UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549




______________




FORM 10-Q




x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the Quarterly Period Ended June 30, 2010




o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the Transition Period From _________ to _________




Commission File Number000-22400




STRATEGIC DIAGNOSTICS INC.


(Exact name of Registrant as specified in its charter)


______________




Delaware
56-1581761(State or other jurisdiction of
(I.R.S. employerincorporation or organization)
identification no.)111 Pencader DriveNewark, Delaware
19702(Address of principal executive offices)
(Zip Code)




Registrant’s telephone number, including area code: (302) 456-6789


______________




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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).





Yes: x
No: 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated filer o
Accelerated filer oNon-accelerated filer o
Smaller reporting company x(Do not check if a smaller reporting company)





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




As of July 29, 2010, there were 20,496,836 outstanding shares of the Registrant’s common stock, par value $.01 per share.









STRATEGIC DIAGNOSTICS INC.




INDEX





Item

PagePART I FINANCIAL INFORMATIONITEM 1. Financial Statements (Unaudited)Consolidated Balance Sheets – June 30, 2010 and December 31, 2009
2Consolidated Statements of Operations – Three and six months ended June 30, 2010 and 2009
3Consolidated Statements of Cash Flows – Six months ended June 30, 2010 and 2009
4Notes to Consolidated Interim Financial Statements
5ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
12ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
16ITEM 4. Controls and Procedures
16PART II OTHER INFORMATION
17ITEM 6. Exhibits
17SIGNATURES
18




1




PART I – FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS


STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)


(unaudited)




June 30,


December 31,2010


2009ASSETSCurrent Assets:Cash and cash equivalents

$
7,650


$
7,937Restricted cash


1,250



1,250Receivables, net


3,907



3,650Inventories


3,658



3,714Deferred tax asset


1



1Other current assets


761



551Total current assets


17,227



17,103Property and equipment, net


4,307



4,626Other assets


85



10Deferred tax asset


51



51Intangible assets, net


1,378



1,435Total assets

$
23,048


$
23,225LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Current portion of long-term debt

$
400


$
400Accounts payable


449



571Accrued expenses


1,978



1,386Deferred revenue


2



75Total current liabilities


2,829



2,432Long-term debt


500



700Stockholders' Equity:Preferred stock, $.01 par value, 20,920,648 shares authorized,no shares issued or outstanding


-



-Common stock, $.01 par value, 35,000,000 shares authorized,20,902,030 and 20,786,515 issuedat June 30, 2010 and December 31, 2009, respectively


209



208Additional paid-in capital


41,294



40,958Treasury stock, 406,627 common shares at costat June 30, 2010 and December 31, 2009


(555
)


(555
)Accumulated deficit


(20,950
)


(20,276
)Cumulative translation adjustments


(279
)


(242
)Total stockholders' equity


19,719



20,093Total liabilities and stockholders' equity

$
23,048


$
23,225




The accompanying notes are an integral part of these statements.


2




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except share and per share data)


(unaudited)




Three Months


Six MonthsEnded June 30,


Ended June 30,2010


2009


2010


2009Revenues

$
6,796


$
6,853


$
13,487


$
13,755OPERATING EXPENSES:Manufacturing


2,764



3,223



5,519



6,320Research and development


764



820



1,440



1,483Selling, general and administrative


3,469



3,524



7,184



7,244Gain on disposal of assets


-



-



(8
)


-Total operating expenses


6,997



7,567



14,135



15,047Operating loss


(201
)


(714
)


(648
)


(1,292
)Interest income (expense), net


(14
)


-



(26
)


5Loss before taxes


(215
)


(714
)


(674
)


(1,287
)Income tax expense


-



20



-



8Net loss

$
(215
)

$
(734
)

$
(674
)

$
(1,295
)Basic loss per share

$
(0.01
)

$
(0.04
)

$
(0.03
)

$
(0.06
)Shares used in computing basicloss per share


20,229,963



20,105,814



20,209,158



20,070,882Diluted loss per share

$
(0.01
)

$
(0.04
)

$
(0.03
)

$
(0.06
)Shares used in computing dilutedloss per share


20,229,963



20,105,814



20,209,158



20,070,882




The accompanying notes are an integral part of these statements.


3




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)




Six MonthsEnded June 30,2010


2009Cash Flows from Operating Activities :Net loss

$
(674
)

$
(1,295
)Adjustments to reconcile net loss to netcash provided by (used in) operating activities :Depreciation and amortization


578



653Share-based compensation expense


254



375Deferred income tax provision


-



26Gain on disposal of fixed assets


(8
)


-(Increase) decrease in :Receivables


(257
)


360Inventories


56



(15
)Other current assets


(210
)


(298
)Other assets


(69
)


81Increase (decrease) in :Accounts payable


(122
)


(276
)Accrued expenses


590



(298
)Deferred revenue


(73
)


217Net cash provided by (used in) operating activities


65



(470
)Cash Flows from Investing Activities :Purchase of property and equipment


(205
)


(419
)Proceeds from sale of fixed assets


10



-Net cash used in investing activities


(195
)


(419
)Cash Flows from Financing Activities :Proceeds from employee stock purchase plan


16



8Proceeds from stock option excercises


64



-Restricted cash requirement


-



(2,703
)Repayments on financing obligations


(200
)


(305
)Net cash used in financing activities


(120
)


(3,000
)Effect of exchange rate changes on cash


(37
)


113Net decrease in Cash and Cash Equivalents


(287
)


(3,776
)Cash and Cash Equivalents, Beginning of Period


7,937



9,980Cash and Cash Equivalents, End of Period

$
7,650


$
6,204Supplemental Cash Flow Disclosure :Cash paid (received) for taxes and tax refunds


(112
)


11Cash paid for interest


40



44




The accompanying notes are an integral part of these statements.


4




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)


1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Business





Strategic Diagnostics Inc. and its subsidiaries, now doing business as SDIX (“SDIX” or the “Company”), is a biotechnology company with a core mission of developing, commercializing, and marketing innovative and effective products and solutions that preserve and enhance the quality of human health and wellness.  The Company serves the pharmaceutical, biotechnology, diagnostics, food safety and environmental markets.





In February 2010, the Company announced it would be doing business as SDIX.  The SDIX name and logo were introduced to better reflect the Company’s evolution from its historical beginnings as an industrial diagnostics products and antibody production company to the company it is today, with all of its core capabilities and expanded expertise in developing and delivering a full suite of innovative immuno-solutions.  The new name also aligned the Company’s name with its website address and NASDAQ listing, making the Company easier to find and connect to.





SDIX is a customer-centric organization. The Company’s goals are to consistently deliver increased value to its customers through products and services that facilitate business results, reduce costs, and help manage risk.  SDIX sales professionals focus on delivering a quantifiable “return on investment” to our customers, demonstrating to them how to reduce time and total costs associated with applications for which the Company’s products are used. In addition, the Company believes its tests and immuno-solutions provide high levels of accuracy and reliability, delivering more actionable results to the customer compared to alternative products.





The Company is focused on demonstrating profitable growth by leveraging its expertise in antibodies and immuno-technologies to successfully develop proprietary products and services that enhance the competitive advantage of our 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 our inception. The Company has achieved meaningful economies of scale for the products it offers through the utilization of its facilities in Newark, Delaware for the manufacture of test kits and antibodies and its facilities located in Windham, Maine for the manufacture of antibodies.





The Company’s Life Sciences product portfolio includes a full suite of integrated immuno-solution capabilities including assay design, development, and production.  These capabilities, combined with its proprietary Genomic Antibody TechnologyTM (“GATTM”), are being used today to help discover the mechanisms of disease, facilitate the development of new drugs, and provide the means for rapid diagnosis.





The Company’s Kit Products portfolio includes immunoassays which represent advanced technology for rapid, cost-effective, easy-to-use and accurate detection of food pathogens. SDIX’s RapidChek® and SELECTTM test kits are experiencing growing adoption for the detection of pathogens such as E. coli, Salmonella and Listeria in the production, processing, and manufacturing of food and beverages.





SDIX has been developing antibodies which advance our customers’ immuno-based work for 20 years.  By applying its core competencies of creating proprietary, high-quality antibodies and assay development solutions, the Company has produced sophisticated testing and reagent systems that are responsive to each customer’s analytical information needs.





5





Basis of Presentation and Interim Financial Statements




The accompanying unaudited consolidated interim financial statements of the Company have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. In the opinion of management, the accompanying consolidated interim financial statements include all adjustments (all of which are of a normal recurring nature) necessary for a fair presentation of the results of operations.  The interim operating results are not necessarily indicative of the results to be expected for the entire year.




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 and determinable and collectability is reasonably assured. Management is required to make judgments based on actual experience about whether or not collectability 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 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.  Sales taxes collected from customers are presented net in the consolidated statement of operations.




Use of Estimates




The preparation of the consolidated interim financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated interim financial statements, and the reported amounts of revenues and expenses during the period. These estimates include those made in connection with assessing the valuation of accounts receivable, inventories, deferred tax assets and long lived assets. Actual results could differ from these estimates.





New Accounting Pronouncements





In September 2009, the FASB issued Accounting Standard Update (“ASU”) No. 2009-13,Revenue Recognition (Topic 605) – Multi-Deliverables Revenue Arrangements, a Consensus of the FASB Emerging Issues Task Force, to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. It establishes the accounting and reporting guidance for arrangements under which the vendor will perform multiple revenue-generating activities, specifically, how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact, if any, of adopting the update.





6





Comprehensive Loss





Comprehensive loss consists of the following for each period:





Three Months Ended


Six Months EndedJune 30,


June 30,2010


2009


2010


2009Net loss

$
(215
)

$
(734
)

$
(674
)

$
(1,295
)Currency translation adjustment


(4
)


121



(37
)


113Total comprehensive loss

$
(219
)

$
(613
)

$
(711
)

$
(1,182
)




2.
BASIC AND DILUTED LOSS PER SHARE




Basic loss per share (EPS) is computed by dividing net loss available for common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is similar to basic EPS, except that the dilutive effect of converting or exercising all potentially dilutive securities is also included in the denominator. The Company’s calculation of diluted EPS includes the dilutive effect of stock options and restricted stock units. Basic loss per share excludes potentially dilutive securities.  For the three month periods ended June 30, 2010 and 2009, stock options and unvested restricted shares totaling 336,332 and 226,810, common share equivalents, respectively and for the six month periods ended June 30, 2010 and 2009, stock options and unvested restricted shares totaling 405,897 and 225,519, common share equivalents, respectively, were excluded from this calculation because they were anti-dilutive.





Three Months Ended


Six Months EndedJune 30,


June 30,2010


2009


2010


2009Weighted average common shares outstanding


20,229,963



20,105,814



20,209,158



2,070,882Shares used in computing basicloss per share


20,229,963



20,105,814



20,209,158



2,070,882Dilutive effect of stock options andunvested restricted stock units


-



-



-



-Shares used in computing dilutedloss per share


20,229,963



20,105,814



20,209,158



2,070,882




3.
SHARE-BASED COMPENSATION




Under various plans, executives, key employees and outside directors receive awards of options to purchase common stock. The Company has a stock option plan (the “2000 Plan”) which authorizes the granting of incentive and nonqualified stock options and restricted stock units. Incentive stock options are granted at not less than 100% of fair market value at the date of grant (110% for stockholders owning more than 10% of the Company’s common stock). Nonqualified stock options are granted at not less than 85% of fair market value at the date of grant. A maximum of 6,000,000 shares of common stock are issuable under the 2000 Plan. Certain additional options have been granted outside the 2000 Plan. These options generally follow the provisions of the 2000 Plan.  The Company issues new shares to satisfy option exercises and the vesting of restricted stock awards.




7




The Company also has an Employee Stock Purchase Plan (the “ESPP”). The ESPP allows eligible full-time employees to purchase shares of common stock at 90% of the lower of the fair market value of a share of common stock on the first or last day of the quarter. Eligible employees are provided the opportunity to acquire Company common stock during each quarter. No more than 661,157 shares of common stock may be issued under the ESPP. Such stock may be unissued shares or treasury shares of the Company or may be outstanding shares purchased in the open market or otherwise on behalf of the ESPP.  The Company’s ESPP is compensatory and therefore, the Company is required to recognize compensation expense related to the discount from market value of shares sold under the ESPP.  The Company utilizes unissued shares to satisfy shares purchased under the ESPP.




Share-based compensation expense recorded in the three and six month periods ended June 30, 2010 and 2009 is summarized as follows:




Three Months Ended


Six Months EndedJune 30,


June 30,2010


2009


2010


2009Stock options

$
72


$
79


$
156


$
180Employee stock purchase plan


1



-



7



1Restricted stock units


46



78



91



194Total share-based compensation expense

$
119


$
157


$
254


$
375




Share-based compensation expense is a component of selling, general and administrative expense, and is recorded as a non-cash expense in the operating activities section of the Company’s Consolidated Statements of Cash Flows.




Proceeds received from the exercise of stock options in the six month periods ended June 30, 2010 and 2009, were $64 and $0, respectively.  Proceeds received from employee payments into the ESPP in the six month periods ended June 30, 2010 and 2009, were $16 and $8, respectively.  These amounts are recorded in the cash flows from financing activities section of the Company’s Consolidated Statements of Cash Flows.




8




Information with respect to the activity of outstanding stock options granted under the 2000 Plan and options granted separately from the 2000 Plan for the six months ended June 30, 2010 is summarized as follows:





Weighted

AggregateNumber






Average Remaining

Instrinsicof Shares


Price Range

Contractual term

ValueBalance, January 1, 2010


1,701,800


$
1.10
-
$
6.94Granted


529,852


$
1.50
-
$
2.09Excercised


(42,500
)

$
1.50
-
$
1.50Cancelled / Forfeited


(148,046
)

$
1.49
-
$
6.94Balance, June 30, 2010


2,041,106


$
1.10
-
$
5.17

7.1 years

$
267Vested and excercisable atJune 30, 2010


969,986


$
1.10
-
$
5.17

5.1 years

$
52Expected to vest as ofJune 30, 2010


1,946,291


$
1.10
-
$
5.17

7.0 years

$
246




During the six month period ended June 30, 2010, there were 529,852 options granted with a weighted average grant date fair value, based on a Black-Scholes option pricing model, of $0.83 per share.  The assumptions used in the Black-Scholes model are as follows: dividend yield 0%, expected volatility 51.56%, risk-free interest rate 2.60% and expected life of 5.92 years.  The expected life of options granted was computed using the sum of the average vesting period and the contractual life of the option and dividing by two, for all periods presented.




The following table provides additional information about the Company’s stock options outstanding and exercisable at June 30, 2010:





Options Outstanding


Options ExercisableWeighted Average







Weighted AverageRange of


Number of


Remaining

Exercise


Number of


ExerciseExercise Prices


Shares


Contractual Life

Price


Shares


Price$
1.10
-
$
2.51



1,268,852


8.7 Years

$
1.67



223,732


$
1.72$
3.05
-
$
3.57



206,400


3.1 Years

$
3.32



206,400


$
3.32$
3.69
-
$
5.17



565,854


5.0 Years

$
4.16



539,854


$
4.14$
1.10
-
$
5.17



2,041,106


7.1 Years

$
2.53



969,986


$
3.41





9




A summary of the status of the Company’s unvested restricted stock as of January 1, 2010 and changes during the six month period ended June 30, 2010 is presented below.




Weighted AverageGrant Date


AggregateShares


Fair Value


Intrinsic ValueNon-vested RSA's at January 1, 2010


206,026


$
1.77Granted


67,500


$
1.60Vested


(57,570
)

$
2.09Cancelled / forfeited


(9,300
)

$
1.82Non-vested RSA's at June 30, 2010


206,656


$
1.62


$
374Expected to vest at June 30, 2010


195,656


$
1.59


$
354




Restricted stock granted is generally scheduled to vest over periods of two to four years. The cost of the grant is charged to operations over the vesting period.  At June 30, 2010, the weighted average remaining term of non-vested restricted stock was 1.9 years.





4.
INVENTORIES




The Company’s inventories are valued at the lower of cost or market. For inventories that consist primarily of test kit components, bulk serum and antibody products, cost is determined using the first in, first out method. For inventories that consist of costs associated with the production of custom antibodies, cost is determined using the specific identification method. At June 30, 2010 and December 31, 2009, inventories consisted of the following:





June 30,


December 31,2010


2009Raw materials

$
805


$
807Work in progress


1,231



1,228Finished goods


1,622



1,679Inventories

$
3,658


$
3,714





5.
INTANGIBLE ASSETS




At June 30, 2010 and December 31, 2009, intangible assets consisted of the following:




June 30,


December 31,2010


2009


LivesIntangible assets


2,614



2,614


2-20Accumulated amortization


(1,236
)


(1,179
)Net intangible assets

$
1,378


$
1,435




10




6.
DEBT




On May 5, 2000, the Company entered into a financing agreement with a commercial bank which was amended on August 12, 2009 (as amended, the “Credit Agreement”).




On August 21, 2007, the Company received a term loan under the Credit Agreement to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $2,000 in financing, $900 of which was outstanding at June 30, 2010, and is repayable over five years, with principal payments that began on October 1, 2007. The loan bears a fixed interest rate of 5.96% with equal amortization of principal payments plus interest.




This indebtedness is secured by $1.25 million in restricted cash as required by the Credit Agreement.





7.
INCOME TAXES





The Company evaluates its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required.  The Company had a full valuation allowance offsetting its U.S. federal and state net deferred tax assets which primarily represent net operating loss carryforwards (“NOLs”) at December 31, 2009.  During the six month period ended June 30, 2010, the Company’s management concluded that the full valuation allowance for U.S. federal and state net deferred tax assets is appropriate as the facts and circumstances during 2010 have not changed management’s conclusion that a full valuation allowance is necessary.




The Company is subject to U.S. federal and UK income tax, as well as income taxes of multiple state jurisdictions.   The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.  At June 30, 2010, the Company had no interest or penalties accrued related to uncertain tax positions due to the available NOLs.




As of January 1, 2010, the Company provided a liability for approximately $510 of unrecognized tax benefits, which if recognized in a period where there was not a full valuation allowance, would affect the effective tax rate.  For the six months ended June 30, 2010, unrecognized tax benefits decreased by $17 to $493, which if recognized in a period where there was not a full valuation allowance, would affect the effective tax rate.




For federal purposes, post-1993 tax years remain open to examination as a result of earlier net operating losses being utilized in recent years. For state purposes, the statute of limitations remains open in a similar manner for states that have generated net operating losses. The Company does not expect that the total amount of unrecognized tax benefits related to positions taken in prior periods will change significantly during the next 12 months.




11





Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations




Forward-Looking Statements




This Form 10-Q contains certain forward-looking statements reflecting the current expectations of Strategic Diagnostics Inc. and its subsidiaries (the “Company” or “SDIX”). In addition, when used in this quarterly report, the words “anticipate,” “enable,” “estimate,” “intend,” “expect,” “believe,” “potential,” “may,” “will,” “should,” “project” and similar expressions as they relate to the Company are intended to identify said forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated at this time. Such risks and uncertainties include, without limitation, changes in demand for products, delays in product development, delays in market acceptance of new products, retention of customers, attraction and retention of management and key employees, adequate supply of raw materials, inability to obtain or delays in obtaining third party approvals or required government approvals, the ability to meet increased market demand, competition, protection of intellectual property, non-infringement of intellectual property, seasonality, the ability to obtain financing and other factors more fully described in the Company’s public filings with the SEC including, without limitation, the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.




Background





SDIX is a biotechnology company with a core mission of developing, commercializing and marketing innovative and effective products, services and solutions that preserve and enhance the quality of human health and wellness.





The Company believes that its competitive position has been enhanced through the combination of talent, technology and resources resulting from the business development activities it has pursued since its inception. The Company has achieved meaningful economies of scale for the products it offers through the utilization of its consolidated facilities in Newark, Delaware for the manufacture of test kits and antibodies, and its facility located in Windham, Maine for the manufacture of antibodies.





The Company believes that by applying its core competency of creating custom antibodies to assay development, it produces sophisticated diagnostic testing and reagent systems that are responsive to customer diagnostic and information needs. Customers benefit from a quantifiable “return on investment” by reducing time, labor and/or material costs associated with applications for which the Company’s products are used. In addition, the Company believes its tests provide high levels of accuracy, reliability and actionability of essential test results as compared to alternative products. The Company is focused on sustaining this competitive advantage by leveraging its expertise in immunology, proteomics, bio-luminescence and other bio-reactive technologies to continue its successful customer-focused research and development efforts. The Company believes that an established product base, quality manufacturing expertise, experienced sales and marketing organization, established network of distributors, corporate partner relationships and proven research and development expertise will be critical elements of its potential future success.





12




In 2009, and continuing into the first six months of 2010, the Company continued the transition from a fragmented product offering and marketing strategy to becoming a focused organization, with proven, proprietary technologies tied directly to its customers’ needs. The transition is most evident in the Life Science immuno-solutions initiative and food pathogen detection products, where the Company believes significant progress is being made.





The Company continues to develop and introduce new methods for the detection of food pathogens that deliver a strong competitive advantage to its customers. In 2009, the Company received a patent for new technology to be used in proprietary enrichments of its food pathogen testing methods. The patent covers technology for increasing the specificity and sensitivity of the Company’s immunoassay test methods. The patent also makes claims for the application of the technology in large scale bio-production/bio-fermentation processes, such as those used in the production of amino acids, ethanol, enzymes and other processes using microbiological production methods.





The Company continued to develop multiple channels to market worldwide through an approach that includes direct sales, inside sales, distributors and agents. The Company increased distribution for its food pathogen products in Europe and Asia where there is growing demand for the Company’s product line.





The Company believes it is making progress in many of its business efforts. As the deployment of new initiatives is accelerated, building on the Company’s leadership position in food pathogens and expanding its strong positioning in the emerging area of genomic antibodies, the Company anticipates that the revenue lost to market changes in its legacy businesses will be replaced and the Company will develop a stronger, more predictable revenue base.





The Company expects the life science and food pathogen product lines to be its primary growth drivers in the future, and that the Company’s competencies and competitive positions in these two areas will remain strong.





Results of Operations




Three Months Ended June 30, 2010 versus Three Months Ended June 30, 2009




Revenues for the three months ended June 30, 2010 decreased 1% to $6.8 million, compared to $6.9 million for the same period in 2009. The decrease in revenues in the second quarter of 2010 was primarily the result of a 13% decrease in sales of kit products, partially offset by a 10% increase in sales of Life Science products.




Three Months EndedJune 30,


Increase


Percent2010


2009


(Decrease)


Change(in thousands, except percentages)Life sciences

$
3,673


$
3,346


$
327



10
%Kit products


3,048



3,507



(459
)


(13
%)Contract


75



-



75



n/aRevenues

$
6,796


$
6,853


$
(57
)


(1
%)




Life Science Products




Life Science revenues increased 10% to $3.7 million for the three month period ended June 30, 2010, compared to $3.3 million for the same period in 2009.  Sales of custom monoclonal products increased 41% to $1.0 million; custom polyclonal product sales increased 9% to $1.6 million and sales of bulk antibody products increased 5% to $0.8 million.  These increases were partially offset by a decrease in sales of products utilizing the GAT TM platform of 29% to $0.3 million.  This increase in Life Science revenues was primarily the result of increased sales to the Company’s customers in the biopharma and antibody catalog industries.




Kit Products





Kit product revenues decreased 13% to $3.0 million for the three months ended June 30, 2010 compared to $3.5 million in the same period of 2009.  Sales of food pathogen products decreased 7% to $1.3 million; Ag-GMO product sales decreased 17%, to $0.5 million and water and environmental products revenue decreased 17%, to $1.2 million in the three month period ended June 30, 2010 as compared to the same period of 2009.




Gross profit (defined as total revenues less manufacturing costs) for the three months ended June 30, 2010 was $4.0 million compared to $3.6 million for the same period in 2009. Gross margins were 59% and 53% for the three month periods ended June 30, 2010 and 2009, respectively.  The increase in gross margin is primarily attributable to effective cost control and more efficient manufacturing in kit products production, as well as increased revenues in life science products.




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Research and development expense were $764,000 or 11% of revenues in the three month period ended June 30, 2010, compared to $820,000 or 12% of revenues in the three month period ended June 30, 2009.




Selling, general and administrative expenses were $3.5 million in both of the three month periods ended June 30, 2010 and 2009.




The Company had net interest expense of $14,000 in the three month period ended June 30, 2010 compared to no net interest expense in the three month period ended June 30, 2009. The increase was primarily due to decreased levels of invested cash and cash equivalents during the 2010 period.




The Company has full valuation allowances placed against U.S. federal and state deferred tax assets.




Net loss was $215,000, or $0.01 per diluted share, in the three month period ended June 30, 2010, compared to a net loss of $734,000, or $0.04 per diluted share, for the same period in 2009. Diluted shares utilized in these computations were 20.2 million and 20.1 million for the 2010 and 2009 periods, respectively.




Six Months Ended June 30, 2010 versus Six Months Ended June 30, 2009




Revenues for the six months ended June 30, 2010 decreased 2% to $13.5 million, compared to $13.8 million for the same period in 2009. The decrease in revenues in the first six months of 2010 was primarily the result of a 10% decrease in sales of kit products, partially offset by a 6% increase in sales of Life Science products.




Six Months EndedJune 30,


Increase


Percent2010


2009


(Decrease)


Change(in thousands, except percentages)Life sciences

$
7,460


$
7,023


$
437



6
%Kit products


5,952



6,637



(685
)


(10
%)Contract


75



95



(20
)


(21
%)Revenues

$
13,487


$
13,755


$
(268
)


(2
%)




Life Science Products




Life Science revenues increased 6% to $7.5 million for the six month period ended June 30, 2010, compared to $7.0 million for the same period in 2009.  Sales of custom monoclonal products increased 51% to $2.1 million; custom polyclonal product sales increased 8% to $3.1 million.  These increases were partially offset by a decrease in sales of products utilizing the GAT TM platform of 30% to $0.6 million and a decrease in sales of bulk antibody products of 11% to $1.7 million.  This increase in Life Science revenues was primarily the result of increased sales to the Company’s customers in the biopharma and antibody catalog industries.




Kit Products





Kit product revenues decreased 10% to $6.0 million for the six months ended June 30, 2010 compared to $6.6 million in the same period of 2009.  Sales of food pathogen products decreased 3% to $2.7 million; Ag-GMO product sales decreased 11%, to $1.1 million and water and environmental products revenue decreased 17%, to $2.2 million in the six month period ended June 30, 2010 as compared to the same period of 2009.




Gross profit (defined as total revenues less manufacturing costs) for the six months ended June 30, 2010 was $8.0 million compared to $7.4 million for the same period in 2009. Gross margins were 59% and 54% for the six month periods ended June 30, 2010 and 2009, respectively.  The increase in gross margin is primarily attributable to effective cost control and more efficient manufacturing in kit products production, as well as increased revenues in life science products.




Research and development expenses were $1.4 million or 11% of revenues in the six month period ended June 30, 2010, compared to $1.5 million or 11% of revenues in the six month period ended June 30, 2009.




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Selling, general and administrative expenses were $7.2 million in both of the six month periods ended June 30, 2010 and 2009.




The Company had net interest expense of $26,000 in the six month period ended June 30, 2010 compared to net interest income of $5,000 in the six month period ended June 30, 2009. The increase was primarily due to decreased levels of invested cash and cash equivalents during the 2010 period.




The Company has full valuation allowances placed against U.S. federal and state deferred tax assets.




Net loss was $674,000, or $0.03 per diluted share, in the six month period ended June 30, 2010, compared to a net loss of $1.3 million, or $0.06 per diluted share, for the same period in 2009. Diluted shares utilized in these computations were 20.2 million and 20.1 million for the 2010 and 2009 periods, respectively.




Liquidity and Capital Resources




The net cash provided by operating activities was $65,000 for the first six months of 2010 compared to net cash used in operating activities of $470,000 for the first six months of 2009.  The net cash provided by operating activities for the 2010 period was primarily the result of the net loss recorded in the period offset by increases in accrued expenses and accounts receivable.  The net cash used in operating activities for the 2009 period was primarily the result of the net loss recorded in the period, an increase in other current assets and decreases in accounts receivable and accrued expenses.




Net cash used in investing activities of $195,000 for the first six months of 2010 related primarily to the capital expenditures for the period. This compares to net cash used in investing activities of $419,000 for the first six months of 2009. The capital expenditures for the 2010 and 2009 periods were primarily related to purchases of computer, manufacturing and laboratory equipment.




Net cash used in financing activities of $120,000 in the first six months of 2010 was primarily attributable to scheduled debt repayments, partially offset by funds received from stock option exercises.  Net cash used in financing activities of $3.0 million for the first six months of 2009 was primarily the result of a restricted cash requirement from the Company’s commercial bank and scheduled debt repayments.




The Company’s working capital (current assets less current liabilities) was $14.4 million at June 30, 2010 compared to $14.7 million at December 31, 2009.




On May 5, 2000, the Company entered into a financing agreement with a commercial bank which was amended on August 12, 2009 (as amended, the “Credit Agreement”).




On August 21, 2007, the Company received a term loan under the Credit Agreement to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $2 million in financing, $900,000 of which was outstanding at June 30, 2010, and is repayable over five years, with principal payments that began on October 1, 2007. The loan bears a fixed interest rate of 5.96% with equal amortization of principal payments plus interest.




This indebtedness is secured by $1.25 million in restricted cash as required by the Credit Agreement.




15




For the six months ended June 30, 2010, the Company satisfied all of its cash requirements from cash available and on-hand.  At June 30, 2010, the Company had $900,000 in debt and $19.7 million in stockholders’ equity.




Based upon its cash and cash equivalents on hand, credit facilities, current product sales and the anticipated sales of new products, the Company believes it has, or has access to, sufficient resources to meet its operating requirements through at least the next 12 months. The Company’s ability to meet its long-term capital needs will depend on a number of factors, including compliance with new loan covenants, the success of its current and future products, the focus and direction of its research and development programs, competitive and technological advances, future relationships with corporate partners, government regulation, the Company’s marketing and distribution strategy, its successful sale of additional common stock and/or the Company successfully locating and obtaining other financing, and the success of the Company’s plan to make future acquisitions. Accordingly, no assurance can be given that the Company will be able to meet the future liquidity requirements that may arise from these inherent and similar uncertainties.




Item 3. Quantitative and Qualitative Disclosures About Market Risk




The Company conducts operations in the United Kingdom. The consolidated financial statements of the Company are denominated in U.S. dollars and changes in exchange rates between foreign countries and the U.S. dollar will affect the translation of financial results of foreign subsidiaries into U.S. dollars for purposes of recording the Company’s consolidated financial results. Historically, the effects of translation have not been material to the consolidated financial results.




Item 4. Controls and Procedures




(a)
Evaluation of Disclosure Controls and Procedures




Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2010, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.




(b)
Change in Internal Control over Financial Reporting




No change in the Company’s internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.




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PART II – OTHER INFORMATION




Item 6. Exhibits





31.1
Certifications of the Chief Executive Officer of Strategic Diagnostics Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 193431.2
Certifications of the Chief Financial Officer of Strategic Diagnostics Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 193432.1
Certification of the Chief Executive Officer of Strategic Diagnostics Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 200232.2
Certification of the Chief Financial Officer of Strategic Diagnostics Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002





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SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





STRATEGIC DIAGNOSTICS INC.Date: August 6, 2010

/s/ Francis M. DiNuzzoFrancis M. DiNuzzo

President, Chief Executive Officer

(Principal Executive Officer)








Date: August 6, 2010

/s/ Kevin J. BrattonKevin J. Bratton

Vice President – Finance and Chief Financial Officer

(Principal Financial and Accounting Officer)