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 1934For the Quarterly Period Ended September 30, 2009o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the Transition Period From _________ to _________




Commission File Number 000-22400




STRATEGIC DIAGNOSTICS INC.


(Exact name of Registrant as specified in its charter)







Delaware

56-1581761(State or other jurisdiction of
incorporation or organization)

(I.R.S. employer
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: xNo: 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: oNo: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: oNo:x




As of November 6, 2009, there were 20,379,888 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 – September 30, 2009 and December 31, 2008

2Consolidated Statements of Operations – Three and nine months ended September 30, 2009 and 2008

3Consolidated Statements of Cash Flows – Nine months ended September 30, 2009 and 2008

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

17ITEM 4. Controls and Procedures

17PART II OTHER INFORMATION

18ITEM 6. Exhibits

18SIGNATURES

19


1




PART I – FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)


(unaudited)


September 30,


December 31,2009


2008ASSETSCurrent Assets:Cash and cash equivalents

$
7,220


$
9,980Restricted cash


1,250



—Receivables, net


4,042



4,099Inventories


4,002



3,890Deferred tax asset


3



3Other current assets


622



534Total current assets


17,139



18,506Property and equipment, net


4,885



5,275Other assets


42



107Deferred tax asset


38



71Intangible assets, net


1,463



1,562Total assets

$
23,567


$
25,521LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent Liabilities:Current portion of long-term debt

$
400


$
1,658Accounts payable


337



691Accrued expenses


1,727



1,860Deferred revenue


55



64Total current liabilities


2,519



4,273Long-term debt


800



—Stockholders’ 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, 20,782,874 and 20,680,522 issued at September 30, 2009 and December 31, 2008, respectively


208



206Additional paid-in capital


40,846



40,345Treasury stock, 406,627 common shares at cost at September 30, 2009 and December 31, 2008


(555
)


(555
)Accumulated deficit


(20,211
)


(18,625
)Cumulative translation adjustments


(40
)


(123
)Total stockholders’ equity


20,248



21,248Total liabilities and stockholders’ equity

$
23,567


$
25,521




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
Ended September 30,


Nine Months
Ended September 30,2009


2008


2009


2008Revenues

$
7,196


$
6,892


$
20,951


$
20,631OPERATING EXPENSES:Manufacturing


3,083



3,555



9,403



9,861Research and development


752



969



2,235



2,830Selling, general and administrative


3,642



3,513



10,886



10,814Gain on disposal of assets


—



(11
)


—



(11
)Total operating expenses


7,477



8,026



22,524



23,494Operating loss


(281
)


(1,134
)


(1,573
)


(2,863
)Interest income (expense), net


(9
)


35



(4
)


134Loss before taxes


(290
)


(1,099
)


(1,577
)


(2,729
)Income tax expense


1



1,119



9



582Net loss


(291
)


(2,218
)


(1,586
)


(3,311
)Basic loss per share

$
(0.01
)

$
(0.11
)

$
(0.08
)

$
(0.16
)Shares used in computing basic loss per share


20,151,694



20,395,339



20,098,311



20,386,811Diluted loss per share

$
(0.01
)

$
(0.11
)

$
(0.08
)

$
(0.16
)Shares used in computing dilutedloss per share


20,151,694



20,395,339



20,098,311



20,386,811




The accompanying notes are an integral part of these statements.


3




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)


Nine Months
Ended September 30,2009


2008Cash Flows from Operating Activities:Net loss

$
(1,586
)

$
(3,311
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


968



1,004Share-based compensation expense


486



533Deferred income tax provision


33



597Gain on disposal of fixed assets


—



(11
)(Increase) decrease in:Receivables


57



241Inventories


(112
)


215Other current assets


(88
)


(260
)Other assets


70



3Increase (decrease) in:Accounts payable


(354
)


54Accrued expenses


(133
)


197Deferred revenue


(9
)


120Net cash used in operating activities


(668
)


(618
)Cash Flows from Investing Activities:Purchase of property and equipment


(479
)


(702
)Proceeds from sale of assets


—



15Net cash used in investing activities


(479
)


(687
)Cash Flows from Financing Activities:Proceeds from employee stock purchase plan


12



55Restricted cash requirement


(1,250
)


—Repayments on financing obligations


(458
)


(458
)Net cash used in financing activities


(1,696
)


(403
)Effect of exchange rate changes on cash


83



(103
)Net decrease in Cash and Cash Equivalents


(2,760
)


(1,811
)Cash and Cash Equivalents, Beginning of Period


9,980



12,988Cash and Cash Equivalents, End of Period

$
7,220


$
11,177Supplemental Cash Flow Disclosure:Cash paid for taxes


15



10Cash paid for interest


65



90




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 (“SDI” or the “Company”) is a biotechnology company with a core mission of developing, commercializing and marketing innovative and proprietary products, services and solutions that preserve and enhance the
quality of human health and wellness.




The Company’s Life Science portfolio includes products and custom services that supply critical reagents used across the life science research and development markets. The Company’s Genomic Antibody TechnologyTM (“GATTM”) is used by several of
our customers and partners in proteomic research, disease understanding and drug/biomarker discovery among academic, biotech, in-vitro diagnostic and large pharmaceutical customers.




The Company’s Kit products portfolio includes immunoassays, which represent advanced technology for rapid, cost-effective detection of food pathogens as well as water and soil contaminants. SDI’s RapidChek®and
SELECT TM 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.




By applying its core competencies of creating proprietary antibodies and assay development, the Company has produced sophisticated testing and reagent systems that are responsive to each customer’s analytical information needs.




SDI is a customer-centric organization. The Company’s goals are to consistently deliver increased value to its customers that facilitate their business results, reduce costs and help in the management of risk. SDI sales professionals focus on delivering a quantifiable “return
on investment” to their customers by reducing time and total costs associated with applications for which the Company’s products are used. In addition, the Company believes its tests provide high levels of accuracy and reliability, which deliver more actionable test results to the customer as compared to alternative products. The Company is focused on sustaining profitable growth by leveraging its expertise in antibodies and immuno-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
products it offers through the utilization of its facilities in Newark, Delaware for the manufacture of test kits and antibodies, and its facility in Windham, Maine for the manufacture of antibodies.




The continued economic downturn, including disruptions in the capital and credit markets, may continue indefinitely and intensify, and could adversely affect our results of operations, cash flows and financial condition or those of our customers and suppliers. These circumstances
could adversely affect our access to liquidity needed to conduct or expand our business or conduct acquisitions or make other discretionary investments. These circumstances may also adversely impact the capital needs of our customers and suppliers, which, in turn, could adversely affect their ability to purchase our products or supply us with necessary equipment and raw materials. This could adversely affect our results of operations, cash flows and financial condition. A weakening business climate could cause
longer sales cycles and slower growth, and could expose us to increased business or credit risk in dealing with customers or suppliers adversely affected by economic conditions. Our ability to collect accounts receivable may be delayed or precluded if our customers are unable to pay their obligations.


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, 2008. 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 June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS
168”). SFAS 168 establishes the FASB Accounting Standards Codification (“ASC”) as the single source of authoritative nongovernmental U.S. GAAP. The ASC only changes the referencing of financial accounting standards and does not change or alter existing GAAP. The Codification is effective for interim and annual periods ending after September 15, 2009. The adoption of this standard did not have a material impact on the Company’s financial statements. SFAS 168 has been incorporated into
the ASC as ASC-105, Generally Accepted Accounting Principals, or ASC 105.




In December 2007, the FASB issued SFAS No. 141(Revised), Business Combinations 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 non-controlling interest
in the acquired 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 non-controlling interest in the acquired, 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. SFAS No. 141(R)’s impact on accounting for business combinations is dependent upon future acquisitions the Company may make. SFAS 141R has been incorporated into the ASC as ASC-805, Business Combinations, or ASC 805.


6




In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful
life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. FSP 142-3’s impact on the Company is dependent upon future acquisitions the Company may make. FSP 142-3 has been
incorporated into the ASC as ASC-350, Intangibles, or ASC 350.




In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available
to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. Adoption of SFAS No. 165 did not have an impact on the Company’s financial position, results of operations or liquidity. SFAS 165 has been incorporated into
the ASC as ASC-855, Subsequent Events, or ASC 855.




Comprehensive Loss




Comprehensive loss consists of the following for each period:


Three Months Ended
September 30,

Nine Months Ended
September 30,2009


2008


2009


2008Net loss

$
(291
)

$
(2,218
)

$
(1,586
)

$
(3,311
)Currency translation adjustment


(30
)


(106
)


83



(103
)Total comprehensive loss

$
(321
)

$
(2,324
)

$
(1,503
)

$
(3,414
)


7




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 and nine month periods ended September 30, 2009 and 2008, conversion of stock options and unvested restricted shares totaling 2,203,280 and 1,560,272, respectively, into common share equivalents were excluded from this calculation because they were anti-dilutive.


Three Months Ended
September 30,


Nine Months Ended
September 30,2009


2008


2009


2008Weighted average common shares outstanding


20,151,694



20,395,339



20,098,311



20,386,811Shares used in computing basic loss per share


20,151,694



20,395,339



20,098,311



20,386,811Dilutive effect of stock options and unvested restricted stock units


—



—



—



—Shares used in computing diluted loss per share


20,151,694



20,395,339



20,098,311



20,386,811




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 units.




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 percent 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 issues new shares to satisfy shares purchased under the ESPP.


8




Share-based compensation expense recorded in the three and nine month periods ended September 30, 2009 and 2008 is summarized as follows:


Three Months Ended
September 30,


Nine Months Ended
September 30,2009


2008


2009


2008Stock options

$
64


$
70


$
244


$
295Employee stock purchase plan


3



2



4



6Restricted stock units


44



61



238



232Total share-based compensation expense

$
111


$
133


$
486


$
533




The deferred income tax benefit related to share-based compensation expense for the nine month period ended September 30, 2009 was $0 due to the full valuation allowance against deferred tax assets, and $133 for the nine month period ended September 30, 2008. 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.




No options were exercised in the nine month periods ended September 30, 2009 and 2008. Proceeds received from employee payments into the ESPP in the nine month periods ended September 30, 2009 and 2008, were $12 and $55, respectively. These amounts are recorded in the cash flows
from financing activities section of the Company’s Consolidated Statements of Cash Flows.




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 nine months ended September 30, 2009 is summarized as follows:


Number
of Shares

Price Range

Weighted
Average Remaining
Contractual term

Aggregate
Instrinsic
ValueBalance, January 1, 2009


1,719,972

$
1.50

-

$
6.94Granted


411,000

$
1.10

-

$
1.50Cancelled / Forfeited


(151,316
)
$
2.88

-

$
4.69Balance, September 30, 2009


1,979,656

$
1.10

-

$
6.94


6.3 years

$
192Vested and excercisable atSeptember 30, 2009


1,199,006

$
1.50

-

$
6.94


4.6 years

$
6Expected to vest as ofSeptember 30, 2009


1,908,459

$
1.10

-

$
6.94


6.2 years

$
174




During the nine month period ended September 30, 2009, there were 411,000 options granted with a weighted average grant date fair value, based on a Black-Scholes option pricing model, of $0.62 per share. The assumptions used in the Black-Scholes model are as follows: dividend
yield 0%, expected volatility 51.36%, risk-free interest rate 2.50% and expected life of 5.9 years. The Company uses the Simplified Method for determining the expected life of options granted which is computed using the sum of the average vesting period and the contractual life of the option and dividing by two, for all periods presented.


9




The following table provides additional information about the Company’s stock options outstanding and exercisable at September 30, 2009:


Options Outstanding

Options ExercisableWeighted Average


Weighted AverageRange of
Exercise Prices

Number of
Shares

Remaining
Contractual Life

Exercise
Price

Number of
Shares

Exercise
Price$ 1.10 - $ 2.61

774,700

8.7 Years

$
1.57

83,150

$
2.26$ 3.05 - $ 3.57

246,400

4.4 Years

$
3.34

246,400

$
3.34$ 3.69 - $ 6.94

958,556

4.9 Years

$
4.12

869,456

$
4.10$ 1.10 - $ 6.94

1,979,656

6.3 Years

$
3.03

1,199,006

$
3.81




A summary of the status of the Company’s unvested restricted stock as of December 31, 2008 and changes during the nine month period ended September 30, 2009 is presented below.


Shares


Weighted Average
Grant Date
Fair Value


Aggregate
Intrinsic ValueNon-vested RSU’s at January 1, 2009


296,406


$
2.28Granted


64,500


$
1.26Vested


(124,532
)

$
2.12Cancelled / forfeited


(12,747
)

$
3.78Non-vested RSU’s at September 30, 2009


223,627


$
1.98


$
394Expected to vest at September 30, 2009


212,916


$
1.95


$
375




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 September 30, 2009, the weighted average remaining term of non-vested restricted stock was 1.9 years.


10




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 September 30, 2009 and December 31, 2008, inventories consisted of the following:


September 30,
2009


December 31,
2008Raw materials

$
1,012


$
1,216Work in progress


1,138



946Finished goods


1,852



1,728Inventories

$
4,002


$
3,890




5.          INTANGIBLE ASSETS




At September 30, 2009 and December 31, 2008, intangible assets consisted of the following:


September 30,
2009


December 31,
2008


LivesIntangible assets

$
2,614


$
2,614



2-20Accumulated amortization


(1,151
)


(1,052
)Net intangible assets

$
1,463


$
1,562




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”). The Credit Agreement was amended to eliminate the revolving line of credit, remove the financial covenants
requiring minimum EBITDA and tangible net worth amounts, and reduce the restricted cash requirement from $2.7 million to $1.25 million.




On August 21, 2007, the Company received a term loan under the Credit Agreement to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $2 million in financing, $1.2 million of which was outstanding at September 30, 2009,
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, 2008. During the nine month period ended September 30, 2009, 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 2009 have not changed management’s conclusion that a full valuation allowance is necessary.


11




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 September 30, 2009, the Company had no interest or penalties
accrued related to uncertain tax positions due to the available NOLs.




As of January 1, 2009, the Company provided a liability for approximately $487 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 nine months
ended September 30, 2009, unrecognized tax benefits increased $35 to $522, 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.




8.       SUBSEQUENT EVENTS




The Company has evaluated all events subsequent to the balance sheet date of September 30, 2009 through the date of issuance, November 16, 2009.




9.       FACILITY CLOSURE




In July 2009, the Company announced to its employees that the Company’s life science facility in Dallas, Texas would close; this closing took place on October 29, 2009. The Company has recorded charges of $203 in the third quarter related to severance, relocation and lease
cancellations costs which was recorded in manufacturing expenses. The Company has $182 accrued at September 30, 2009 related to these costs.




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 “SDI”). 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, 2008.


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Background




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




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





The Company believes that by applying its core competency of creating custom antibodies to assay development, it produces sophisticated diagnostic testing and reagent systems that are responsive to customer diagnostic and information needs. Customers benefit from a quantifiable
“return on investment” by reducing time, labor and/or material costs associated with applications for which the Company’s products are used. In addition, the Company believes its test systems 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 2008, 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
TechnologyTM (GATTM) 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 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 continues to develop multiple channels to market products worldwide through an approach that includes direct sales, inside sales, distributors and agents.




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 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 GATTM and food pathogen products to be its primary growth drivers in the future, and that the Company’s competencies and competitive positions in these two areas are strong.




Results of Operations




Three Months Ended September 30, 2009 versus Three Months Ended September 30, 2008




Revenues for the third quarter of 2009 increased 4% to $7.2 million, compared to $6.9 million for the same period in 2008. The increase in revenues in the third quarter of 2009 was primarily the result of a 29% increase in sales of life science products, partially offset by an
18% decline in sales of kit products.


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Life Science Products




Life science revenues increased 29% to $4.3 million for the third quarter of 2009, compared to $3.3 million for the same quarter in 2008. Sales of custom monoclonal products increased 67% to $1.2 million, bulk antibody sales increased 64% to $1.0 million, sales of custom polyclonal
products increased 6% to $1.5 million and sales of products utilizing the GAT TM platform increased 1% to $522,000. This increase in life science revenues was primarily the result of increased sales to the Company’s in-vitro diagnostic (“IVD”) customers.




Kit Products




Kit product revenues decreased 18% to $2.9 million in the third quarter of 2009 as compared to $3.6 million in the third quarter of 2008, as described below.




Sales of food pathogen products decreased 9% to $1.4 million in the third quarter of 2009 as compared to the third quarter of 2008 primarily due to decreased overall testing by customers using the Company’s pathogen tests. Ag-GMO product sales decreased 32% to $425,000,
in the third quarter of 2009 as compared to the third quarter of 2008, which was primarily attributable to decreased demand for the Company’s testing products in Brazil. Water and environmental products revenue decreased 23% to $1.1 million in the third quarter of 2009 as compared to the third quarter of 2008, which was primarily attributable to lower sales of water testing equipment in China.




Gross profits (defined as total revenues less manufacturing costs) for the third quarter of 2009 were $4.1 million compared to $3.3 million for the same period in 2008. Gross margins were 57% and 48% for the third quarters of 2009 and 2008, respectively. The increase in margins
was primarily attributable to increased production volumes in the life sciences business which created a lower per unit cost of sale. Included in the manufacturing expenses for the quarter ended September 30, 2009, were $203,000 of expenses related to the closure of the Company’s Dallas, Texas manufacturing facility for lease costs, severance and relocation.




Operating expenses for the third quarter of 2009 decreased 7% to $7.5 million, compared to $8.0 million for the third quarter of 2008. This decrease was primarily attributable to a 13% decrease in manufacturing costs (described above), and a 22% decrease in research and development
costs, partially offset by a 4% increase in selling, general and administrative costs, all as described below.




Research and development spending was $752,000, or 10% of revenues, in the third quarter of 2009, compared to $969,000, or 14% of revenues, in the third quarter of 2008. This decrease was primarily due to costs incurred in the 2008 period related to use of the Company’s
proprietary phage technology in ethanol production that were not incurred in the 2009 period and decreased spending and effort on the development of the Company’s SEQer TM antibodies which are produced by the GAT TMplatform and are being sold through the Company’s antibody catalog.




Selling, general and administrative expenses were $3.6 million for the third quarter of 2009, compared to $3.5 million for the same quarter in 2008. This increase is primarily attributable to increased sales and marketing personnel.




The Company had net interest expense of $9,000 in the third quarter of 2009 compared to net interest income of $35,000 in the third quarter of 2008. The decrease was primarily due to lower interest rates received on decreased levels of invested cash and cash equivalents during
the third quarter of 2009.




The Company’s effective income tax rate was 102% for the three month period ended September 30, 2008. The reduction in the tax provision in 2009 is due to valuation allowances placed against U.S. federal and state deferred tax assets beginning as of September 30, 2008.




Net loss in the third quarter of 2009 was $291,000, or $0.01 per diluted share, compared to a net loss of $2.2 million, or $0.11 per diluted share, for the same period in 2008. Diluted shares utilized in these computations were 20.2 million and 20.4 million for the third quarters
of 2009 and 2008, respectively.


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Nine Months Ended September 30, 2009 versus Nine Months Ended September 30, 2008




Revenues for the nine months ended September 30, 2009 increased 2% to $20.9 million compared to $20.6 million for the nine month period ended September 30, 2008. The increase in revenues was primarily the result of a 13% increase in sales of life science products, partially offset
by a 9% decline in sales of kit products.




Life Science Products




Life science revenues increased 13% to $11.3 million for the nine months ended September 30, 2009, compared to $10.0 million for the same period in 2008. Sales of bulk antibody products increased 36% to $2.9 million, sales of products utilizing the GAT TM platform increased
24% to $1.3 million, sales of custom monoclonal products increased 3% to $2.5 million and sales of custom polyclonal products increased 2% to $4.2 million. This increase in life science revenues was primarily the result of increased sales to the Company’s IVD customers.




Kit Products




Kit product revenues decreased 9% to $9.7 million in the nine months ended September 30, 2009 as compared to $10.6 million for the same period in 2008, as described below.




Sales of food pathogen products remained the same at $4.2 million in both the 2009 and 2008 nine month periods. Ag-GMO product sales decreased 25% to $1.7 million for the 2009 period as compared to the 2008 period, which was primarily attributable to decreased demand for the
Company’s testing products in Brazil and reduced demand for products that detect the StarlinkTM trait in grains. Water and environmental products revenue decreased 11% to $3.7 million for the first nine months of 2009 as compared to the first nine months of 2008, which was primarily attributable to lower sales of water testing equipment in China.




Gross profits (defined as total revenues less manufacturing costs) increased to $11.5 million in the first nine months of 2009 from $10.8 million in the first nine months of 2008. Gross margins improved to 55% in the 2009 nine month period compared to 52% in the 2008 nine month
period. The increase in margins was primarily attributable to increased production volumes in the life sciences business which created a lower per unit cost of sale. Included in the manufacturing expenses for the nine months ended September 30, 2009 were $203,000 of expenses related to the closure of the Company’s Dallas, Texas manufacturing facility for lease costs, severance and relocation.




Operating expenses for the nine months ended September 30, 2009 decreased 4% to $22.5 million, compared to $23.5 million for the nine months ended September 30, 2008. This decrease was primarily attributable to a 5% decrease in manufacturing costs (described above) and a 21%
decrease in research and development costs, which was partially offset by a 1% increase selling, general and administrative expenses as described below.




Research and development spending was $2.2 million, or 11% of net revenues, in the first nine months of 2009, compared to $2.8 million, or 14% of net revenues, in the first nine months of 2008. This decrease was primarily due to decreased spending and effort on development of
the Company’s proprietary SEQerTM antibodies, which are produced by the GAT TM platform and are being sold through the Company’s antibody catalog and decreased spending and effort on development of the Company’s proprietary phage technology for use in ethanol production.




Selling, general and administrative expenses were $10.9 million for the nine months ended September 30, 2009, compared to $10.8 million for the nine months ended September 30, 2008. The increase is primarily the result of increased sales and marketing personnel and services costs
offset by reductions in severance costs.




The Company recorded $4,000 in net interest expense in the nine months ended September 30, 2009 compared to net interest income of $134,000 in the nine months ended September 30, 2008, due to lower interest rates received on decreased levels of invested cash and cash equivalents
during the 2009 period.




The Company’s effective income tax rate was 21% for the nine month period ended September 30, 2008. The reduction in the tax provision for 2009 is due to valuation allowances placed against U.S. federal and state deferred tax beginning as of September 30, 2008.


15




Net loss in the nine months ended September 30, 2009 was $1.6 million, or $0.08 per diluted share, compared to a net loss of $3.3million, or $0.16 per diluted share, for the nine months ended September 30, 2008. Diluted shares utilized in these computations were 20.1 million
and 20.4 million for the 2009 and 2008 periods, respectively.




Liquidity and Capital Resources




The net cash used in operating activities of $668,000 for the first nine months of 2009 compares to net cash used in operating activities of $618,000 for the first nine months of 2008. The net cash used in operating activities for the 2009 period was primarily the result of the
net loss recorded in the period, increases in inventories and decreases in accrued expenses and accounts payable. The net cash used in operating activities for the 2008 period was primarily the result of the net loss recorded in the period and an increase in other current assets.




Net cash used in investing activities of $479,000 for the first nine months of 2009 related to the capital expenditures for the period. This compares to net cash used in investing activities of $687,000 for the first nine months of 2008. The capital expenditures for the 2009
period were primarily related to purchases of computer and electronic equipment. The capital expenditures for the 2008 period were primarily related to purchases of laboratory equipment.




Net cash used in financing activities of $1.7 million in the first nine months of 2009 was primarily attributable to the Company’s requirement to have $1.25 million in restricted cash pursuant to the terms of the August 12, 2009 amendment to the Company’s Credit Agreement,
which is described below, as well as scheduled debt payments. Net cash used in financing activities of $403,000 for the first nine months of 2008 was primarily the result of scheduled debt repayments.




The Company’s working capital (current assets less current liabilities) was $14.6 million at September 30, 2009 compared to $14.2 million at December 31, 2008.




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




On August 21, 2007, the Company received a term loan under the Credit Agreement to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $2 million in financing, $1.2 million of which was outstanding at September 30,
2009, and is repayable over five years, with principal payments that began on October 1, 2007. The loan bears a fixed interest rate of 5.96% with equal amortization of principal payments plus interest.




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




For the nine months ended September 30, 2009, the Company satisfied all of its cash requirements from cash available and on-hand. At September 30, 2009, the Company had $1.2 million in debt and $20.2 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 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.


16




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 September 30, 2009, 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. Exhibits10.1*

Amended and Restated Distribution Agreement, dated as of August 31, 2009, by and between Strategic Diagnostics Inc. and the DuPont Qualicon Division of E.I. du Pont de Nemours and Company.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




* Confidential treatment has been requested as to certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.


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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: November 16, 2009
/s/ Francis M. DiNuzzoFrancis M. DiNuzzoPresident, Chief Executive Officer(Principal Executive Officer)Date: November 16, 2009
/s/ Kevin J. BrattonKevin J. BrattonVice President – Finance and Chief Financial Officer(Principal Financial and Accounting Officer)