
Our business could suffer if we cannot attract, retain and motivate skilled personnel.
Our success depends on our continued ability to attract, retain and motivate highly qualified personnel, including our current executive officers and other key employees. If such executive officers or other key employees were to leave and the Company were unable to obtain adequate replacements, the Company’s operating results could be adversely affected. In addition, the Company’s growth depends on its ability to attract, retain and motivate skilled employees, and on the ability of its officers and key employees to manage growth successfully.
It is difficult and costly to protect our intellectual property rights, and we cannot ensure the protection of these rights; we may be sued by others for infringing their intellectual property rights.
Our commercial success will depend in part on obtaining patent protection on our products and successfully defending these patents against third party challenges. The patent positions of technology driven companies can be highly uncertain and involve complex legal and factual questions. Accordingly, we cannot predict the breadth of claims allowed in our patents.
Others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or competitive to ours, or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed or licensed by us, or that we or our licensors will not be involved in interference proceedings before the United States Patent and Trademark Office.
Although no third party claims of infringement are outstanding against the Company, others may hold proprietary rights that will prevent our product candidates from being marketed unless we can obtain a license to those proprietary rights. Any patent related legal action against our collaborators or us claiming damages and seeking to enjoin commercial activities relating to our products and processes could subject us to potential liability for damages and require us to obtain a license to continue to manufacture or market the affected products and processes. We cannot predict whether we would prevail in any of these actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. If we become involved in litigation, it could consume substantial managerial and financial resources.
We rely on trade secrets to protect technology in cases where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require certain employees and suppliers to enter into confidentiality agreements, we may not be able to protect adequately our trade secrets or other proprietary information. If we cannot maintain the confidentiality of our technology, our ability to receive patent protection or protect our proprietary information may be imperiled.
If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may have to limit or cease commercialization of our products.
The testing and marketing of our products gives rise to an inherent risk of product liability. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or cease commercialization of our products. We currently carry product liability insurance at a level we believe is commercially reasonable, although there is no assurance that it will be adequate to cover claims that may arise. In certain customer contracts we indemnify third parties for certain product liability claims related to our products. These indemnification obligations may cause us to pay significant sums of money for claims that are covered by these indemnifications.
If we do not produce future taxable income, our ability to realize the benefits of deferred tax assets could be impaired.
As of December 31, 2007, the Company had federal net operating loss carryforwards, including those acquired in the Company’s past acquisitions, of approximately $11.9 million, which, if not utilized, begin to expire 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.
The Tax Reform Act of 1986 (the Act) limits the annual use of net operating loss and research and development tax credit carryforwards (after certain ownership changes, as defined by the Act). The application of these limits could significantly restrict our ability to utilize carryforwards. Of our total net operating loss carryforwards, approximately $7.5 million is subject to limitations, since a cumulative change in ownership of more than 50% has occurred within a three year period with respect to those net operating loss carryforwards. Because United States tax laws limit the time period during which these carryforwards may be applied against future taxes, we may not be able to take full advantage of these attributes for Federal income tax purposes if we do not have future taxable income against which to use the carryforwards before they expire.
Our results of operations may fluctuate, which could cause volatility in our stock price.
Our results of operations may fluctuate significantly in the future as a result of a number of factors, many of which are outside of our control. These factors include, but are not limited to:
The results of our operations may fluctuate significantly from quarter to quarter and may not meet expectations of securities analysts and investors. This may cause our stock price to be volatile.
If we use hazardous materials in a manner that causes injury or violates laws, we may be liable for damages.
Our research and development activities involve the controlled use of potentially harmful biological materials as well as hazardous materials, chemicals and various radioactive compounds. We use radioactivity in conducting biological assays and we use solvents that could be flammable in conducting our research and development activities. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. We do not maintain a separate insurance policy for these types of risks. In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our resources. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations could be significant.
Our antibody production process utilizes various species of animals that could contract disease or die, interrupting business operations.
Our antibody production process utilizes animals to produce antibodies. We cannot completely eliminate the risks of animals contracting disease or a disaster that could cause death to valuable production animals. Disease or death on a broad scale could interrupt business operations as animals are a key part of the antibody production operation.
The difficulties of operating in international markets may harm sales of our products.
The international nature of our business subjects us and our representatives, agents and distributors to the laws and regulations of the jurisdictions in which they operate, and in which our products are sold. The types of risks that we face in international operations include, but are not limited to:
Our international sales and operations may be limited or disrupted if we cannot successfully meet the challenges of operating internationally.
Certain of our shareholders are able to influence significantly proposals for a change in control or other matters requiring a shareholder vote.
Directly, or through entities that they control, members of our Board as of December 31, 2007 controlled in excess of 13% of our common stock. Through entities that he controls, Steven R. Becker, who joined our Board effective March 12, 2008, controlled approximately 10.6% of our outstanding common stock. Due to this concentration of ownership, members of our Board, acting together or, in some cases, individually, can substantially influence all matters requiring a stockholder vote, including, without limitation:
Provisions in our organizational documents could prevent or frustrate attempts by stockholders to replace our current management.
Our certificate of incorporation and our bylaws contain provisions that could make it more difficult for a third party to acquire us without consent of our Board. Our certificate of incorporation provides for a staggered board and removal of directors only for cause. Accordingly, stockholders may elect only a portion of our board at any annual meeting, which may have the effect of delaying or preventing changes in management. In addition, under our certificate of incorporation, our Board of Directors may issue additional shares of preferred stock and determine the terms of those shares of stock without any further action by our stockholders. Our issuance of additional preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock and thereby effect a change in the composition of our Board of Directors. Our bylaws require advance notice of stockholder proposals and director nominations and permit only our President or a majority of the Board of Directors to call a special stockholder meeting. These provisions may have the effect of preventing or hindering attempts by our stockholders to replace our current management. In addition, our certificate of incorporation contains provisions that limit our ability to engage in a business combination with any holder of 15% or more of our capital stock unless, among other possibilities, the Board of Directors approves the transaction. These provisions may have the effect of preventing or hindering a change of control of our company.
Our stock has generally had low trading volume, and its public trading price has been volatile.
During the year ended December 31, 2007, the price of our common stock fluctuated between $3.35 and $6.46 per share, with an average daily trading volume for the year of approximately 50,000 shares. The market may experience significant price and volume fluctuations that are often unrelated to the operating performance of individual companies.
Item 1B. Unresolved Staff Comments
Item 2. Properties
The Company is headquartered in Newark, Delaware, and occupies approximately 29,000 square feet of space under an operating lease expiring in December 2009. The Company also leases approximately 26,000 square feet of manufacturing and research space, in Newark, Delaware, under an operating lease expiring in December 2009. The Company owns and occupies approximately 75,000 square feet of manufacturing, research and animal facility space and approximately 64 acres of farmland in Windham, Maine. The Company leases approximately 1,900 square feet of manufacturing and research space in Dallas, Texas under an operating lease expiring in January 2009. The Company leases regional sales offices near London, England expiring in June 2011. The Company believes that its equipment and facilities are adequate for its present purposes.
The Company’s inactive subsidiary, AZUR Environmental Limited, is the lessee for two real property leases located in the United Kingdom. In 2001, the landlord of the two properties gave AZUR Environmental Limited its consent to allow AZUR to assign the lease and its related obligations to a third party. As inducement to the landlord to grant the assignment, AZUR was required to guarantee performance under the original lease terms if the third party fails to perform. Both lease terms expire in November 2016 and provide for annual principal rent payments of approximately $300,000 in the aggregate. The Company believes that based on its assessment of the current financial strength of the third party, no liability is required to be recorded with regard to the guarantee or lease obligation.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company’s stockholders during the fourth quarter of the fiscal year ended December 31, 2007.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s Common Stock is traded on The NASDAQ Global Market under the symbol “SDIX.” Set forth below are the quarterly high and low bid prices for the shares of Common Stock of the Company as reported by The NASDAQ Global Market without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
On March 20, 2008, there were approximately 30,400 holders (343 holders of record) of the common stock of the Company. The Company has never paid any cash dividends on its common stock and pursuant to the Company’s financing agreement with PNC Bank, Delaware, the Company’s commercial bank, no dividends or distributions may be paid on account of its common stock.
Stock Performance Graph
The following line graph compares for the fiscal years ended December 31, 2002 through 2007 (i) the yearly cumulative total shareholder return on the Common Stock with (ii) the cumulative total return of the NASDAQ Composite Index and with (iii) a Peer Group Index consisting of NASDAQ Medical Equipment Stocks.
COMPARISON OF CUMULATIVE TOTAL RETURN
Strategic Diagnostics Inc., NASDAQ Composite and NASDAQ Medical Equipment Peer Group Indices
Item 6. Selected Financial Data
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 “SDI”). 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.
The Company is a leading provider of antibody products and analytical test kits for a broad range of food, water, agricultural, industrial, environmental and scientific applications.
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 facilities located in Windham, Maine and Dallas, Texas for the manufacture of antibodies.
The Company believes that by applying its core competency of creating custom antibodies to assay development, it produces unique, sophisticated diagnostic testing and reagent systems that are responsive to customer diagnostic and information needs. Customers benefit with 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 2007, 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 Genomic Antibody Technology™ (GAT) initiative and food pathogen detection products, where 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 2005, the Company filed 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 most 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 unique 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 Genomic Antibody Technology™ and food pathogen products to be its primary growth drivers in the future, and that the Company’s competencies and the competitive positions these two areas provide are the strongest in the Company’s history.
Corporate and Growth Initiatives:
The following provides an update on the business development activities related to the Genomic Antibody Technology™ initiative and the new Salmonella product in the food pathogen area, which utilizes a patent-pending enrichment media technology.
Genomic Antibody Technology™>: The Company announced an initiative to develop technology for the high throughput production of genetic antibodies early in 2005, and in January 2006, opened a new facility for molecular biology and hired two scientists who had been leading the development of this technology. In January 2006, the Company announced the commercial introduction of the lead product, mouse polyclonal antibodies. In May 2007, the Company launched GAT in rabbits and in January 2008, announced it had surpassed one million dollars in project bookings.
In October 2007, the Company announced the launch of a new internet-based catalog of antibody reagents in support of oncology based research and discovery. These high quality reagents are manufactured utilizing the Company’s Genomic Antibody Technology™ and will carry the SEQer brand.
The antibody product group is strategically important to the growth of the Company, and to transforming the Company into a biotech company with much greater opportunities to access the human health market with proteomic tools and solutions. In November 2007, the Company completed a $2.0 million expansion in its Windham, Maine facility to support its growth initiatives and increased polyclonal antibody production capacity by 44%. Additionally, the Company also announced the expansion of its Molecular Biology Lab in Dallas, Texas and its facility in Newark, Delaware in response to growth in demand for both GAT and conventional hybridoma development.
Food Safety:> The Company’s test for the detection of Salmonella, launched commercially in August 2006, has experienced increasing acceptance in the marketplace. The success of this product has played a substantial role in driving the Company’s three consecutive quarters of more than 20% year-over-year growth, which began with the second quarter of 2007.
One of the technologies that made the new Salmonella product possible is the subject of a patent filed by the Company during the fourth quarter of 2005. The patent claims the use of bacteria phage for the growth and detection of a target bacterium in an environment that is contaminated by competing and cross-reacting bacteria. This new technology solves the problem of singling out the harmful pathogen among many other bacteria by creating an optimized environment for rapid growth of the targeted pathogen while dramatically suppressing other competing bacteria or bacteria that can interfere with the fidelity of the test method. This technology is also being utilized by the Company in the development of an E. coli select product line.
In July 2007, the Company announced the expansion of its product line to include hygiene monitoring, with the exclusive distribution rights to Kikkoman’s Lumitester PD-10N/LuciPac system from Kikkoman in the U.S. marketplace. This unique, patented platform with a proprietary enzymatic recycling technology enables detection of residual biofilm and will allow the Company to address the growing hygiene market in food protection, food service, quick service restaurants and personal and health care.
Industrial Bio-Processing:> The Company believes that the same technology used in its Salmonella product has application in other bio-processing environments including industrial bio-processing. There are many large scale industrial processes in which a manufacturer is attempting to manage the yield of a production organism in an environment contaminated by a competing bacteria. These processes include applications such as ethanol and amino acid production, bio-plastics and others. The Company claims such application in its patent. In 2006, the Company announced an agreement to develop a commercial application in this technology with the Poet Company (formerly called Broin), a U.S.-based producer of ethanol. This agreement was discontinued by Poet in the fourth quarter of 2007. The Company has hired Energetix LLC as its consultant and is actively pursuing technology scale-up and demonstration in fully commercial ethanol plants as early as the third quarter of 2008.
The Company has a robust new product pipeline with technologies that the Company believes will provide sustainable differentiation to address larger markets. Sales and marketing professionals are being hired in anticipation of new product launches and the opportunities identified. The Company continues to be focused on key customers and prospects in target markets: food, pharma, in-vitro diagnostics and biotech. Continuously improving the efficiency of the Company’s manufacturing and supply chain processes and improving the overall quality of products and services remains critical to the Company’s success.
Economic and Industry-Wide Factors
Results of Operations
Year ended December 31, 2007 versus year ended December 31, 2006
Revenues for the year ended December 31, 2007 increased 7% to $27.2 million, compared to $25.5 million for 2006. The following table sets out revenues by product category:
Antibody revenues increased 29% to $14.3 million in the year ended December 31, 2007, compared to $11.1 million for 2006 as the Company’s GAT platform continued to expand.
In 2007, antibody and food pathogen products together represented 69% of total revenues compared to 58% in 2006, with revenue increases of $3.2 million and $0.9 million, respectively, when compared to 2006.
Food Safety Products
For the year ended December 31, 2007, food safety revenues were $7.7 million, compared to $9.2 million for 2006, a decline of 16%.
Sales of tests for food pathogens grew 24%, to $4.6 million from $3.7 million when comparing the years ended December 31, 2007 and December 31, 2006 as the Company continued to gain traction with its RapidChek line of food pathogen tests.
Ag/GMO revenues declined 43%, to $3.1 million from $5.4 million when comparing the years ended December 31, 2007 and December 31, 2006 due to a shrinking marketplace.
Water and Environmental Products
Water and environmental products revenue declined by 2% to $5.1 million for the year ended December 31, 2007, compared to $5.2 million for the year ended December 31, 2006.
Gross profit, defined as revenue less manufacturing costs, for the year ended December 31, 2007 totaled $16.4 million, as compared to $13.8 million for 2006. The gross margin percentage in 2007 was 60%, compared to 54% for the year ended December 31, 2006, as the Company increased efficiencies in its manufacturing process and implemented a change in its sales mix to higher margin products.
For the year ended December 31, 2007, operating expenses increased 3.5% to $25.8 million, compared to $24.9 million for 2006, as spending increased in support of the Company’s antibody technology.
For the year ended December 31, 2007, research and development spending was $2.9 million, or 11% of revenues, compared to $2.6 million, or 10% of revenues, for 2006.
Selling, general and administrative expenses were $12.0 million for the year ended December 31, 2007, compared to $10.6 million for 2006. This 13% increase is primarily attributable to marketing efforts to launch the Genomic Antibody Technology™ products and the antibody catalog, as well as costs associated with regulatory compliance.
The Company recorded net interest income of $433,000 during 2007 compared to interest income of $386,000 during 2006. This increase is primarily due to increased interest rates year over year and an increase in cash balances.
The Company’s annual effective tax rate of 53.2% for 2007 reflects the federal statutory rate of 34.0%, state income taxes net of U.S. Federal benefit of 4.4%, increases in our provision for uncertain tax positions of 10.4%, differences resulting from our provision to tax return reconciliation of 6.2% and other changes of 4.9%. These increases were offset by research and development credits of 6.7%. This compares to the 29.2% effective annual tax rate recorded for 2006. This increase is primarily due to an increase in the provision for uncertain tax positions of 10.4%, and a decrease in the credit for research and development of 7.9%.
Net income for the year ended December 31, 2007 was $860,000, or $0.04 per diluted share, compared to $684,000, or $0.03 per diluted share, for 2006. Diluted shares totaling 20.6 million and 20.1 million were used in the computations for 2007 and 2006, respectively.
Year ended December 31, 2006 versus year ended December 31, 2005
Revenues: Revenues for the year ended December 31, 2006 increased 2.7% to $25.5 million, compared to $24.8 million for 2005. The following table sets out revenues by product category:
Antibody revenues increased 3.5% to $11.1 million in the year ended December 31, 2006, compared to $10.7 million for 2005.
The 2006 increase resulted from an increase in demand for monoclonal products and services, an increase in demand for bulk antibody products and deliveries of Genomic AntibodyTM projects. The “bulk” monoclonal and polyclonal products of the business have inconsistent order patterns and may produce periodic spikes in revenue. Overall, production capacity and utilization of production capacity increased in 2006.
Food Safety Products
For the year ended December 31, 2006, food safety revenues were $9.2 million, compared to $9.0 million for 2005, an increase of 2.6%.
Sales of tests for food pathogens grew 14.5%, to $3.7 million from $3.3 million when comparing the years ended December 31, 2006 and December 31, 2005. This increase is due primarily to increased sales of the Company’s tests for Listeria which the Company launched in mid-2004.
Since 2001, sales of the Company’s product for the StarLink™ trait have dropped from $5.4 million to approximately $871,000 in 2006 and $748,800 in 2007.
Water and Environmental Products
Water and environmental products revenue increased 1.2% to $5.2 million for the year ended December 31, 2006, compared to $5.1 million for 2005.
Sales of water and environmental products increased 10% in foreign markets, excluding the effects of foreign currency translation, for the year ended December 31, 2006 when compared to the year ended December 31, 2005. This increase was primarily due to increased sales of water testing equipment and supplies into China. The increased sales into foreign markets were partially offset by a 3.2% decline in sales in the U.S. domestic market from 2005 to 2006.
Gross profit for the year ended December 31, 2006 totaled $13.8 million, as compared to $13.4 million for 2005. Gross margins were 54% for both years presented.
For the year ended December 31, 2006, operating expenses increased 3.2% to $24.9 million, compared to $24.2 million for 2005.
For the year ended December 31, 2006, research and development spending was $2.6 million, or 10.3% of revenues, compared to $3.0 million, or 12.2% of revenues, for 2005. This decrease was primarily the result of approximately $398,000 in spending during 2005 related to upgrades to the Microtox® equipment software.
Selling, general and administrative expenses were $10.6 million for the year ended December 31, 2006, compared to $9.7 million for 2005. This increase is primarily attributable to marketing efforts utilized to launch the Genomic Antibodies™ product and the cost of a detailed review of the Company’s business and opportunities for growth by an outside consulting group.
The Company recorded net interest income of $386,000 during 2006 compared to interest income of $207,000 during 2005. This increase is primarily due to increased interest rates received on invested funds in 2006.
The Company’s annual effective tax rate of 29.2% for 2006 primarily reflects the federal statutory rate of 34%, state income taxes net of U.S. Federal benefit of 6.2% and other charges of 3.3%, offset by research and development credits of 14.6%.
Net income for the year ended December 31, 2006 was $684,000, or $0.03 per diluted share, compared to $584,000, or $0.03 per diluted share, for 2005. Diluted shares totaling 20.1 million and 19.9 million were used in the computations for 2006 and 2005, 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.
The following is a summary of selected cash flow information:
Net cash provided by operating activities of $2.3 million and $1.7 million for 2007 and 2006, respectively, was primarily the result of earnings before interest, taxes, depreciation and amortization (EBITDA) for the periods ended December 31, 2007 and 2006 of $2.6 million and $1.6 million, respectively. See “Non-GAAP Financial Measures” below.
Net cash used in investing activities for 2007 of $2.5 million compares to net cash used in investing activities of $1.1 million for 2006. These cash outflows were primarily the result of capital purchases which totaled $2.5 million in 2007 versus $1.0 million in 2006. The capital expenditures in 2007 were primarily related to the Company’s expansion in Maine. The capital expenditures in 2006 were related to purchases of manufacturing and laboratory equipment.
Net cash provided by financing activities of $2.3 million for 2007 was primarily a result of additional debt incurred to fund the expansion in the Maine facility. In 2006, net cash provided by financing activities was $0.2 million, consisting mostly of proceeds from the exercise of stock options.
The Company’s working capital (current assets less current liabilities) increased approximately $3.3 million to $20.0 million at December 31, 2007 from $16.7 million at December 31, 2006, primarily due to the increase of $2.1 million in cash and cash equivalents generated during 2007. Outstanding debt increased to $2.3 million at December 31, 2007 from $562,000 at December 31, 2006 due to additional financing of $2.0 million for the expansion of the Maine facility, offset by $311,000 of scheduled debt payments.
On May 5, 2000, the Company entered into a financing agreement with a commercial bank, which was amended on August 10, 2007. This agreement provides for up to a $5 million revolving line of credit, none of which was outstanding and all of which was available at December 31, 2007. The revolving line of credit bears a variable interest rate of between 100 basis points and 225 basis points over the one month LIBOR rate depending upon the ratio of the Company’s funded debt to EBITDA. The current rate of interest on this available line of credit, taking into account the variable interest rate and LIBOR, was approximately 5.80% at December 31, 2007.
On December 13, 2001, the Company entered into an agreement with a commercial bank to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $1.5 million in financing, $351,000 of which was outstanding at December 31, 2007, and is repayable over seven years, with principal payments that began on October 1, 2002. The loan bears a variable interest rate of between 100 basis points and 275 basis points over the one month LIBOR rate depending upon the ratio of the Company’s funded debt to EBITDA, as defined. Payments are due monthly, with equal amortization of principal payments plus interest. The Company’s current rate of interest on this loan, taking into account the variable interest rate and LIBOR, was approximately 5.80% at December 31, 2007.
On August 21, 2007, the Company entered into an agreement with a commercial bank to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $2 million in financing, $1.9 million of which was outstanding at December 31, 2007, and is repayable over five years, with principal payments that began on October 1, 2007. The loan bears a fixed interest rate of 5.961%. Payments are due monthly with equal amortization of principal payments plus interest.
Under the terms of the above financings, the Company is required to meet certain quarterly financial covenants that include a ratio of EBITDA to current maturities of debt plus interest and cash paid for taxes greater than 1.50 and a ratio of funded debt to EBITDA not to exceed 3.25. The Company met all of its financial covenants with respect to this indebtedness at December 31, 2007 and expects that it will be able to meet all of its financial covenants with respect to this indebtedness for at least the next 12 months.
For the year ended December 31, 2007, the Company satisfied all of its cash requirements from the net cash provided by operating activities, cash available and on-hand and from the financing agreements described above. At December 31, 2007, the Company had $2.3 million in debt and stockholders’ equity of $37.1 million. Although the Company has no material commitments for capital expenditures at December 31, 2007, it does anticipate that it may spend approximately $1.2 million in 2008 to upgrade or expand certain manufacturing, research and development and office systems.
Based upon its cash 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 at least through 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 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.
Non-GAAP Financial Measures
The Company presents an EBITDA measure as the Company believes this provides investors and the Company’s management with additional information to measure the Company’s liquidity. EBITDA measures are not a measure of performance under GAAP, and therefore, should not be considered in isolation or as a substitute for net income or cash flows from operations. Additionally, the Company’s EBITDA calculations may differ from the EBITDA calculations for other companies.
The calculation of the Company’s EBITDA measure (as discussed above), and the reconciliation of the Company’s EBITDA measure to net cash provided by operating activities for the years ended December 31, 2007 and 2006, respectively, is as follows (amounts in thousands):
Off-Balance Sheet Arrangements
As of December 31, 2007 the Company did not have any off-balance sheet arrangements as defined in Item 304(a) (4) (ii) of Regulation S-K.
The Company is committed to making cash payments in the future on two types of contracts: our 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, 2007.
Critical Accounting Policies
The Company’s accounting policies are described in Note 1 of the Notes to the Consolidated Financial Statements. The Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles, 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 and long-lived assets. 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, 2007 and December 31, 2006, were net of an allowance for doubtful accounts of $82,000 and $134,000, 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. 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 test kit components, 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 likely 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 deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of existing temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based upon historical taxable income and projections for future taxable income, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2007.
At December 31, 2007, management concluded that no valuation allowance is necessary for federal deferred tax assets after considering the positive and negative evidence. In making this determination, the Company considered the following positive factors:
The Company also considered the following negative factors:
At December 31, 2007, management has concluded that a full valuation allowance of approximately $119,000 is necessary for deferred tax assets in certain state jurisdictions. For the state jurisdictions, management has considered the same positive and negative evidence as utilized for the federal deferred tax assets described above. The Company has also considered the substantial reduction of its presence in North Carolina and Pennsylvania since the time when the net operating losses were incurred in those jurisdictions as additional negative evidence.
At December 31, 2007, the Company had approximately $6.2 million of net operating loss carryforwards for tax purposes related to operations in the United Kingdom (“UK”). Management considered positive and negative indicators in concluding that a substantial valuation allowance of approximately $1.6 million was necessary for the foreign deferred tax assets of $1.7 million. The positive indicators included the contribution to income before taxes by the operations in the UK for 2007 and 2006, and the expected income before taxes in the UK for 2008. The negative indicators included a history of substantial net operating losses in the UK, the lack of income before taxes until 2004 and limitations with regard to estimating income in the UK beyond 2008 resulting from concerns about the future need for a foreign subsidiary.
The net operating loss carryforwards differ from the accumulated deficit, principally due to differences in the timing of recognition of certain research and development expenses, depreciation and amortization, other non-deductible reserves and limitations under federal and state tax regulations for acquired net operating loss carryforwards.
As of December 31, 2007, the Company had federal net operating loss carryforwards, including those acquired, of approximately $11.9 million, which begin to expire 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.
Revenue Recognition — Revenues composed of sales of immunoassay-based test kits and certain antibodies and immunochemical reagents are recognized upon the shipment of the product and transfer of title or when related services are provided. Revenues associated with such products or services are recognized when persuasive evidence of an order exists, shipment of product has occurred or services have been provided, the price is fixed or determinable and, collectibility is probable. Management is required to make judgments based on actual experience about whether or not collectibility is reasonably assured.
The Company enters into contracts related to the production of custom antibodies, which provide for the performance of defined tasks for a fixed price, with delivery of the product upon completion of production. The standard time to complete a project is typically longer than 30 days but less than 12 months and effort is expended over the life of the project. Revenues related to sales of custom antibody projects are recognized when a project’s specifications have been met and/or the related materials have been shipped.
Fees associated with products and services added on to a custom antibody project subsequent to delivery of the initial project are billed monthly and recognized as revenue as the services and other deliverables are provided.
Valuation of Long-Lived Assets—Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds an asset’s fair value.
Stock–Based Compensation — the Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised 2004), “Share–Based Payment” (“SFAS 123 (R)”). SFAS 123 (R) requires the Company to measure all employee stock–based compensation awards using a fair value method and recognize such expense in our consolidated financial statements. In addition, SFAS 123 (R) requires additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from stock–based payment arrangements. We adopted SFAS 123 (R) on January 1, 2006 using the modified prospective transition method in which compensation cost is recognized beginning January 1, 2006 for all stock–based awards granted on or after that date and for all awards granted to employees prior to January 1, 2006 that remain unvested on that date. Under this transition method, compensation cost recognized in fiscal 2006 includes: (a) compensation cost for all stock–based awards granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, as adjusted for an estimate of the number of awards that will be forfeited and (b) compensation cost for all stock–based awards granted on or after January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123 (R).
Previously, the Company had recognized the impact of forfeitures as they occurred. The grant date fair value of the awards generally vests over the service period. The stock-based compensation expense is included in SG&A expenses. SFAS 123 (R) requires management to make estimates and assumptions to determine the underlying value of stock options and restricted stock awards, including the vesting for restricted stock awards and options containing performance-based vesting features, the expected term of stock options, an estimate of future forfeitures and the volatility of our stock price in the future. These assumptions have an impact on the valuation assigned to equity awards and the associated recognition of expense.
On December 27, 2005, the Board of Directors of the Company approved the accelerated vesting, effective as of December 31, 2005, of all unvested stock options granted to employees and non-employee directors from 2002 through 2005 under the Company’s 2000 Stock Incentive Plan, as well as options granted to the Company’s Chief Executive Officer under his original employment agreement. The acceleration of vesting of these options reduced non-cash compensation expense that would have been recorded in the Company’s income statement in 2006 and future periods in anticipation of the adoption of SFAS 123(R) in January 2006. The Board’s decision to accelerate the vesting was based on such factors as: 48% of the options were “out of the money”; the options generally vested over the next three years; to reduce compensation expense that might be recorded in future periods following the adoption of SFAS 123R; and, the Company has decided to rely, to a substantial degree, on restricted stock as opposed to options in future incentive compensation awards.
New Accounting Standards and Disclosures
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, the Company has adopted the provisions of FIN 48 and there was no material effect on the consolidated financial statements. As a result, there was no cumulative effect related to adopting FIN 48.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No. 157 provides guidance for using fair value to measure assets and liabilities and is intended to respond to investors’ requests for expanded information about the extent to which a company measures assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on income. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. SFAS No. 157 also requires expanded disclosure of the effect on income for items measured using unobservable data, establishes a fair value hierarchy that prioritizes the information used to develop those assumptions and requires separate disclosure by level within the fair value hierarchy. The provisions of SFAS No. 157 are effective for interim financial statements issued for fiscal years beginning after November 15, 2007, or the Company’s fiscal 2008. The Company is currently evaluating the impact of adopting SFAS No. 157 on the Consolidated Financial Statements, but does not expect the adoption of SFAS No. 157 to have a material effect on its consolidated financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of SFAS No. 115.” The new statement allows entities to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, in the case of the Company, fiscal 2008. The Company is currently evaluating the impact of adopting SFAS No. 159 on the consolidated financial statements.
In June 2007, the FASB issued EITF No. 07-03, “Accounting for nonrefundable advance payments for goods or services received for use in future research and development activities.” EITF No. 07-03 requires companies that make nonrefundable advance payments for future research and development activities to capitalize the payment, and recognize the expense as the goods are delivered or services are performed. EITF No. 07-03 is effective for fiscal years beginning after December 15, 2007, (in the case of the Company, fiscal 2008), but is to be applied prospectively to new contracts entered into on or after the effective date. The Company does not expect the adoption of EITF No. 07-03 will have a material effect on the consolidated financial statements.
In November 2007, the EITF of the FASB reached a consensus on Issue No. 07-01,"Accounting for Collaborative Arrangements," ("EITF No. 07-01"). EITF No. 07-01 defines a collaborative arrangement as a contractual arrangement in which the parties are: (1) active participants to the arrangement; and (2) exposed to significant risks and rewards that depend upon the commercial success of the endeavor. The issue also addresses the appropriate income statement presentation for activities and payments between the participants in a collaborative arrangement as well as for costs incurred and revenue generated from transactions with third parties. EITF No. 07-01 is effective for the Company for the reporting period beginning April 1, 2009. The Company is in the process of evaluating the impact of the adoption of EITF No. 07-01 on its consolidated financial statements
In December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations,” or SFAS No. 141(R), which replaces SFAS No. 141, “Business Combinations,” and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. SFAS No. 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We expect to adopt this statement on January 1, 2009. SFAS No. 141(R)’s impact on accounting for business combinations is dependent upon acquisitions at that time.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51" (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The standard also requires disclosure on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. In addition this standard establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 becomes effective for fiscal periods beginning after December 15, 2008. The Company expects to adopt this statement on January 1, 2009. As the Company currently does not have a noncontrolling interest in a subsidiary, the effect of SFAS 160 if any, will be dependent on changes in the Company’s current business structure.
For further information related to new accounting standards and disclosures, see Note 1 of the Notes to Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to changing interest rates, and is currently not engaged in hedging activities. Interest on approximately $351,000 of outstanding indebtedness is at a variable rate of 100 basis points over the published one month LIBOR rate. At the Company’s current level of indebtedness, each 1% change in the variable interest rate will have an effect of $4,000 on the Company’s annual interest expense charges.
The Company conducts operations in 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 8. Financial Statements and Supplementary Data
The following consolidated financial statements and supplemental quarterly financial data of the Company and its subsidiary are included as part of this Form 10-K:
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. 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 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 our disclosure controls and procedures as of December 31, 2007, were functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) 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 our internal control over financial reporting occurred during the year ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The report of management on our internal control over financial reporting is set forth in Item 8 of this report and is incorporated herein by reference.
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
The applicable information set forth in the Company’s Definitive Proxy Statement is incorporated herein by reference.
Identification of Executive Officers and Certain Significant Employees
The executive officers of the Company, their positions with the Company, their ages and a brief biography for each are as follows:
Matthew H. Knight> joined SDI in September 2003 as President and CEO, and also serves as a Director. Prior to joining SDI, Mr. Knight spent 23 years at Nalco Chemical Company. He began his career in field sales in 1980, and advanced through a series of sales and marketing management positions over the next 15 years. In 1996, Mr. Knight became General Manager of Nalco’s European operating group serving the water management needs of manufacturers, including the food, beverage and pharmaceutical industries. In 1998, he was promoted to General Manager of Nalco’s largest water treatment business unit and in 2000 he was promoted to Group Vice President and President of the company’s Industrial Division. Mr. Knight also served as Group Vice President, Sales Force Optimization, focused on development of sales and sales management processes for Nalco’s global sales force. Mr. Knight is a graduate of Miami University of Ohio, with a B.A. in Chemistry, and the Amos Tuck Executive Program.
James W. Stave> joined SDI in March 1991 as a research group leader. Subsequently, Dr. Stave was promoted to director of Research and Development. In October 1993, Dr. Stave was promoted to Vice President—Research and Development and Chief Technical Officer. Dr. Stave was elected Chief Science Officer in 2006. Prior to joining SDI, Dr. Stave worked for DuPont, Molecular Genetics, Inc. and the U.S. Department of Agriculture. Dr. Stave received his Ph.D. in Microbiology from the University of Maryland and his B.S. in Biology from Michigan Technological University.
Stanley Fronczkowski >joined the Company in January 2007 as Vice President – Finance, Chief Financial Officer and Corporate Secretary. Prior to joining SDI, Mr. Fronczkowski spent 29 years with Keystone Foods. He began his career with Keystone in 1978, rising to the position Vice President, International Finance in 1988, and over the next 10 years, supported Keystone’s growth across multiple companies on four continents. In 1998, Mr. Fronczkowski became COO for Keystone Europe, Middle East and Africa with full responsibility for the operating results of this business group. Following Keystone’s reorganization to Strategic Business Units in Europe and North America, Mr. Fronczkowski assumed his most recent assignment as Keystone’s Vice President for Finance, Asia-Pacific. Mr. Fronczkowski is a graduate of the State University of New York at Cortland with a B.S in Political Science, the University of Delaware with a B.S. in Accounting, and Widener University with a M.S. in Finance and Taxation.
Francis M. DiNuzzo> joined the Company in February 2008 as Executive Vice President – Marketing and Chief Commercial Officer. Prior to joining SDI, Mr. DiNuzzo spent 26 years at Agilent Technologies / Hewlett Packard. He began his career in research and development in 1981 and advanced through a series of functional management over the next 18 years. In 1999, Mr. DiNuzzo became General Manager of Agilent’s Chemical Solutions Business Unit where he had global responsibility for analytical equipment, consumables and service products serving the chemical, environmental, food and forensics markets. In 2001, Mr. DiNuzzo became General Manager of the Consumable and Services Business Unit, with global responsibility for all consumables and services across all Life Science and Chemical Analysis markets. In 2004, Mr. DiNuzzo became Vice President and General Manager of the Integrated Biology Solutions unit, a role where he formed a biotechnology business focused on Genomics, Proteomics and BioInformatics. Mr. DiNuzzo holds B.S and M.S. degrees in Engineering with a minor in Business Administration from the University of New Hampshire.
Item 11. Executive Compensation
The applicable information set forth in the Company’s Definitive Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The applicable information set forth in the Company’s Definitive Proxy Statement is incorporated herein by reference.
The table below presents certain information as of December 31, 2007 concerning securities issuable in connection with equity compensation plans that have been approved by the Company’s shareholders and that have not been approved by the Company’s shareholders.