Standard Diversified (SDI) 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2007

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:þ          No:o

     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filero          Accelerated Filero     Non-Accelerated Filerþ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes:o          No:þ

     As of June 30, 2007 there were 20,356,424 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
Consolidated Balance Sheets – June 30, 2007 and December 31, 2006		2
Consolidated Statements of Operations – Three and six months ended June 30, 2007 and 2006		3
Consolidated Statements of Cash Flows – Six months ended June 30, 2007 and 2006		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		16
ITEM 4. Controls and Procedures		17
PART II OTHER INFORMATION		18
ITEM 4. Submission of Matters to a Vote of Security Holders		18
ITEM 6. Exhibits		18
SIGNATURES		18
Certifications of the Chief Executive Officer
Certifications of the Chief Financial Officer
Certifications of the Chief Executive Officer, pursuant to Section 906
Certifications of the Chief Financial Officer, pursuant to Section 906

1

PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)
(unaudited)

	June 30,			December 31,
	2007			2006
ASSETS
Current Assets :
Cash and cash equivalents	$	10,622		$	10,892
Receivables, net		3,706			3,678
Inventories		4,070			3,178
Deferred tax asset		1,275			831
Other current assets		827			492
Total current assets		20,500			19,071
Property and equipment, net		4,934			4,058
Other assets		7			3
Deferred tax asset		7,667			8,484
Intangible assets, net		6,190			6,337
Total assets	$	39,298		$	37,953
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities :
Accounts payable	$	443		$	541
Accrued expenses		1,551			1,455
Deferred revenue		160			133
Current portion of long term debt		211			211
Total current liabilities		2,365			2,340
Long-term debt		246			351
Non-current taxes payable		89			—
Total non-current liabilities		335			351
Stockholders’ Equity:
Preferred stock, $.01 par value, 20,920,648 shares authorized, no shares issued or outstanding		—			—
Common stock, $.01 par value, 35,000,000 shares authorized, 20,356,424 and 20,192,402 issued and outstanding at June 30, 2007 and December 31, 2006, respectively		204			202
Additional paid-in capital		39,278			38,605
Accumulated deficit		(2,996	)		(3,690	)
Cumulative translation adjustments		112			145
Total stockholders’ equity		36,598			35,262
Total liabilities and stockholders’ equity	$	39,298		$	37,953

The accompanying notes are an integral part of these statements.

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STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)
(unaudited)

	Three Months					Six Months
	Ended June 30,					Ended June 30,
	2007		2006			2007		2006
Revenues	$	6,725	$	5,640		$	13,372	$	11,908
OPERATING EXPENSES:
Manufacturing		2,647		2,728			5,224		5,668
Research and development		764		596			1,461		1,293
Selling, general and administrative		3,099		2,793			5,761		5,356
Total operating expenses		6,510		6,117			12,446		12,317
Operating income (loss)		215		(477	)		926		(409	)
Interest income (expense), net		116		91			226		174
Income (loss) before taxes		331		(386	)		1,152		(235	)
Income tax expense (benefit)		127		(155	)		458		(96	)
Net income (loss)		204		(231	)		694		(139	)
Basic net income (loss) per share	$	0.01	$	(0.01	)	$	0.03	$	(0.01	)
Shares used in computing basic net income (loss) per share		20,334,000		19,970,000			20,272,000		19,966,000
Diluted net income (loss) per share	$	0.01	$	(0.01	)	$	0.03	$	(0.01	)
Shares used in computing diluted net income (loss) per share		20,619,000		19,970,000			20,466,000		19,966,000

The accompanying notes are an integral part of these statements.

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STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
(unaudited)

	Six Months
	Ended June 30,
	2007			2006
Cash Flows from Operating Activities :
Net income (loss)	$	694		$	(139	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities :
Depreciation and amortization		603			497
Share-based compensation expense		218			174
Deferred income tax provision		398			(60	)
(Increase) decrease in :
Receivables		(28	)		114
Inventories		(892	)		11
Other current assets		(335	)		(507	)
Other assets		(4	)		—
Increase (decrease) in :
Accounts payable		(98	)		1
Accrued expenses		98			(296	)
Deferred revenue		27			113
Non-current taxes payable		89			—
Net cash provided by (used in) operating activities		770			(92	)
Cash Flows from Investing Activities :
Purchase of property and equipment		(1,360	)		(258	)
Purchase of intangible assets		—			(117	)
Net cash used in investing activities		(1,360	)		(375	)
Cash Flows from Financing Activities :
Proceeds from exercise of incentive stock options		447			69
Proceeds from employee stock purchase plan		11			12
Repayments on financing obligations		(105	)		(106	)
Net cash provided by (used in) financing activities		353			(25	)
Effect of exchange rate changes on cash		(33	)		69
Net decrease in Cash and Cash Equivalents		(270	)		(423	)
Cash and Cash Equivalents, Beginning of Period		10,892			10,009
Cash and Cash Equivalents, End of Period	$	10,622		$	9,586
Supplemental Cash Flow Disclosure :
Cash paid for taxes		130			8
Cash paid for interest		19			25

The accompanying notes are an integral part of these statements

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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 (the “Company”) develops, manufactures and markets antibody products and analytical test kits to a diverse customer base, across multiple industrial and human health markets. By applying its core competency of creating custom antibodies to assay development, the Company produces unique, sophisticated diagnostic testing and reagent systems that are responsive to customer diagnostic and information needs. Customers benefit with quantifiable “return on investment” by reducing time, labor, and/or material costs. All this is accomplished while increasing accuracy, reliability and actionability of essential test results. 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.

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 regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States 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, 2006. In the opinion of management, the accompanying consolidated financial statements include all adjustments (all of which are of a normal recurring nature) necessary for a fair presentation of the results of operations.

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 collectibility is probable. Management is required to make judgments based on actual experience about whether or not collectibility 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.

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 and deferred tax assets. Actual results could differ from these estimates.

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New Accounting Pronouncements

     In September 2006, the FASB issued SFAS No.157 “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities and is intended to respond to investors’ requests for expanded information about the extent to which a company measures assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on income. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value to any new circumstances. SFAS No. 157 also requires expanded disclosure of the effect on income for items measured using unobservable data, establishes a fair value hierarchy that prioritizes the information used to develop those assumptions and requires separate disclosure by level within the fair value hierarchy. The provisions of SFAS No. 157 are effective for interim financial statements issued for fiscal years beginning after November 15, 2007, in the case of the Company, fiscal 2008. The Company is currently evaluating the impact of adopting SFAS No. 157 on the consolidated financial statements.

     In February 2007, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of SFAS No. 115.” The new statement allows entities to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, in the case of the Company, fiscal 2008. The Company is currently evaluating the impact of adopting SFAS No. 159 on the consolidated financial statements.

     In June of 2007, the FASB issued EITF No. 07-03, “Accounting for nonrefundable advance payments for goods or services received for use in future research and development activities.” EITF No. 07-03 requires company’s that make nonrefundable advance payments for future research and development activities to capitalize the payment, and recognize the expense as the goods are delivered or services are performed. EITF No. 07-03 is effective for fiscal years beginning after December 15, 2007, in the case of the Company, fiscal 2008, but is to be applied prospectively to new contracts entered into on or after the effective date. The Company is currently evaluating the impact of adopting EITF No. 07-03 on the consolidated financial statements.

     In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, the Company has adopted the provisions of FIN 48 and there was no material effect on the financial statements. As a result, there was no cumulative effect related to adopting FIN 48.

     As of January 1, 2007, the Company has provided a liability for approximately $362,000 of unrecognized tax benefits, of which $326,000 would impact the Company’s effective tax rate, if recognized. For the three and six month periods ended June 30, 2007, unrecognized tax benefits increased approximately $26,000 and $52,000 respectively to approximately $413,000, of which approximately $368,000 would impact the Company’s effective tax rate if recognized.

     The Company is subject to U.S. Federal and United Kingdom income tax, as well as income taxes of multiple state jurisdictions. The Company’s 2005 income tax return is currently under review by the Internal Revenue Service. An estimate of possible changes to the unrecognized tax benefit as a result of this examination cannot be made at this time.

     The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Upon adoption of FIN 48, the Company had no interest or penalties accrued related to uncertain tax positions, due to available net operating loss carryforwards.

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     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.

Comprehensive Income

     Comprehensive income (loss) consists of the following for each period:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007		2006			2007			2006
Net income (loss)	$	204	$	(231	)	$	694		$	(139	)
Currency translation adjustment		18		59			(33	)		10
Total comprehensive income (loss)	$	222	$	(172	)	$	661		$	(129	)

2. BASIC AND DILUTED INCOME PER SHARE

     Basic earnings per share (EPS) are computed by dividing net income 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 exercising stock options into common shares. For the three and six month periods ending June 30, 2006, the effect of exercising stock options into common shares of 124,108 and 130,117, respectively was not included, because it was anti-dilutive.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Weighted avg. common shares outstanding		20,334,106		19,970,459		20,271,733		19,965,579
Shares used in computing basic net income per share		20,334,106		19,970,459		20,271,733		19,965,579
Stock options		284,478		—		193,955		—
Shares used in computing diluted net income per share		20,618,584		19,970,459		20,465,688		19,965,579

3. SHARE-BASED COMPENSATION

     The Company has a stock incentive plan (the “2000 Plan”), which authorizes the granting of incentive and nonqualified stock options and restricted stock. Under the 2000 Plan, executives, key employees and outside directors receive awards of options to purchase common stock or restricted stock. 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 4,000,000 shares of common stock are issuable under the 2000 Plan. Stock

7

options granted under the 2000 Plan have a maximum contractual term of 10 years. The 2000 Plan provides for accelerated vesting if there is a change of control (as defined in the 2000 Plan).

     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. Under SFAS 123R, the Company’s ESPP is compensatory. Therefore, the Company is required to recognize compensation expense related to the discount from market value of shares sold under the ESPP.

     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, the vesting of restricted stock units and shares purchased under the ESPP.

     Share-based compensation expense recorded in the three and six month periods ended June 30, 2007 and 2006 is summarized as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Stock options	$	94	$	45	$	130	$	45
Employee stock purchase plan		1		—		4		1
Restricted stock units		41		63		84		128
Total share-based compensation expense	$	136	$	108	$	218	$	174

     The deferred income tax benefit related to share-based compensation expense for the six months ended June 30, 2007 and 2006 was $62 and $68 respectively. 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 Statement of Cash Flows. The total unamortized fair value of unvested stock options at June 30, 2007 was $491. That cost is expected to be amortized over a weighted average period of 2.3 years.

     The intrinsic value of options exercised during the six month period ended June 30, 2007 and 2006 was $235 and $47, respectively. Proceeds received from the exercise of stock options and from employee payments into the ESPP totaled $447 and $11, respectively, in the three and six month periods ended June 30, 2007 and $69 and $12, respectively, in the three and six month periods ended June 30, 2006. These amounts are recorded in the cash flows from financing activities section of the Company’s Consolidated Statement of Cash Flows.

8

     Information with respect to the activity of outstanding stock options granted under the 2000 Plan and options granted separately from the 2000 Plan for the six months ended June 30, 2007 is summarized as follows:

						Weighted	Aggregate
	Number					Average Remaining	Instrinsic
	of Shares			Price Range		Contractual term	Value
Balance, December 31, 2006		1,469,729		$	1.88 - $6.94
Granted		173,000		$	3.46 - $4.65
Cancelled / Forfeited		(190,534	)	$	3.05 - $6.94
Exercised		(151,600	)	$	1.88 - $3.96
Balance, June 30, 2007		1,300,595		$	2.50 - $6.94	6.3 years	$	992
Vested and excercisable at June 30, 2007		1,079,970		$	2.50 - $6.94	5.6 years	$	881
Expected to vest as of June 30, 2007		1,284,895		$	2.50 - $6.94	6.3 years	$	985

     During the six month period ended June 30, 2007 there were 173,000 options granted with a weighted average grant date fair value of $2.56 per share.

     The following table provides additional information about the Company’s stock options outstanding and exercisable at June 30, 2007:

	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
$2.50 - $2.88		155,700	3.8 Years	$	2.74		155,700	$	2.74
$3.05 - $4.36		1,073,895	6.6 Years	$	3.86		885,268	$	3.84
$4.55 - $6.94		71,000	7.8 Years	$	4.80		39,002	$	4.93
$2.50 - $6.94		1,300,595	6.3 Years	$	3.78		1,079,970	$	3.72

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     A summary of the status of the Company’s unvested restricted stock as of December 31, 2006 and changes during the six month period ended June 30, 2007 is presented below.

				Weighted Average
				Grant Date		Aggregate
	Shares			Fair Value		Intrinsic Value
Non-vested RSU’s at December 31, 2006		85,222		$	3.71
Granted		27,000		$	3.46
Vested		(6,000	)	$	3.05
Non-vested RSU’s at June 30, 2007		106,222		$	3.68	$	391
RSU’s expected to vest at June 30, 2007		103,522		$	3.69	$	382

     During the six month period ended June 30, 2007, there were 27,000 shares of restricted stock granted at a fair value of $3.46. At June 30, 2007, there were 106,222 shares of restricted stock outstanding with a fair value (based on the market price for the stock at the date of grant) totaling $391 and a weighted average remaining term of 1.7 years. 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. The total unamortized fair value of unvested restricted stock, at June 30, 2007 was $294. That cost is expected to be amortized over a weighted average period of 1.7 years.

4. INVENTORIES

     The Company’s inventories are valued at the lower of cost or market. For inventories that consist primarily of test kit components, bulk serum and antibody products, cost is determined using the first in, first out method. For inventories that consist of costs associated with the production of custom antibodies, cost is determined using the specific identification method. At June 30, 2007 and December 31, 2006, inventories consisted of the following:

	June 30, 2007		December 31, 2006
Raw materials	$	1,263	$	1,221
Work in progress		860		653
Finished goods		1,947		1,304
Net inventories	$	4,070	$	3,178

5. INTANGIBLE ASSETS

     At June 30, 2007 and December 31, 2006, intangible assets consisted of the following:

	June 30, 2007			December 31, 2006			Lives
Goodwill	$	4,796		$	4,822		N/A
Other		3,134			3,134		2-20
Less — accumulated amortization		(1,740	)		(1,619	)
Net intangible assets	$	6,190		$	6,337

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6. DEBT

     On May 5, 2000, the Company entered into a financing agreement with a commercial bank. This agreement provides for up to a $5,000 revolving line of credit, none of which was outstanding and approximately $2,734 of which was available at June 30, 2007, based on eligible assets. The revolving line of credit bears a variable interest rate of between 1.75% and 2.75% over LIBOR depending upon the ratio of the Company’s funded debt to EBITDA, and is subject to a borrowing base determined by the Company’s eligible accounts receivable. The Company’s annual effective rate of interest on this line of credit, taking into account the variable interest rate and LIBOR, was approximately 7.07% at June 30, 2007.

     On December 13, 2001, the Company entered into an agreement with a commercial bank to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $1,500 in financing, $457 of which was outstanding at June 30, 2007, and is repayable over seven years, with principal payments that began on October 1, 2002. The loan bears a variable interest rate of between 2% and 3% over LIBOR depending upon the ratio of the Company’s funded debt to EBITDA, as defined. Payments are due monthly, with equal amortization of principal payments plus interest. The Company’s annual effective rate of interest on this loan at June 30, 2007 was approximately 7.32%.

     Under the terms of the above financing, the Company is required to meet certain quarterly financial covenants that include a ratio of EBITDA to current maturities of debt plus interest and cash paid for taxes greater than 1.50 and a ratio of funded debt to EBITDA not to exceed 3.25. The Company met all of its financial covenants with respect to this indebtedness at June 30, 2007 and expects that it will be able to meet all of its financial covenants with respect to this indebtedness for 2007.

     At June 30, 2007 and December 31, 2006, the outstanding balance on all of the Company’s commercial bank debt was $457 and $562, respectively. This indebtedness is secured by substantially all of the Company’s assets.

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

Forward-Looking Statements

     This Form 10-Q contains certain forward-looking statements reflecting the current expectations of Strategic Diagnostics Inc. and its subsidiaries (the “Company” or “SDI”). These statements include, among others, statements regarding: the Company’s intentions with respect to future spending on research and development; the development, market acceptance and sales of tests for food-borne pathogens and related growth media; the size and nature of demand in the markets for the Company’s products and related effects on operating results; the need for water quality and toxicity tests; approval and validation by third parties of the Company’s food pathogen tests; the performance of the Company’s testing products; sales of the Company’s antibodies; timing of new product introductions and other information that may be predictive of future operating results; the Company’s ability to reduce operating expenses; and the Company’s ability to improve operating results thus enabling it to meet future loan covenants. In addition, when used in this Form 10-Q, 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 U.S. Securities and Exchange Commission, including without limitation its Annual Report on Form 10-K for the year ended December 31, 2006.

Background

     We provide bio-services and industrial bio-detection services. Bio-services include providing custom antibody production services and antibody reagents to the diagnostic, pharmaceutical, bio-medical and academic research and development markets. Industrial bio-detection services include providing test kits for assessing the health, safety and quality of food, water and the environment.

     Our primary core competency is the development and manufacture of antibodies. These antibodies are used by medical diagnostic and pharmaceutical companies, research institutions and incorporated into test kits manufactured by us for the detection of a wide variety of substances related to food safety and water quality.

     Our food safety product group markets tests to detect specific traits in genetically engineered plants, tests to detect Genetically Modified (GM) traits in food ingredients and food fractions, tests to detect naturally occurring fungi in grains (mycotoxins) and tests for food pathogens.

     Our water quality product group includes tests to detect toxicity in drinking water, industrial process water and wastewater, and tests to detect specific traits in soil and other waste matter for use at environmental remediation projects, hazardous waste operations and other applications.

     Our antibody product group provides a wide array of antibodies and antibody services, including hybridoma development, genomic antibody development, calibrators, antigens and reagents and the production of monoclonal and polyclonal antibodies. These antibodies are incorporated into test kits we manufacture as described above and diagnostic and therapeutic products, and used in clinical research.

     We sell products and services in the food safety, water quality and antibody market categories through our U.S. direct sales force, a network of over 50 distributors in Canada, Mexico, Latin America, Europe and Asia and our corporate partners. These products and services are sold to a wide range of customers including water utilities, food processors, pharmaceutical, biotechnology and diagnostic companies and major biomedical research centers.

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Results of Operations

     Three Months Ended June 30, 2007 versus Three Months Ended June 30, 2006

     Revenues for the second quarter of 2007 increased 19% to $6.7 million, compared to $5.6 million for the same period in 2006. Revenues for the second quarter were positively impacted by a 42% increase in sales of antibody products. In addition, sales of the Company’s RapidChek® line of food pathogen testing products grew 38% in the second quarter of 2007 as compared to the same period in 2006. Overall growth in the Company’s food safety division was negatively impacted by a 32% decrease sales of in Agricultural and GMO testing products. Overall food safety division revenues grew 2% for the second quarter of 2007 as compared to the same period in 2006.

     Operating expenses for the second quarter of 2007 increased 6% to $6.5 million, compared to $6.1 million for the second quarter of 2006. This increase is primarily attributable to a 28% increase in research and development expenses, an 11% increase in selling, general and administrative expenses partially offset by a 3% reduction in manufacturing expenses all as described below.

     The Company continued to demonstrate ongoing improvement in gross profit (defined as total revenues less manufacturing expenses) stemming from its supply chain optimization efforts and the introduction of new products and services. For the quarter ended June 30, 2007, gross profit totaled $4.1 million, as compared to $2.9 million for the same period in 2006. Gross profit margins were 60.6% for the second quarter of 2007 compared to 51.6% for the same period in 2006.

     Research and development costs for the second quarter were 11.4% of revenues compared to 10.6% in the prior year. Increases in R&D are primarily associated with the Company’s new Genomic Antibodies® Technology (GAT™) platform as well as development of its bacteriophage technology for the selective control of microbial contaminants.

     SG&A expenses increased to $3.1 million in the second quarter of 2007 from $2.8 million in the second quarter of 2006. As a percentage of sales, SG&A expenses were 46.1% of revenues for the second quarter compared to 49.5% in the prior year. The Company continues to invest in the development of its sales, marketing and customer service capabilities.

     The Company recorded net interest income of $116,000 in the second quarter of 2007 compared to $91,000 in the prior year second quarter. The increase was primarily due to increased interest rates received on higher levels of invested cash during the 2007 period.

     Pre-tax income totaled $331,000 for the three months ended June 30, 2007 compared to pre-tax loss of $386,000 for the same period in 2006.

     The Company’s effective tax rate was approximately 40% for the three month period ended June 30, 2007 and approximately 38% for the three month period ended June 30, 2006.

     Net income in the second quarter of 2007 was $204,000, or $0.01 per diluted share, compared to a loss of $231,000, or ($0.01) per diluted share, for the same period in 2006. Diluted shares utilized in these computations were 20.6 million and 20.0 million for the second quarters of 2007 and 2006, respectively.

     Six Months Ended June 30, 2007 versus Six Months Ended June 30, 2006

     Revenues for the first six months of 2007 increased 12% to $13.4 million, compared to $12.0 million for the same period in 2006. Revenue gains were driven by antibody sales, which increased 37.1%, and food pathogen test kit sales, which increased 22.3%, over the same period in 2006. Gains were offset by a 27% decrease in the Company’s Ag/GMO product line in the first six months of 2007 as compared to the same period in 2006.

     Operating expenses for the first six months of 2007 increased 1% to $12.4 million, compared to $12.3 million for the first six months of 2006. This increase is primarily attributable to a 13% increase in research and development costs and an 8% increase in selling, general and administrative costs, partially offset by a decrease of 8% in manufacturing costs, all as described below.

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     Gross profits (defined as total revenues less manufacturing costs) for the first six months of 2007 were $8.1 million compared to $6.2 million in the year ago period. Gross margins were 60.9% and 52.4% for the first six months of 2007 and 2006, respectively. The increase in margins was primarily attributable to a more favorable mix of products sold.

     Research and development spending was $1.5 million, or 10.9% of net revenues, in the first six months of 2007, compared to $1.3 million, or 10.9% of net revenues, in the first six months 2006. This increase was primarily the result of increased research activity within the antibody product group.

     Selling, general and administrative expenses were $5.8 million for the first six months of 2007, compared to $5.4 million for the same six month period in 2006. This increase was primarily attributable to increased employee related costs and professional fees.

     The Company recorded net interest income of $226,000 in the first six months of 2007 compared to $174,000 in the prior year first six months. The increase was primarily due to higher levels of invested cash and increased interest rates received on invested cash during the 2007 period.

     Pre-tax income totaled $1.2 million for the six months ended June 30, 2007 compared to a pre-tax loss of $235,000 for the same period in 2006.

     The Company’s effective tax rate was approximately 40% for the six month period ended June 30, 2007 and approximately 41% for the six month period ended June 30, 2006.

     Net income in the first six months of 2007 was $694,000, or $0.03 per diluted share, compared to a net loss of $139,000, or ($0.01) per diluted share, for the same period in 2006. Diluted shares utilized in these computations were 20.5 million and 20.0 million for the first six months of 2007 and 2006, respectively.

     Product Groups

Antibody Products

     Antibody revenues increased 42% to $3.5 million in the quarter ended June 30, 2007 compared to $2.5 million for the same period in 2006. Bulk antibody revenues accounted for approximately 31% of total antibody revenue, and the Company has experienced a steady increase for its proprietary bulk antibodies, including its antibodies for Strep A and Troponin I. Bulk antibodies can be subject to inconsistent order patterns and higher rates of sales variance. The Company also noted solid increases in demand for its custom antibody services, driven by its new Genomic Antibodies® Technology. For the quarter antibody revenues were 53% of total revenues compared to 44% in 2006.

Food Safety Products

     Food safety revenues were flat, $1.8 million for the second quarter of 2007 compared to $1.8 million for the same period in 2006. Food pathogen sales (a subset of food safety sales) increased 38% in the United States in the current quarter as compared to the second quarter of 2006, as the Company continues to gain traction with its new RapidChek® SELECT™ for Salmonella. International sales have improved and the Company continued to actively recruit and train new distributors during the quarter.

     Ag-GMO products (a subset of food safety sales) were down 32%, for the second quarter of 2007 as compared to last year’s first quarter, and down 28% YTD, consistent with the Company’s expectations. Sales in this product line were primarily impacted by the reduction in soy and cotton seed testing during the first half of 2007 as compared to the same period in 2006.

Water and Environmental Products

     Water and environmental products revenue remained the same at $1.4 million for the each of the quarters ended June 30, 2007 and June 30, 2006. For the first six months of 2007, water and environmental products revenues decreased to $2.49 million from $2.54 million or 2% when compared to the first six months of 2006.

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Liquidity and Capital Resources

     The net cash provided by operating activities of $770,000 for the first six months of 2007 was primarily the result of net income of $694,000, non-cash expenses for depreciation, amortization and share-based compensation expense of $821,000, as well as deferred taxes of $386,000, all partially offset by increased inventories of $892,000 and increased other current assets of $335,000.

     Net cash used in investing activities of approximately $1.4 million for the first six months of 2007 was primarily related to the capital expenditures for the period. This compares to net cash used in investing activities of $375,000 for the first six months of 2006. The capital expenditures for 2007 are primarily related to construction in progress at the Maine animal site, as well as for purchases of land, laboratory and manufacturing equipment. For 2006, the capital expenditures are primarily related to purchases of laboratory and manufacturing equipment.

     Net cash provided by financing activities of $353,000 for the first six months of 2007 and net cash used by financing activities for the first six months of 2006 of $25,000 were primarily driven by proceeds from the exercise of stock options, which was offset by net repayments of outstanding debt.

     The Company’s working capital, current assets less current liabilities, increased $1.4 million to $18.1 million at June 30, 2007 from $16.7 million at December 31, 2006, primarily due to increases in inventory of $892,000, current portion of deferred taxes of $444,000 and increases in other current assets of $335,000. Outstanding debt decreased $105,000 from $562,000 at December 31, 2006 to $457,000 on June 30, 2007, due to scheduled repayments.

     The Company has a financing agreement with a commercial bank that provides for up to a $5.0 million revolving line of credit, none of which was outstanding and approximately $2.7 million of which was available at June 30, 2007, based on eligible assets.

     The revolving line of credit bears a variable interest rate of between 1.75% and 2.75% over LIBOR depending upon the ratio of the Company’s funded debt to EBITDA, and is subject to a borrowing base determined by the Company’s eligible accounts receivable. The Company’s annual effective rate of interest on this line of credit, taking into account the variable interest rate and LIBOR, was approximately 7.07% at June 30, 2007.

     On December 13, 2001, the Company entered into an agreement with a commercial bank to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $1.5 million in financing, $457,000 of which was outstanding at June 30, 2007, and is repayable over seven years, with principal payments that began on October 1, 2002. The loan bears a variable interest rate of between 2% and 3% over LIBOR depending upon the ratio of the Company’s funded debt to EBITDA. Payments are due monthly, with equal amortization of principal payments plus interest. The Company’s annual effective rate of interest on this loan at June 30, 2007, was approximately 7.32%.

     Under the terms of the above financing, the Company is required to meet certain quarterly financial covenants that include a ratio of EBITDA to current maturities of debt plus interest and cash paid for taxes greater than 1.50 and a ratio of funded debt to EBITDA not to exceed 3.25. The Company met all of its financial covenants with respect to this indebtedness at June 30, 2007.

     For the quarter ended June 30, 2007, the Company satisfied all of its cash requirements from cash provided by operating activities, cash available and on-hand and from the financing agreements described above. At June 30, 2007, the Company had $246,000 in long-term debt and stockholders’ equity of $36.6 million. In April 2007, the Company committed to construction of an approximately $1.4 million addition to its animal facility in Windham, Maine, of which approximately $900,000 has been expended at June 30, 2007. In addition, the Company anticipates that it may spend approximately $1.1 million in 2007 to upgrade or expand certain manufacturing, research and development and office equipment and systems that will drive productivity or generate cost savings, and also to introduce automation into certain manufacturing processes that are currently labor intensive.

     Based upon its cash on hand, credit facilities, current product sales and the anticipated sales of new products, the Company believes it has, or has access to, sufficient resources to meet its operating requirements through the next twelve months. The Company’s ability to meet its long-term capital needs will depend on a number of factors, including compliance with existing and 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

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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.

     Non-GAAP Financial Measures

     The Company presents an EBITDA measure as the Company believes this provides investors and the Company’s management with additional information to measure the Company’s liquidity. EBITDA measures are not a measure of performance under GAAP, and therefore should not be considered in isolation or as a substitute for net income or cash flows from operations. Additionally, the Company’s EBITDA calculations may differ from the EBITDA calculations for other companies.

     The calculation of the Company’s EBITDA measure (as discussed above), and the reconciliation of the Company’s EBITDA measure to net cash provided by operating activities for the six months ended June 30, 2007 and 2006, respectively, is as follows (amounts in thousands):

	Six Months Ended June 30,
	2007			2006
Net cash (used in) provided by operating activities	$	770		$	(92	)
Changes in assets and liabilities:
Receivables		28			(114	)
Inventories		892			(11	)
Other current assets		335			507
Other assets		4			—
Accounts payable		98			(1	)
Accrued expenses		(98	)		296
Deferred revenue		(27	)		(113	)
Non-current taxes payable		(89	)		—
Net change in deferred income tax		60			(36	)
Share-based compensation expense		(218	)		(174	)
Interest income, net		(226	)		(174	)
EBITDA	$	1,529		$	88

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The Company has exposure to changing interest rates, and is currently not engaged in hedging activities. Interest on approximately $457,000 of outstanding indebtedness is at a variable rate of between 2% to 3% over the published London Interbank Offered Rate (LIBOR), based upon the Company’s ratio of funded debt to EBITDA, and was 2% over LIBOR on average for the year. At the Company’s current level of indebtedness, each 1% change in the variable interest rate will have an effect of $5,000 on the Company’s annual interest expense charges.

     The Company conducts operations in 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.

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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 Act of 1934, as amended, as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2007, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Change in Internal Control over Financial Reporting

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

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PART II – OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

     On May 15, 2007, we held our annual meeting of stockholders. At the annual meeting, the stockholders voted on the election of three directors, each for a two-year term. The voting results at the annual meeting were as follows:

Name of Nominee	Votes For		Votes Withheld
Morton Collins		18,128,874		47,346
Matthew H. Knight		18,138,718		37,502
Grover C. Wrenn		18,134,618		41,602

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

SIGNATURES

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

	STRATEGIC DIAGNOSTICS INC.
Date: August 13, 2007	/s/ Matthew H. Knight
	Matthew H. Knight
	President, Chief Executive Officer (Principal Executive Officer)
Date: August 13, 2007	/s/ Stanley A. Fronczkowski
	Stanley A. Fronczkowski
	Vice President – Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

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