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EX-32.1 - EXHIBIT 32.1 - STANDARD DIVERSIFIED INC.ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - STANDARD DIVERSIFIED INC.ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - STANDARD DIVERSIFIED INC.ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - STANDARD DIVERSIFIED INC.ex32-2.htm


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 September 30, 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 Number 000-22400
 
STRATEGIC DIAGNOSTICS INC.
(Exact name of Registrant as specified in its charter)
 

 
Delaware
56-1581761
(State or other jurisdiction of
(I.R.S. employer
incorporation or organization)
identification no.)
   
111 Pencader Drive
 
Newark, Delaware
  19702
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (302) 456-6789
 

    Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes: x
No: o

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

Yes: x
No: o

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated filer o
     
Non-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 November 7, 2011, there were 20,594,333 outstanding shares of the Registrant’s common stock, par value $.01 per share.
 
 
 

 

STRATEGIC DIAGNOSTICS INC.
 
INDEX
 
 
Item
   
Page
PART I FINANCIAL INFORMATION
   
ITEM 1. Financial Statements (Unaudited)
   
Consolidated Balance Sheets – September 30, 2011 and December 31, 2010
 
2
Consolidated Statements of Operations – Three and nine months ended September 30, 2011 and 2010
 
3
Consolidated Statements of Cash Flows – Nine months ended September 30, 2011 and 2010
 
4
Notes to Consolidated Interim Financial Statements
 
5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 
17
ITEM 4. Controls and Procedures
 
17
PART II OTHER INFORMATION
 
18
ITEM 6. Exhibits
 
18
SIGNATURES
 
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,
 
   
2011
   
2010
 
 ASSETS
           
 Current Assets :
           
 Cash and cash equivalents
  $ 7,035     $ 8,056  
 Restricted cash
    400       700  
 Receivables, net
    4,436       4,376  
 Inventories
    3,376       3,333  
 Other current assets
    940       561  
 Total current assets
    16,187       17,026  
                 
 Property and equipment, net
    3,886       4,087  
 Other assets
    6       45  
 Deferred tax asset
    36       37  
 Intangible assets, net
    1,235       1,321  
 Total assets
  $ 21,350     $ 22,516  
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
               
 Current Liabilities :
               
 Current portion of long-term debt
  $ 400     $ 400  
 Accounts payable
    449       491  
 Accrued expenses
    2,270       1,597  
 Deferred revenue
    87       24  
 Total current liabilities
    3,206       2,512  
                 
 Long-term debt
    -       300  
                 
 Stockholders' Equity:
               
 Preferred stock, $.01 par value, 20,920,648 shares authorized,
               
 no shares issued or outstanding
    -       -  
Common stock, $.01 par value, 50,000,000 and 35,000,000 shares authorized,
         
 at September 30, 2011 and December 31, 2010, respectively
               
 20,997,587 and 20,916,433 issued
               
 at September 30, 2011 and December 31, 2010, respectively
    210       209  
 Additional paid-in capital
    42,000       41,551  
 Treasury stock, 406,627 common shares at cost
               
 at September 30, 2011 and December 31, 2010
    (555 )     (555 )
 Accumulated deficit
    (23,248 )     (21,239 )
 Cumulative translation adjustments
    (263 )     (262 )
 Total stockholders' equity
    18,144       19,704  
 Total liabilities and stockholders' equity
  $ 21,350     $ 22,516  
 
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
   
Nine Months
 
     
Ended September 30,
   
Ended September 30,
 
     
2011
   
2010
   
2011
   
2010
 
                         
Revenues
  $ 6,915     $ 7,473     $ 21,462     $ 20,960  
                                 
Cost of sales
    2,864       3,015       9,137       8,534  
                                 
 
Gross profit
    4,051       4,458       12,325       12,426  
                                 
OPERATING EXPENSES:
                               
 
Research and development
    1,056       767       2,761       2,207  
 
Selling, general and administrative
    3,652       3,711       11,517       10,895  
 
Gain on disposal of assets
    -       -       -       (8 )
 
 Total operating expenses
    4,708       4,478       14,278       13,094  
                                 
Operating loss
    (657 )     (20 )     (1,953 )     (668 )
                                 
Interest expense, net
    (10 )     (9 )     (27 )     (35 )
                                 
                                 
Loss before taxes
    (667 )     (29 )     (1,980 )     (703 )
                                 
Income tax expense
    27       -       29       -  
                                 
                                 
Net loss
    (694 )     (29 )     (2,009 )     (703 )
                                 
Basic loss per share
  $ (0.03 )   $ (0.00 )   $ (0.10 )   $ (0.03 )
                                 
Shares used in computing basic
                               
 
loss per share
    20,467,245       20,289,602       20,423,521       20,236,462  
                                 
Diluted loss per share
  $ (0.03 )   $ (0.00 )   $ (0.10 )   $ (0.03 )
                                 
Shares used in computing diluted
                               
 
loss per share
    20,467,245       20,289,602       20,423,521       20,236,462  
 
 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,
 
   
2011
   
2010
 
             
Cash Flows from Operating Activities :
           
Net loss
  $ (2,009 )   $ (703 )
 Adjustments to reconcile net loss to net
               
 cash provided by (used in) operating activities :
               
 Depreciation and amortization
    928       875  
 Share-based compensation expense
    376       375  
 Deferred income tax provision
    1       -  
 Gain on disposal of fixed assets
    -       (8 )
(Increase) decrease in :
               
 Receivables
    (60 )     (525 )
 Inventories
    (43 )     142  
 Other current assets
    (379 )     (44 )
 Other assets
    36       (48 )
Increase (decrease) in :
               
 Accounts payable
    (42 )     (56 )
 Accrued expenses
    673       784  
 Deferred revenue
    63       (66 )
Net cash provided by (used in) operating activities
    (456 )     726  
                 
Cash Flows from Investing Activities :
               
 Purchase of property and equipment
    (641 )     (460 )
 Proceeds from sale of assets
    -       10  
Net cash used in investing activities
    (641 )     (450 )
                 
Cash Flows from Financing Activities :
               
 Proceeds from employee stock purchase plan
    13       19  
 Proceeds from stock option exercises
    64       64  
 Restricted cash requirement
    300       450  
 Repayments on financing obligations
    (300 )     (300 )
Net cash provided by financing activities
    77       233  
                 
Effect of exchange rate changes on cash
    (1 )     (8 )
                 
Net increase (decrease) in Cash and Cash Equivalents
    (1,021 )     501  
                 
Cash and Cash Equivalents, Beginning of Period
    8,056       7,937  
                 
Cash and Cash Equivalents, End of Period
  $ 7,035     $ 8,438  
                 
Supplemental Cash Flow Disclosure :
               
                 
 Cash paid for taxes, net of tax refunds
    32       (107 )
                 
 Cash paid for interest
    39       56  
 
 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 (“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 goal is 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 Technology™ (“GAT™”), 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 ™ 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.
 
 
5

 
 
Revenue Recognition
 
Revenue 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. Revenue 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. Revenue 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 Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net loss
  $ (694 )   $ (29 )   $ (2,009 )   $ (703 )
                                 
Currency translation adjustment
    (17 )     29       (1 )     (8 )
                                 
Total comprehensive loss
  $ (711 )   $ -     $ (2,010 )   $ (711 )
 
 
6

 
 
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 months  ended September 30, 2011 and 2010, conversion of stock options and unvested restricted shares totaling 316,752 and 325,374 common share equivalents, respectively, and for the nine months ended September 30, 2011 and 2010, stock options and unvested restricted shares totaling 371,466 and 527,140 common share equivalents, respectively, were excluded from the calculation of diluted loss per share because they were anti-dilutive.
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Weighted average common shares outstanding
    20,467,245       20,289,602       20,423,521       20,236,462  
                                 
Shares used in computing basic loss per share
    20,467,245       20,289,602       20,423,521       20,236,462  
                                 
Dilutive effect of stock options and
                               
unvested restricted stock units
    -       -       -       -  
                                 
Shares used in computing diluted loss per share
    20,467,245       20,289,602       20,423,521       20,236,462  
 
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 8,000,000 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.
 
 
7

 
 
Share-based compensation expense recorded in the three and nine month periods ended September 30, 2011 and 2010 is summarized as follows:
 
     
Three Months Ended
   
Nine Months Ended
 
     
September 30,
   
September 30,
 
     
2011
   
2010
   
2011
   
2010
 
                           
                                   
 
Stock options
  $ 98     $ 78     $ 285     $ 234  
 
Employee stock purchase plan
    -       -       2       7  
 
Restricted stock awards
    28       43       89       134  
                                   
Total share-based compensation expense   $ 126     $ 121     $ 376     $ 375  
 
    Share-based compensation expense is a component of selling, general and administrative expense, cost of sales and research and development expense and is recorded as a non-cash expense in the operating activities section of the Company’s consolidated statements of cash flows.
 
    Proceeds received from the exercise of stock options in the nine month periods ended September 30, 2011 and 2010 were $64 each period.  Proceeds received from employee payments into the ESPP in the nine month periods ended September 30, 2011 and 2010 were $13 and $19, 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, 2011 is summarized as follows:
  
                           
                   
Weighted
 
Aggregate
 
   
Number
             
Average Remaining
 
Instrinsic
 
   
of Shares
   
Price Range
 
Contractual term
 
Value
 
                           
Balance, January 1, 2011
    2,158,906     $ 1.10 -   $ 5.17          
                                 
Granted
    760,400     $ 1.85 -   $ 2.25          
Exercised
    (40,000 )   $ 1.50 -   $ 2.09          
Cancelled / Forfeited
    (323,500 )   $ 1.10 -   $ 4.55          
                                 
Balance, September 30, 2011
    2,555,806     $ 1.49 -   $ 5.17  
 7.1 years
  $ 167  
                                   
Vested and excercisable at
                                 
September 30, 2011
    1,154,271     $ 1.49 -   $ 5.17  
 5.3 years
  $ 79  
                                   
Expected to vest as of
                                 
September 30, 2011
    2,427,801     $ 1.49 -   $ 5.17  
 7.0 years
  $ 158  
 
    During the nine month period ended September 30, 2011, there were 760,400 options granted with a weighted average grant date fair value, based on a Black-Scholes option pricing model, of $1.07 per share.  The assumptions used in the Black-Scholes model are as follows: dividend yield 0%, expected volatility 50.04%, risk-free interest rate 2.37% and expected life of 6.07 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.
 
 
8

 
 
The following table provides additional information about the Company’s stock options outstanding and exercisable at September 30, 2011:
 
                   
Options Outstanding
           
Options Exercisable
 
                         
Weighted Average
             
Wtd. Average
 
 
Range of
   
Number of
   
Remaining
 
Exercise
   
Number of
   
Exercise
 
 
Exercise Prices
   
Shares
   
Contractual Life
 
Price
   
Shares
   
Price
 
                                                 
 
$  
1.49   -     $ 2.51       1,904,302       8.2  
 Years
  $ 1.88       502,767     $ 1.68  
 
 3.05   -     $ 3.57       206,400       1.9  
 Years
  $ 3.32       206,400     $ 3.32  
 
 3.69   -     $ 5.17       445,104       4.9  
 Years
  $ 4.18       445,104     $ 4.18  
 
$  
1.49   -     $ 5.17       2,555,806       7.1  
 Years
  $ 2.40       1,154,271     $ 2.93  
                                                             

 
    A summary of the status of the Company’s unvested restricted stock as of December 31, 2010 and changes during the nine months  ended September 30, 2011 is presented below.
 
         
Weighted Average
       
         
Grant Date
   
Aggregate
 
   
Shares
   
Fair Value
   
Intrinsic Value
 
                   
                   
Non-vested RSA's at January 1, 2011
    135,750     $ 1.95        
Granted
    42,500     $ 2.17        
Vested
    (49,500 )   $ 2.26        
Cancelled / forfeited
    (7,500 )   $ 1.49        
                       
Non-vested RSA's at September 30, 2011
    121,250     $ 1.92     $ 233  
                         
Expected to vest at September 30, 2011
    111,750     $ 1.93     $ 215  
 
    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, 2011, the weighted average remaining term of non-vested restricted stock was 2.1 years.
 
    The Company also issued 315,000 performance-based Restricted Stock Units (“RSUs”) during the nine months ended September 30, 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 upon 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.  No expense has been recognized for these awards as the probability of achieving the targets is currently assesses at zero.
 
 
9

 
 
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, 2011 and December 31, 2010, inventories consisted of the following:
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Raw materials
  $ 697     $ 794  
Work in progress
    1,058       1,214  
Finished goods
    1,621       1,325  
Inventories
  $ 3,376     $ 3,333  
                 

5.
INTANGIBLE ASSETS
 
    At September 30, 2011 and December 31, 2010, intangible assets consisted of the following:
 
   
September 30,
   
December 31,
       
   
2011
   
2010
   
Lives
 
Intangible assets
    2,614       2,614     2-20  
Accumulated amortization
    (1,379 )     (1,293 )        
Net intangible assets
  $ 1,235     $ 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, $400 of which was outstanding at September 30, 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 $400 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 nine months  ended September 30, 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 nine months of 2011 did not change management’s conclusion that a full valuation allowance is necessary.
 
 
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    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, 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 nine months ended September 30, 2011, unrecognized tax benefits increased by $10 to $550, 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.
 
 8.
SUBSEQUENT EVENTS
 
    On November 10, 2011, the Company entered into an agreement to sell its water and environmental products assets to Modern Water plc. for $4.5million. The transaction is expected to close during the fourth quarter.
 
 
11

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
 
This Form 10-Q contains certain forward-looking statements reflecting the current expectations of Strategic Diagnostics Inc. and its subsidiaries (the “Company” or “SDIX”). In addition, when used in this quarterly report, the words “anticipate,” “enable,” “estimate,” “intend,” “expect,” “believe,” “potential,” “may,” “will,” “should,” “project” and similar expressions as they relate to the Company are intended to identify said forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated at this time. Such risks and uncertainties include, without limitation, changes in demand for products, delays in product development, delays in market acceptance of new products, retention of customers, attraction and retention of management and key employees, adequate supply of raw materials, inability to obtain or delays in obtaining third party approvals or required government approvals, the ability to meet increased market demand, competition, protection of intellectual property, non-infringement of intellectual property, seasonality, the ability to obtain financing and other factors more fully described in the Company’s public filings with the SEC including, without limitation, the Company’s Annual Report on Form 10-K for the year ended December 31, 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.
 
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 may benefit from a quantifiable “return on investment” by reducing 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, an experienced sales and marketing organization, an 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 continues 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.
 
 
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    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 continue to provide upside potential for the business.
 
Results of Operations
 
Three Months Ended September 30, 2011 versus Three Months Ended September 30, 2010
 
Revenue for the three months ended September 30, 2011 decreased 7% to $6.9 million, compared to $7.5 million for the same period in 2010. The decrease in revenue in the third quarter of 2011 was primarily the result of a 25% decrease in sales of Kit products and services, partially offset by a 10% increase in the sale of Life Science products and services.
 
 
   
Three Months Ended
             
   
September 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(in thousands, except percentages)
       
Life Sciences
  $ 4,085     $ 3,718     $ 367       10 %
Kit Products
    2,830       3,755       (925 )     (25 )%
Revenues
  $ 6,915     $ 7,473     $ (558 )     (7 )%
 
 
Life Science Products and Services
 
Life Science revenue increased 10% to $4.1 million for the third quarter of 2011, compared to $3.7 million for the same period in 2010.  This increase was primarily the result of increased sales to the Company’s in-vitro diagnostic customers.  This increase reflects the continued refocusing of the Company’s sales efforts and capabilities on in-vitro diagnostics and biopharma customers.
 
Kit Products
 
    Kit product revenue decreased 25% to $2.8 million for the third quarter of 2011 as compared to $3.8 million for the same period of 2010.  Sales of food pathogen products decreased 4% to $1.5 million for the third quarter of 2011 from $1.6 million for the same period in 2010.  This decrease was primarily the result of decreased sales of E. Coli testing products used primarily in the beef industry.  Water and environmental products revenue decreased 41%, to $0.9 million, in the third quarter of 2011 as compared to the same period of 2010, primarily attributable to decreased sales of water testing equipment to China.  Ag-GMO product sales decreased 37%, to $0.4 million, in the third quarter of 2011 as compared to the same period of 2010.  This decrease was primarily attributable to initial stocking orders from the Company’s exclusive US distributor, Romer Labs, made in the 2010 three month period and not repeated in the 2011 three month period.
 
 
13

 
 
Gross profit
 
Gross profit for the third quarter of 2011 was $4.1 million compared to $4.5 million for the same period in 2010. Gross margins were 59% and 60% for the third quarters of 2011 and 2010, respectively.  The decrease in gross margin was primarily attributable to the higher percentage of Life Science revenues to total revenues, which have a lower gross margin than the Kit products.
 
Research and development
 
Research and development expenses were $1.1 million, or 15% of revenue, for the third quarter of 2011, compared to $767,000, or 10% of revenue, for the same period in 2010.  This increase was primarily the result of collaboration costs with third parties related to the development of new antibody technologies and further enhancement of the Company’s proprietary GAT process.  The Company expects to continue making investments to further develop its advanced GAT process.
 
Selling, general and administrative
 
Selling, general and administrative expenses were $3.7 million for both the third quarter in 2011 and 2010.
 
Interest expense, net
 
The Company had net interest expense of $10,000 for the third quarter of 2011 compared to net interest expense of $9,000 for the same period in 2010.
 
Income taxes
 
The Company recorded an income tax expense of $27,000 for the third quarter of 2011 compared to no income tax provision for the same period in 2010.  The Company has full valuation allowances placed against U.S. federal and state deferred tax assets.
 
Net loss
 
Net loss was $694,000, or $0.03 per diluted share, for the third quarter of 2011, compared to a net loss of $29,000, or $0.00 per diluted share, for the same period in 2010. Diluted shares utilized were 20.5 million and 20.3 million for the 2011 and 2010 periods, respectively.
 

 
Nine Months Ended September 30, 2011 versus Nine Months Ended September 30, 2010
 
Revenues for the nine months ended September 30, 2011 increased 2% to $21.5 million, compared to $21.0 million for the same period in 2010. The increase in revenues in the first nine months of 2011 was primarily the result of a 13% increase in sales of Life Science products and services, partially offset by a 10% decrease in the sale of Kit products.
 
   
Nine Months Ended
             
   
September 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(in thousands, except percentages)
       
Life Sciences
  $ 12,736     $ 11,254     $ 1,482       13 %
Kit Products
    8,726       9,706       (980 )     (10 )%
Revenues
  $ 21,462     $ 20,960     $ 502       2 %

 
Life Science Products and Services
 
Life Science revenue increased 13% to $12.8 million for the nine month period ended September 30, 2011, compared to $11.3 million for the same period in 2010.  This increase was primarily the result of increased sales to the Company’s in-vitro diagnostic and biopharma customers, partially offset by a decrease in sales to the Company’s academia/government customers and content customers.  This increase reflects the continued refocusing of the Company’s sales efforts and capabilities on in-vitro diagnostics and biopharma customers.
 
 
14

 
 
Kit Products
 
    Kit product revenue decreased 10% to $8.7 million for the nine months ended September 30, 2011 as compared to $9.7 million for the same period of 2010.  Sales of food pathogen products increased 16% to $4.9 million for the nine months ended September 30, 2011 from $4.3 million for the nine months ended September 30, 2010.  This increase was primarily the result of increased sales of Salmonella testing products used primarily in the poultry industry, partially offset by decreased sales of E. Coli testing products used primarily in the beef industry.  These results reflect the Company’s focus and investments in its food pathogens products.  Offsetting this increase, water and environmental products revenue decreased 23%, to $2.8 million, in the nine month period ended September 30, 2011 as compared to the same period of 2010. This decrease was primarily attributable to decreased sales of tests for PCB’s in soil and water testing equipment, primarily in China.  Ag-GMO product sales decreased 45%, to $1.0 million, in the first nine 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 the Company’s exclusive US distributor, Romer Labs, due to the timing of restocking orders compared to prior year direct sales to customers.
 
Gross profit
 
Gross profit for the nine months ended September 30, 2011 was $12.3 million compared to $12.4 million for the nine months ended September 30, 2010. Gross margins were 57% and 59% for the nine month periods ended September 30, 2011 and 2010, respectively.  The decrease in gross margin was primarily attributable to the higher percentage of Life Science revenues to total revenues, which have a lower gross margin than the Kit products.
 
Research and development
 
Research and development expenses were $2.8 million, or 13% of revenue, for the nine month period ended September 30, 2011, compared to $2.2 million, or 11% of revenue, for the nine month period ended September 30, 2010.  This increase was primarily the result of collaboration costs with third parties and increased personnel costs related to the development of new antibody technologies and further enhancement of the Company’s proprietary GAT process.  The Company expects to continue making investments to further develop its advanced GAT process.
 
Selling, general and administrative
 
Selling, general and administrative expenses were $11.5 million for the nine month period ended September 30, 2011 and $10.9 million for the nine month period ended September 30, 2010.  This increase was primarily the result of increased selling and marketing personnel costs in the Company’s core focus areas of Life Science and Food Safety.
 
Interest expense, net
 
The Company had net interest expense of $27,000 for the nine month period ended September 30, 2011 compared to net interest expense of $35,000 for the nine month period ended September 30, 2010. The decrease was primarily due to lower levels of debt in the 2011 period.
 
Income taxes
 
The Company recorded an income tax expense of $29,000 for the nine month period ended September 30, 2011 compared to no income tax provision for the nine month period ended September 30, 2010.  The Company has full valuation allowances placed against U.S. federal and state deferred tax assets.
 
Net loss
 
Net loss was $2.0 million, or $0.10 per diluted share, for the nine month period ended September 30, 2011, compared to net loss of $703,000, or $0.03 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.
 
 
15

 
 
Liquidity and Capital Resources
 
The net cash used in operating activities was $456,000 for the first nine months of 2011 compared to $726,000 provided by operating activities for the first nine months of 2010.  The net cash used in operating activities for the 2011 period was primarily the result of the net loss recorded and increases in other current assets, partially offset by increases in accrued expenses.  The net cash provided by operating activities for the 2010 period was primarily the result of an increase in accrued expenses, partially offset by increases in accounts receivable.
 
Net cash used in investing activities of $641,000 for the first nine months of 2011 related to the capital expenditures for the period. This compares to net cash used in investing activities of $450,000 for the first nine months of 2010. The capital expenditures for the 2011 period were primarily related to purchases of computer and electronic equipment and leasehold improvements.  The leasehold improvements were made to expand the Company’s monoclonal antibody production capabilities.  The capital expenditures for the 2010 period were primarily related to purchases of laboratory and computer and electronic equipment.
 
Net cash provided by financing activities of $77,000 for the first nine months of 2011 was primarily attributable to proceeds received for stock option exercises.  Net cash provided financing activities of $233,000 for the first nine months of 2010 was primarily the result of a reduced restricted cash requirement.
 
The Company’s working capital (current assets less current liabilities) was $13.0 million at September 30, 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, $400,000 of which was outstanding at September 30, 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 $400,000 in restricted cash as required by the Credit Agreement.
 
For the nine months ended September 30, 2011, the Company satisfied all of its cash requirements from cash available and on-hand.  At September 30, 2011, the Company had $400,000 of debt and $18.1 million of stockholders’ equity.
 
The Company expects capital expenditures to increase during the final quarter of 2011 due to renovations of the company’s leased facilities in Newark, Delaware.
 
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 any future 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, 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

 
 
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 1934
   
31.2
Certifications of the Chief Financial Officer of Strategic Diagnostics Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 1934
   
32.1
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 2002
   
32.2
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
 
101.INS
XBRL Instance document
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
   
 
 
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: November 14, 2011
 
 
/s/ Francis M. DiNuzzo
   
Francis M. DiNuzzo
President, Chief Executive Officer
(Principal Executive Officer)
 
 
 
Date: November 14, 2011
 
 
/s/ Kevin J. Bratton
   
Kevin J. Bratton
Vice President – Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)

19