| STRATEGIC DIAGNOSTICS INC/DE/ 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: • timing and scope of regulatory approval; • product availability; • awareness and acceptance of our products and their application; • channels to market; • marketing and sales capabilities; • product attributes relative to its cost; • price; and • exclusivity, through patent protection or otherwise |
| 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 |
| 16 ______________________________________________________________________ [107]Back to Contents 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 US Food and Drug Administration (the “FDA”) or any other regulatory agency |
| However, agencies such as the EPA, FDA and the Food Safety and Inspection Service of the US Department of Agriculture are engaged in testing environmental samples and, together with the Association of Official Analytical Chemists International (“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, 17 ______________________________________________________________________ [108]Back to Contents 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 |
| 18 ______________________________________________________________________ [109]Back to Contents If our Company does not produce future taxable income, our ability to realize the benefits of deferred tax assets could be impaired |
| As of December 31, 2005, the Company had federal net operating loss carryforwards, including those acquired in the Company’s past acquisitions, of approximately dlra18cmam873, which, if not utilized, begin to expire as follows: Year Amount of NOL (in thousands) _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ 2007 $ 946 2008 2cmam565 2009 3cmam297 2010 5cmam109 2017 760 2018 1cmam327 2019 550 2020 66 2021 51 2022 2cmam253 2024 1cmam824 2025 125 _________________________________________________________________ _________________________________________________________________ Total $ 18cmam873 _________________________________________________________________ _________________________________________________________________ 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, dlra14cmam794 is subject to limitations, since a cumulative change in ownership of more than 50prca 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: • unanticipated events associated with regulatory changes; • general economic conditions; • seasonality; • acceptance of our products; • the success of products competitive with ours; • expenses associated with development and protection of intellectual property matters; • establishing or maintaining commercial scale manufacturing capabilities; • the timing of expenses related to commercialization of new products; • the timing and success in building our distribution channels; The results of our operations may fluctuate significantly from quarter to quarter and may not meet expectations of securities analysts and investors |
| 19 ______________________________________________________________________ [110]Back to Contents 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 |
| 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: • the imposition of governmental controls; • logistical difficulties in managing international operations; and • fluctuations in foreign currency exchange rates |
| Our international sales and operations may be limited or disrupted if we cannot successfully meet the challenges of operating internationally |