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 March 31, 2011




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: o          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 May 6, 2011, there were 20,538,654 outstanding shares of the Registrant’s common stock, par value $.01 per share.





2





STRATEGIC DIAGNOSTICS INC.




INDEX





Item


PagePART I FINANCIAL INFORMATIONITEM 1. Financial Statements (Unaudited)Consolidated Balance Sheets – March 31, 2011 and December 31, 2010

4Consolidated Statements of Operations – Three months ended March 31, 2011 and 2010

5Consolidated Statements of Cash Flows – Three months ended March 31, 2011 and 2010

6Notes to Consolidated Interim Financial Statements

7ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

13ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

17ITEM 4. Controls and Procedures

17PART II OTHER INFORMATION

18ITEM 6. Exhibits

18SIGNATURES

19




3




PART I – FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS







STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)


(unaudited)




March 31,


December 31,2011


2010ASSETSCurrent Assets:Cash and cash equivalents

$
8,490


$
8,056Restricted cash


600



700Receivables, net


3,867



4,376Inventories


3,202



3,333Other current assets


1,130



561Total current assets


17,289



17,026Property and equipment, net


3,893



4,087Other assets


16



45Deferred tax asset


37



37Intangible assets, net


1,292



1,321Total assets

$
22,527


$
22,516LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities :Current portion of long-term debt

$
400


$
400Accounts payable


465



491Accrued expenses


2,184



1,597Deferred revenue


82



24Total current liabilities


3,131



2,512Long-term debt


200



300Stockholders' 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,20,943,357 and 20,916,433 issued at March 31, 2011and December 31, 2010, respectively


210



209Additional paid-in capital


41,681



41,551Treasury stock, 406,627 common shares at costat March 31, 2011 and December 31, 2010


(555
)


(555
)Accumulated deficit


(21,897
)


(21,239
)Cumulative translation adjustments


(243
)


(262
)Total stockholders' equity


19,196



19,704Total liabilities and stockholders' equity

$
22,527


$
22,516




The accompanying notes are an integral part of these statements.




4





STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except share and per share data)


(unaudited)




Three MonthsEnded March 31,2011


2010Revenues
$
7,477


$
6,691Cost of sales

3,314



2,755Gross profit

4,163



3,936Operating expenses:Research and development

863



676Selling, general and administrative

3,954



3,715Gain on disposal of assets

-



(8
)Total operating expenses

4,817



4,383Operating loss

(654
)


(447
)Interest expense, net

(9
)


(12
)Loss before taxes

(663
)


(459
)Income tax benefit

(5
)


-Net loss

(658
)


(459
)Basic loss per share
$
(0.03
)

$
(0.02
)Shares used in computing basicloss per share

20,384,041



20,187,890Diluted loss per share
$
(0.03
)

$
(0.02
)Shares used in computing dilutedloss per share

20,384,041



20,187,890




The accompanying notes are an integral part of these statements.




5




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)




Three MonthsEnded March 31,2011


2010Cash Flows from Operating Activities :Net loss
$
(658
)

$
(459
)Adjustments to reconcile net loss to netcash provided by operating activities :Depreciation and amortization

307



291Share-based compensation expense

129



135Gain on disposal of fixed assets

-



(8
)(Increase) decrease in :Receivables

509



349Inventories

131



4Other current assets

(569
)


(464
)Other assets

27



(97
)Increase (decrease) in :Accounts payable

(26
)


(172
)Accrued expenses

587



687Deferred revenue

58



9Net cash provided by operating activities

495



275Cash Flows from Investing Activities :Purchase of property and equipment

(83
)


(37
)Proceeds from sale of assets

-



10Net cash used in investing activities

(83
)


(27
)Cash Flows from Financing Activities :Proceeds from employee stock purchase plan

3



14Restricted cash requirement

100



-Repayments on financing obligations

(100
)


(100
)Net cash provided by (used in) financing activities

3



(86
)Effect of exchange rate changes on cash

19



(33
)Net increase in Cash and Cash Equivalents

434



129Cash and Cash Equivalents, Beginning of Period

8,056



7,937Cash and Cash Equivalents, End of Period
$
8,490


$
8,066Supplemental Cash Flow Disclosure :Cash paid for taxes, net of tax refunds

15



7Cash paid for interest

14



20




The accompanying notes are an integral part of these statements.




6





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 (“SDIX,” the “Company,” “we,” “our” or “us”) 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 serves the pharmaceutical, biotechnology, diagnostics, food safety and environmental markets.




SDIX is a customer-centric organization. Our goals are to consistently deliver increased value to our customers through products and services that facilitate business results, reduce costs and help manage risk. SDIX sales professionals focus, among other things, 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 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 achieving 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 our competitive position has been enhanced through the combination of talent, technology, and resources resulting from the business development activities we have 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 our 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 detection of food pathogens as well as water and soil contaminants. SDIX’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.




SDIX has been developing antibodies which have advanced 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 our customers’ analytical information needs.




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, 2010.  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.




7




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)




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.





Comprehensive Loss





Comprehensive loss consists of the following for each period:




Three Months EndedMarch 31,2011


2010Net loss

$
(658
)

$
(459
)Currency translation adjustment


19



(33
)Total comprehensive loss

$
(639
)

$
(492
)




8




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)









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 March 31, 2011 and 2010, conversion of stock options and unvested restricted shares totaling 461,583 and 275,210, respectively, into common share equivalents were excluded from this calculation because they were anti-dilutive.





Three Months EndedMarch 31,2011


2010Weighted average common shares outstanding


20,384,041



20,187,890Shares used in computing basic loss per share


20,384,041



20,187,890Dilutive effect of stock options andunvested restricted stock units


-



-Shares used in computing diluted loss per share


20,384,041



20,187,890


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.




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.




9





STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)









Share-based compensation expense recorded in the three month periods ended March 31, 2011 and 2010 is summarized as follows:




Three Months EndedMarch 31,2011


2010Stock options

$
90


$
84Employee stock purchase plan


1



6Restricted stock awards


38



45Total share-based compensation expense

$
129


$
135




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 three month periods ended March 31, 2011 and 2010.  Proceeds received from employee payments into the ESPP in the three month periods ended March 31, 2011 and 2010, were $3 and $14, 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 three months ended March 31, 2011 is summarized as follows:





Weighted

AggregateNumber







Average Remaining

Instrinsicof Shares


Price Range

Contractual term

ValueBalance, January 1, 2011


2,158,906


$
1.10


$
5.17Granted


350,000


$
1.85


$
2.19Cancelled / Forfeited


(69,000
)

$
1.10


$
1.81Balance, March 31, 2011


2,439,906


$
1.49


$
5.17

7.0 years

$
784Vested and excercisable atMarch 31, 2011


1,129,534


$
1.49


$
5.17

5.0 years

$
236Expected to vest as ofMarch 31, 2011


2,320,061


$
1.49


$
5.17

6.9 years

$
726




10




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)









During the three month period ended March 31, 2011, there were 350,000 options granted with a weighted average grant date fair value, based on a Black-Scholes option pricing model, of $1.10 per share.  The assumptionsused in the Black-Scholes model are as follows: dividend yield 0%, expected volatility 50.20%, risk-free interest rate 2.45% and expected life of 6.25 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.






The following table provides additional information about the Company’s stock options outstanding and exercisable at March 31, 2011:





Options Outstanding


Options ExercisableWeighted Average





Wtd. AverageRange of


Number of


Remaining

Exercise


Number of


ExerciseExercise Prices


Shares


Contractual Life

Price


Shares


Price$
1.49


$
2.51



1,667,652



8.5 Years

$
1.79



363,280


$
1.62$
3.05


$
3.57



206,400



2.4 Years

$
3.32



206,400


$
3.32$
3.69


$
5.17



565,854



4.3 Years

$
4.16



559,854


$
4.16$
1.49


$
5.17



2,439,906



7.0 Years

$
2.46



1,129,534


$
3.19




A summary of the status of the Company’s unvested restricted stock as of December 31, 2010 and changes during the three month period ended March 31, 2011 is presented below.


Weighted AverageGrant Date


AggregateShares


Fair Value


Intrinsic ValueNon-vested RSA's at January 1, 2011


135,750


$
1.95Granted


25,000


$
2.14Vested


(15,250
)

$
3.32Non-vested RSA's at March 31, 2011


145,500


$
1.84


$
327Expected to vest at March 31, 2011


133,200


$
1.83


$
300






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 March 31, 2011, the weighted average remaining term of non-vested restricted stock was 2.4 years.




The Company also issued 315,000 performance-based Restricted Stock Units (“RSUs”) during the quarter ended March 31, 2011.  The fair value of an RSU is equal to the market value of a share of stock on the date of grant.  The performance-based RSUs vest based on the achievement of certain revenue targets.  50% of the RSUs vest upon the achievement of certain revenue growth targets during any 12-month period prior to December 31, 2012, and any remaining unvested RSUs vest upon the achievement of certain revenue growth targets during any 12-month period prior to December 31, 2014.  Unless forfeited, the performance-based RSUs will be paid out in the form of stock, if the Company meets the performance targets.  If the designated performance targets are not met during any 12-month period prior to December 31, 2014, no payout will be made.




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 March 31, 2011 and December 31, 2010, inventories consisted of the following:




11





STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)




March 31,


December 31,2011


2010Raw materials

$
862


$
794Work in progress


1,006



1,214Finished goods


1,334



1,325Inventories

$
3,202


$
3,333


5.          INTANGIBLE ASSETS




At March 31, 2011 and December 31, 2010, intangible assets consisted of the following:




March 31,


December 31,2011


2010


LivesIntangible assets


2,614



2,614



2-20Accumulated amortization


(1,322
)


(1,293
)Net intangible assets

$
1,292


$
1,321









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, $600 of which was outstanding at March 31, 2011, 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 $600 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, 2010.  During the three month period ended March 31, 2011, 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 the first three months of 2011 did not change management’s conclusion that a full valuation allowance is necessary.




12




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)









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 taxexpense.  At March 31, 2011, the Company had no interest or penalties accrued related to uncertain tax positions due to the available NOLs.




As of January 1, 2011, the Company provided a liability for approximately $540 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 three months ended March 31, 2011, unrecognized tax benefits increased by $6 to $546, which if recognized in a period where there was not a full valuation allowance, would affect the effective tax rate.




For federal purposes, post-1992 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.











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, 2010.






Background







SDIX 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 facilities located in Windham, Maine for the manufacture of antibodies.




13


STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)









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.




Over the past several years, the Company has 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 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 life science 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 will remain strong.




Results of Operations




Three Months Ended March 31, 2011 versus Three Months Ended March 31, 2010




Revenues for the three months ended March 31, 2011 increased 12% to $7.5 million, compared to $6.7 million for the same period in 2010. The increase in revenues in the first quarter of 2011 was primarily the result of a 19% increase in sales of Life Science products and services, and a 3% increase in the sale of Kit products.




14




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)









Three Months EndedMarch 31,


Increase


Percent2011


2010


(Decrease)


Change(in thousands, except percentages)Life Sciences

$
4,498


$
3,788


$
710



19
%Kit products


2,979



2,903



76



3
%Revenues

$
7,477


$
6,691


$
786



12
%











Life Science Products and Services




Life Science revenues increased 19% to $4.5 million for the three month period ended March 31, 2011, compared to $3.8 million for the same period in 2010.  This increase was primarily the result of increased sales to the Company’s biopharma, in-vitro diagnostic and content/reseller customers, partially offset by a decrease in sales to the Company’s academia/government customers.  This change reflects the continued refocusing of the Company’s sales efforts and capabilities on in-vitro diagnostics and biopharma customers and shows the Company’s broad range of capabilities rather than concentrating on strictly antibody production.




Kit Products





Kit product revenues increased 3% to $3.0 million for the three months ended March 31, 2011 as compared to $2.9 million for the same period of 2010.  Sales of food pathogen products increased 28% to $1.8 million for the three months ended March 31, 2011 from $1.4 million for the three month periods ended March 31, 2010.  This increase was primarily the result of increased sales of all three major pathogen tests (E. Coli, Salmonella and Listeria) used primarily in the beef and poultry industries.  Water and environmental products revenue increased 3%, to $0.9 million, in the three month period ended March 31, 2011 as compared to the same period of 2010. This increase was primarily attributable to increased sales of water testing equipment.  Ag-GMO product sales decreased 57%, to $0.3 million, in the first three months of 2011 as compared to the same period of 2010.  This decrease was primarily attributable to lower sales of seed testing products in Brazil plus uneven demand from its distributor, Romer Labs, due to the timing of restocking orders.




Gross profit




Gross profit for the three months ended March 31, 2011 was $4.2 million compared to $3.9 million for the same period in 2010. Gross margins were 56% and 59% for the three month periods ended March 31, 2011 and 2010, respectively.  The increase in gross profit is primarily attributable to increased sales volumes as discussed above.  The decrease in gross margin was primarily attributable to the higher percentage of Life Science revenues to total revenues, as the Life Science products and services have a lower gross margin than the Kit products.




Research and development




Research and development expenses were $863,000, or 12% of revenues for the three month period ended March 31, 2011, compared to $676,000, or 10% of revenues for the three month period ended March 31, 2010.  This increase was primarily the result of increased personnel costs and lab supplies on research relating to Life Science and Food Safety products and technologies.




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STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)









Selling, general and administrative




Selling, general and administrative expenses were $4.0 million for the three month period ended March 31, 2011 and $3.7 million for the three month period ended March 31, 2010.  This increase was primarily the result of increased personnel costs as the Company has increased its sales and marketing infrastructure.




Interest expense, net




The Company had net interest expense of $9,000 for the three month period ended March 31, 2011 compared to net interest expense of $12,000 for the three month period ended March 31, 2010. The decrease was primarily due to lower levels of debt in the 2011 period.




Income taxes




The Company recorded an income tax benefit of $5,000 for the three month period ended March 31, 2011 compared to no income tax provision for the three month period ended March 31, 2010.  The Company has full valuation allowances placed against U.S. federal and state deferred tax assets.




Net loss




Net loss was $658,000, or $0.03 per diluted share, for the three month period ended March 31, 2011, compared to a net loss of $459,000, or $0.02 per diluted share, for the same period in 2010. Diluted shares utilized were 20.4 million and 20.2 million for the 2011 and 2010 periods, respectively.








Liquidity and Capital Resources




The net cash provided by operating activities was $495,000 for the first three months of 2011 compared to $275,000 for the first three months of 2010.  The net cash provided by operating activities for both the 2011 and 2010 periods was primarily the result of decreased receivables and inventories and increased accrued expenses, partially offset by the net loss recorded in the periods and increases in other current assets.




Net cash used in investing activities of $83,000 for the first three months of 2011 related to the capital expenditures for the period. This compares to net cash used in investing activities of $27,000 for the first three months of 2010. The capital expenditures for the 2011 and 2010 periods were primarily related to purchases of computer and electronic equipment.




Net cash provided by financing activities of $3,000 for the first three months of 2011 was primarily attributable to a reduction in the Company’s restricted cash requirement offset by scheduled debt repayments.  Net cash used in financing activities of $86,000 for the first three months of 2010 was primarily the result of scheduled debt repayments.




The Company’s working capital (current assets less current liabilities) was $14.2 million at March 31, 2011 compared to $14.5 million at December 31, 2010.





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, $600,000 of which was outstanding at March 31, 2011, 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.




16




STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)









This indebtedness is secured by $600,000 in restricted cash as required by the Credit Agreement.




For the three months ended March 31, 2011, the Company satisfied all of its cash requirements from cash available and on-hand.  At March 31, 2011, the Company had $600,000 of debt and $19.2 million of 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 March 31, 2011, 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.




17





STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in thousands, except share and per share data)


(unaudited)









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





18




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: May 16, 2011

/s/ Francis M. DiNuzzoFrancis M. DiNuzzo

President, Chief Executive Officer

(Principal Executive Officer)








Date: May 16, 2011

/s/ Kevin J. BrattonKevin J. Bratton

Vice President – Finance and Chief Financial Officer

(Principal Financial and Accounting Officer)