UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549










FORM
10-Q




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




For
the Quarterly Period Ended March 31, 2010




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




For the
Transition Period From _________ to _________




Commission File
Number000-22400




STRATEGIC
DIAGNOSTICS INC.


(Exact
name of Registrant as specified in its charter)










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




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









Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.




Yes: x        No:
o




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




Yes: o          No:
o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




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




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





Yes: o          No:
x




As of
April 30, 2010, there were 20,413,403 outstanding shares of the Registrant’s
common stock, par value $.01 per share.









STRATEGIC
DIAGNOSTICS INC.




INDEX




Item
            
            
            PagePART
      I FINANCIAL INFORMATIONITEM
      1. Financial Statements (Unaudited)Consolidated
      Balance Sheets – March 31, 2010 and December 31, 2009
            
            2Consolidated
      Statements of Operations – Three months ended March 31, 2010 and
      2009
            
            3Consolidated
      Statements of Cash Flows – Three months ended March 31, 2010 and
      2009
            
            4Notes
      to Consolidated Interim Financial Statements
            
            5ITEM
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            
            12ITEM
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            
            15ITEM
      4. Controls and Procedures
            
            15PART
      II OTHER INFORMATION
            
            16ITEM
      6. Exhibits
            
            16SIGNATURES
            
            17




1


PART
I – FINANCIAL INFORMATION


ITEM
1. FINANCIAL STATEMENTS




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED
BALANCE SHEETS


(in
thousands, except share data)


(unaudited)


March
      31,
              
              
              December
      31,2010
              
              
              2009ASSETSCurrent
      Assets :Cash
      and cash equivalents
              
              $
              8,066
              
              
              $
              7,937Restricted
      cash
              
              
              1,250
              
              
              
              1,250Receivables,
      net
              
              
              3,301
              
              
              
              3,650Inventories
              
              
              3,710
              
              
              
              3,714Deferred
      tax asset
              
              
              1
              
              
              
              1Other
      current assets
              
              
              1,015
              
              
              
              551Total
      current assets
              
              
              17,343
              
              
              
              17,103Property
      and equipment, net
              
              
              4,399
              
              
              
              4,626Other
      assets
              
              
              105
              
              
              
              10Deferred
      tax asset
              
              
              51
              
              
              
              51Intangible
      assets, net
              
              
              1,406
              
              
              
              1,435Total
      assets
              
              $
              23,304
              
              
              $
              23,225LIABILITIES
      AND STOCKHOLDERS’
      EQUITYCurrent
      Liabilities :Current
      portion of long-term debt
              
              $
              400
              
              
              $
              400Accounts
      payable
              
              
              399
              
              
              
              571Accrued
      expenses
              
              
              2,087
              
              
              
              1,386Deferred
      revenue
              
              
              84
              
              
              
              75Total
      current liabilities
              
              
              2,970
              
              
              
              2,432Long-term
      debt
              
              
              600
              
              
              
              700Stockholders’
      Equity:Preferred
      stock, $.01 par value, 20,920,648 shares authorized,no
      shares issued or outstanding
              
              
              -
              
              
              
              -Common
      stock, $.01 par value, 35,000,000 shares authorized,20,806,247
      and 20,786,515 issuedat
      March 31, 2010 and December 31, 2009, respectively
              
              
              208
              
              
              
              208Additional
      paid-in capital
              
              
              41,091
              
              
              
              40,958Treasury
      stock, 406,627 common shares at costat
      March 31, 2010 and December 31, 2009
              
              
              (555
              )
              
              
              (555
              )Accumulated
      deficit
              
              
              (20,735
              )
              
              
              (20,276
              )Cumulative
      translation adjustments
              
              
              (275
              )
              
              
              (242
              )Total
      stockholders’ equity
              
              
              19,734
              
              
              
              20,093Total
      liabilities and stockholders’ equity
              
              $
              23,304
              
              
              $
              23,225




The
accompanying notes are an integral part of these
statements.


2


STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF OPERATIONS


(in
thousands, except share and per share data)


(unaudited)


Three
      MonthsEnded
      March 31,2010
              
              
              2009Revenues
              
              $
              6,691
              
              
              $
              6,902OPERATING
      EXPENSES:Manufacturing
              
              
              2,755
              
              
              
              3,097Research
      and development
              
              
              676
              
              
              
              663Selling,
      general and administrative
              
              
              3,715
              
              
              
              3,720Gain
      on disposal of assets
              
              
              (8
              )
              
              
              -Total
      operating expenses
              
              
              7,138
              
              
              
              7,480Operating
      loss
              
              
              (447
              )
              
              
              (578
              )Interest
      income (expense), net
              
              
              (12
              )
              
              
              5Loss
      before taxes
              
              
              (459
              )
              
              
              (573
              )Income
      tax benefit
              
              
              -
              
              
              
              (12
              )Net
      loss
              
              
              (459
              )
              
              
              (561
              )Basic
      loss per share
              
              $
              (0.02
              )
              
              $
              (0.03
              )Shares
      used in computing basic loss per share
              
              
              20,187,890
              
              
              
              20,035,174Diluted
      loss per share
              
              $
              (0.02
              )
              
              $
              (0.03
              )Shares
      used in computing diluted loss per share
              
              
              20,187,890
              
              
              
              20,035,174


The
accompanying notes are an integral part of these statements.




3


STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)




Three
      MonthsEnded
      March 31,2010
              
              
              2009Cash
      Flows from Operating Activities :Net
      loss
              
              $
              (459
              )
              
              $
              (561
              )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities :Depreciation
      and amortization
              
              
              291
              
              
              
              329Share-based
      compensation expense
              
              
              135
              
              
              
              218Deferred
      income tax provision
              
              
              -
              
              
              
              12(Gain)
      loss on disposal of fixed assets
              
              
              (8
              )
              
              
              -(Increase)
      decrease in :Receivables
              
              
              349
              
              
              
              512Inventories
              
              
              4
              
              
              
              (104
              )Other
      current assets
              
              
              (464
              )
              
              
              (576
              )Other
      assets
              
              
              (97
              )
              
              
              82Increase
      (decrease) in :Accounts
      payable
              
              
              (172
              )
              
              
              (269
              )Accrued
      expenses
              
              
              687
              
              
              
              (507
              )Deferred
      revenue
              
              
              9
              
              
              
              300Net
      cash provided by (used in) operating activities
              
              
              275
              
              
              
              (564
              )Cash
      Flows from Investing Activities :Purchase
      of property and equipment
              
              
              (37
              )
              
              
              (193
              )Proceeds
      from sale of assets
              
              
              10
              
              
              
              -Net
      cash used in investing activities
              
              
              (27
              )
              
              
              (193
              )Cash
      Flows from Financing Activities :Proceeds
      from employee stock purchase plan
              
              
              14
              
              
              
              4Repayments
      on financing obligations
              
              
              (100
              )
              
              
              (153
              )Net
      cash used in financing activities
              
              
              (86
              )
              
              
              (149
              )Effect
      of exchange rate changes on cash
              
              
              (33
              )
              
              
              (8
              )Net
      increase (decrease) in Cash and Cash Equivalents
              
              
              129
              
              
              
              (914
              )Cash
      and Cash Equivalents, Beginning of Period
              
              
              7,937
              
              
              
              9,980Cash
      and Cash Equivalents, End of Period
              
              $
              8,066
              
              
              $
              9,066Supplemental
      Cash Flow Disclosure :Cash
      paid for taxes
              
              
              7
              
              
              
              8Cash
      paid for interest
              
              
              20
              
              
              
              26


The
accompanying notes are an integral part of these statements.


4


STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


(in
thousands, except share and per share data)


(unaudited)




1.
            DESCRIPTION
      OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES




Business




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




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




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




The
Company is focused on sustaining profitable growth by leveraging its expertise
in antibodies and immuno-technologies to successfully develop proprietary
products and services that enhance the competitive advantage of our
customers.




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




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




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




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




5




Basis
of Presentation and Interim Financial Statements




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




Revenue
Recognition




Revenues
composed of sales of immunoassay-based test kits and certain antibodies and
immunochemical reagents are recognized upon the shipment of the product and
transfer of title, or when related services are provided. Revenues associated
with such products or services are recognized when persuasive evidence of an
order exists, shipment of product has occurred or services have been provided,
the price is fixed and determinable and collectability is reasonably assured.
Management is required to make judgments based on actual experience about
whether or not collectability is reasonably assured.




The
Company enters into contracts related to the production of custom antibodies,
which provide for the performance of defined tasks for a fixed price, with
delivery of the product upon completion of production. The standard time to
complete a project is typically longer than 30 days but less than 12 months, and
effort is expended over the life of the project. Revenues related to sales of
custom antibody projects are recognized when a project’s specifications have
been met and the related materials have been shipped.




Fees
associated with products and services added on to a custom antibody project
subsequent to delivery of the initial project are billed monthly and recognized
as revenue as the services and other deliverables are provided.  Sales
taxes collected from customers are presented net in the consolidated statement
of operations.




Use
of Estimates




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




New
Accounting Pronouncements





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




6




Comprehensive
Loss
 
 Comprehensive
loss consists of the following for each period:




Three Months EndedMarch 31,2010
              
              
              2009Net
      loss
              
              $
              (459
              )
              
              $
              (561
              )Currency
      translation adjustment
              
              
              (33
              )
              
              
              (8
              )Total
      comprehensive loss
              
              $
              (492
              )
              
              $
              (569
              )




2.       BASIC
AND DILUTED LOSS PER SHARE




Basic
loss per share (EPS) is computed by dividing net loss available for common
stockholders by the weighted-average number of common shares outstanding during
the period. Diluted EPS is similar to basic EPS, except that the dilutive effect
of converting or exercising all potentially dilutive securities is also included
in the denominator. The Company’s calculation of diluted EPS includes the
dilutive effect of stock options and restricted stock units. Basic loss per
share excludes potentially dilutive securities.  For the three month
periods ended March 31, 2010 and 2009, conversion of stock options and unvested
restricted shares totaling 275,210 and 293,065, respectively, into common share
equivalents were excluded from this calculation because they were
anti-dilutive.




Three
      Months EndedMarch
      31,2010
            
            
            2009Weighted
      average common shares outstanding
            
            
            20,187,890
            
            
            
            20,035,174Shares
      used in computing basic loss per share
            
            
            20,187,890
            
            
            
            20,035,174Dilutive
      effect of stock options andunvested
      restricted stock units
            
            
            -
            
            
            
            -Shares
      used in computing diluted loss per share
            
            
            20,187,890
            
            
            
            20,035,174




3.
            SHARE-BASED
      COMPENSATION




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




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




7




Share-based
compensation expense recorded in the three month periods ended March 31, 2010
and 2009 is summarized as follows:





Three
      Months EndedMarch
      31,2010
            
            
            2009Stock
      options
            
            $
            84
            
            
            $
            101Employee
      stock purchase plan
            
            
            6
            
            
            
            1Restricted
      stock awards
            
            
            45
            
            
            
            116Total
      share-based compensation expense
            
            $
            135
            
            
            $
            218





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




Proceeds
received from employee payments into the ESPP in the three month periods ended
March 31, 2010 and 2009, were $14 and $4, respectively.  These amounts
are recorded in the cash flows from financing activities section of the
Company’s Consolidated Statements of Cash Flows.




Information
with respect to the activity of outstanding stock options granted under the 2000
Plan and options granted separately from the 2000 Plan for the three months
ended March 31, 2010 is summarized as follows:





Weighted
              
              AggregateNumber
              
              
              
              
              
              
              
              
              Average
      Remaining
              
              Instrinsicof
      Shares
              
              
              Price
      Range
              
              Contractual
      term
              
              ValueBalance,
      January 1, 2010
              
              
              1,701,800
              
              
              $
              1.10
              
              -
              
              $
              6.94Granted
              
              
              216,148
              
              
              $
              1.50
              
              -
              
              $
              1.81Cancelled
      / Forfeited
              
              
              (84,380
              )
              
              $
              1.50
              
              -
              
              $
              6.94Balance,
      March 31, 2010
              
              
              1,833,568
              
              
              $
              1.10
              
              -
              
              $
              5.17
              
              6.8
      years
              
              $
              365Vested
      and excercisable atMarch
      31, 2010
              
              
              964,138
              
              
              $
              1.10
              
              -
              
              $
              5.17
              
              4.9
      years
              
              $
              51Expected
      to vest as ofMarch
      31, 2010
              
              
              1,755,168
              
              
              $
              1.10
              
              -
              
              $
              5.17
              
              6.7
      years
              
              $
              336


During
the three month period ended March 31, 2010, there were 216,148 options granted
with a weighted average grant date fair value, based on a Black-Scholes option
pricing model, of $0.83 per share.  The assumptions used in the
Black-Scholes model are as follows: dividend yield 0%, expected volatility
51.60%, risk-free interest rate 2.72% and expected life of 6.13
years.  The expected life of options granted was computed
using the sum of the average vesting period and the contractual life of the
option and dividing by two, for all periods presented.




8




The
following table provides additional information about the Company’s stock options
outstanding and exercisable at March 31, 2010:
 
 Options
      Outstanding
              
              
              Options
      ExercisableWeighted
      Average
              
              
              
              
              
              Weighted
      AverageRange
      of
              
              
              Number
      of
              
              Remaining
              
              Exercise
              
              
              Number
      of
              
              
              ExerciseExercise
      Prices
              
              
              Shares
              
              Contractual
      Life
              
              Price
              
              
              Shares
              
              
              Price$
              1.10
              
              -
              
              $
              2.51
              
              
              
              1,010,648
              
              
              8.7
              
              Years
              
              $
              1.57
              
              
              
              186,548
              
              
              $
              1.80$
              3.05
              
              -
              
              $
              3.57
              
              
              
              206,400
              
              
              3.4
              
              Years
              
              $
              3.32
              
              
              
              206,400
              
              
              $
              3.32$
              3.69
              
              -
              
              $
              5.17
              
              
              
              616,520
              
              
              4.9
              
              Years
              
              $
              4.16
              
              
              
              571,190
              
              
              $
              4.15$
              1.10
              
              -
              
              $
              5.17
              
              
              
              1,833,568
              
              
              6.8
              
              Years
              
              $
              2.64
              
              
              
              964,138
              
              
              $
              3.52
  A summary
of the status of the Company’s unvested
restricted stock as of December 31, 2009 and changes during the three month
period ended March 31, 2010 is presented below.
  Weighted
      AverageGrant
      Date
                
                
                AggregateShares
                
                
                Fair
      Value
                
                
                Intrinsic
      ValueNon-vested
      RSA’s
      at January 1, 2010
                
                
                206,026
                
                
                $
                1.77Granted
                
                
                25,000
                
                
                $
                1.49Vested
                
                
                (20,596
                )
                
                $
                3.42Cancelled
      / forfeited
                
                
                (9,300
                )
                
                $
                1.82Non-vested
      RSA’s
      at March 31, 2010
                
                
                201,130
                
                
                $
                1.56
                
                
                $
                382Expected
      to vest at March 31, 2010
                
                
                191,705
                
                
                $
                1.53
                
                
                $
                364
  Restricted
stock granted is generally scheduled to vest over periods of two to four years.
The cost of the grant is charged to operations over the vesting
period.  At March 31, 2010, the weighted average remaining term of
non-vested restricted stock was 1.7 years.
  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 March 31, 2010 and December 31,
2009, inventories consisted of the following:
 
 March
      31,
              
              
              December
      31,2010
              
              
              2009Raw
      materials
              
              $
              796
              
              
              $
              807Work
      in progress
              
              
              1,221
              
              
              
              1,228Finished
      goods
              
              
              1,693
              
              
              
              1,679Inventories
              
              $
              3,710
              
              
              $
              3,714
  5.        INTANGIBLE
ASSETS
  At March
31, 2010 and December 31, 2009, intangible assets consisted of the
following:
  March
      31,
              
              
              December
      31,2010
              
              
              2009
              
              
              LivesIntangible
      assets
              
              
              2,614
              
              
              
              2,614
              
              
              
              2-20Accumulated
      amortization
              
              
              (1,208
              )
              
              
              (1,179
              )Net
      intangible assets
              
              $
              1,406
              
              
              $
              1,435
  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, $1,000 of which was
outstanding at March 31, 2010, and is repayable over five years, with principal
payments that began on October 1, 2007. The loan bears a fixed interest rate of
5.96% with equal amortization of principal payments plus interest.
  This indebtedness is secured by $1.25
million in restricted cash as required by the Credit Agreement.
  10
  7.        INCOME
TAXES
 
 The Company evaluates its deferred
tax assets on a regular basis to determine if a valuation allowance against the
net deferred tax assets is required.  The Company had a full valuation
allowance offsetting its U.S. federal and state net deferred tax assets which
primarily represent net operating loss carryforwards (“NOLs”) at December 31,
2009.  During the three month period ended March 31, 2010, the
Company’s management concluded that the full valuation allowance for U.S.
federal and state net deferred tax assets is appropriate as the facts and
circumstances during 2010 have not changed management’s conclusion that a full
valuation allowance is necessary.
  The
Company is subject to U.S. federal and UK income tax, as well as income taxes of
multiple state jurisdictions.   The Company recognizes interest
and penalties related to uncertain tax positions in income tax
expense.  At March 31, 2010, the Company had no interest or penalties
accrued related to uncertain tax positions due to the available
NOLs.
  As
of January 1, 2010, the Company provided a liability for approximately $510 of
unrecognized tax benefits, which if recognized in a period where there was not a
full valuation allowance, would affect the effective tax rate.  For
the three months ended March 31, 2010, unrecognized tax benefits increased by $1
to $511, which if recognized in a period where there was not a full valuation
allowance, would affect the effective tax rate.
  For
federal purposes, post-1993 tax years remain open to examination as a result of
earlier net operating losses being utilized in recent years. For state purposes,
the statute of limitations remains open in a similar manner for states that have
generated net operating losses. The Company does not expect that the total
amount of unrecognized tax benefits related to positions taken in prior periods
will change significantly during the next 12 months.
  11
  Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
  Forward-Looking
Statements
  This Form
10-Q contains certain forward-looking statements reflecting the current
expectations of Strategic Diagnostics Inc. and its subsidiaries (the “Company”
or “SDIX”). In addition, when used in this quarterly report, the words
“anticipate,” “enable,” “estimate,” “intend,” “expect,” “believe,” “potential,”
“may,” “will,” “should,” “project” and similar expressions as they relate to the
Company are intended to identify said forward-looking statements. Investors are
cautioned that all forward-looking statements involve risks and uncertainties,
which may cause actual results to differ from those anticipated at this time.
Such risks and uncertainties include, without limitation, changes in demand for
products, delays in product development, delays in market acceptance of new
products, retention of customers, attraction and retention of management and key
employees, adequate supply of raw materials, inability to obtain or delays in
obtaining third party approvals or required government approvals, the ability to
meet increased market demand, competition, protection of intellectual property,
non-infringement of intellectual property, seasonality, the ability to obtain
financing and other factors more fully described in the Company’s public filings
with the SEC including, without limitation, the Company’s Annual Report on Form
10-K for the year ended December 31, 2009.
  Background
 
 SDIX is a
biotechnology company with a core mission of developing, commercializing and
marketing innovative and proprietary products, services and solutions that
preserve and enhance the quality of human health and wellness.
 
 The
Company believes that its competitive position has been enhanced through the
combination of talent, technology and resources resulting from the business
development activities it has pursued since its inception. The Company has
achieved meaningful economies of scale for the products it offers through the
utilization of its consolidated facilities in Newark, Delaware for the
manufacture of test kits and antibodies, and its facility located in Windham,
Maine for the manufacture of antibodies.
 
 The
Company believes that by applying its core competency of creating custom
antibodies to assay development, it produces sophisticated diagnostic testing
and reagent systems that are responsive to customer diagnostic and information
needs. Customers benefit from a quantifiable “return on investment” by reducing
time, labor and/or material costs associated with applications for which the
Company’s products are used. In addition, the Company believes its tests provide
high levels of accuracy, reliability and actionability of essential test results
as compared to alternative products. The Company is focused on sustaining this
competitive advantage by leveraging its expertise in immunology, proteomics,
bio-luminescence and other bio-reactive technologies to continue its successful
customer-focused research and development efforts. The Company believes that an
established product base, quality manufacturing expertise, experienced sales and
marketing organization, established network of distributors, corporate partner
relationships and proven research and development expertise will be critical
elements of its potential future success.
 
 In 2009,
the Company continued the transition from a fragmented product offering and
marketing strategy to becoming a focused organization, with proven, proprietary
technologies tied directly to its customers’ needs. The transition is most
evident in the Life Science immuno-solutions initiative and food pathogen
detection products, where the Company believes significant progress is being
made.
 
 The
Company continues to develop and introduce new methods for the detection of food
pathogens that deliver a strong competitive advantage to its customers. In 2009,
the Company received a patent for new technology to be used in proprietary
enrichments of its food pathogen testing methods. The patent covers technology
for increasing the specificity and sensitivity of the Company’s immunoassay test
methods. The patent also makes claims for the application of the technology in
large scale bio-production/bio-fermentation processes, such as those used in the
production of amino acids, ethanol, enzymes and other processes using
microbiological production methods.
 
 The
Company continued to develop multiple channels to market worldwide through an
approach that includes direct sales, inside sales, distributors and agents. The
Company increased distribution for its food pathogen products in Europe and Asia
where there is growing demand for the Company’s product line.
  12
 
 The
Company believes it is making progress in many of its business efforts. As the
deployment of new initiatives is accelerated, building on the Company’s
leadership position in food pathogens and expanding its strong positioning in
the emerging area of genomic antibodies, the Company anticipates that the
revenue lost to market changes in its legacy businesses will be replaced and the
Company will develop a stronger, more predictable revenue base.
 
 The
Company expects the life science and food pathogen product lines to be its
primary growth drivers in the future, and that the Company’s competencies and
competitive positions in these two areas will remain strong.
  Results
of Operations
  Three
Months Ended March 31, 2010 versus Three Months Ended March 31,
2009
  Revenues
for the three months ended March 31, 2010 decreased 3% to $6.7 million, compared
to $6.9 million for the same period in 2009. The decrease in revenues in the
first quarter of 2010 was primarily the result of a 7% decrease in sales of kit
products, partially offset by a 3% increase in sales of Life Science
products.
 Three
      Months EndedMarch
      31,
                  
                  
                  Increase
                  
                  
                  Percent2010
                  
                  
                  2009
                  
                  
                  (Decrease)
                  
                  
                  Change(in
      thousands, except percentages)Life
      sciences
                  
                  $
                  3,788
                  
                  
                  $
                  3,678
                  
                  
                  $
                  110
                  
                  
                  
                  3
                  %Kit
      products
                  
                  
                  2,903
                  
                  
                  
                  3,129
                  
                  
                  
                  (226
                  )
                  
                  
                  (7
                  %)Contract
                  
                  
                  -
                  
                  
                  
                  95
                  
                  
                  
                  (95
                  )
                  
                  
                  (100
                  %)Revenues
                  
                  $
                  6,691
                  
                  
                  $
                  6,902
                  
                  
                  $
                  (211
                  )
                  
                  
                  (3
                  %)
  Life Science
Products
  Life
Science revenues increased 3% to $3.8 million for the three month period ended
March 31, 2010, compared to $3.7 million for the same period in
2009.  Sales of custom monoclonal products increased 61% to $1.1
million and custom polyclonal product sales increased 7% to $1.5
million.  These increases were partially offset by decreases in sales
of bulk antibody products of 22% to $0.9 million and sales of products utilizing
the GAT TM
platform of 32% to $0.2 million.  This increase in Life Science
revenues was primarily the result of increased sales to the Company’s largest
Life Science customer and increased sales to the Company’s customers in the
biopharma industry.
  Kit
Products
 
 Kit product revenues decreased 7% to
$2.9 million for the three months ended March 31, 2010 as compared to $3.1
million in the same period of 2009.  Sales of food pathogen products
remained the same at $1.4 million in the three month periods ended March 31,
2010 and 2009.  Ag-GMO product sales decreased 6%, to $0.6 million in
the first three months of 2010 as compared to the same period of
2009.  Water and environmental products revenue decreased 17%, to $0.9
million in the three month period ended March 31, 2010 as compared to the same
period of 2009, which was primarily attributable to lower sales of water testing
equipment.
  Gross
profit (defined as total revenues less manufacturing costs) for the three months
ended March 31, 2010 was $3.9 million compared to $3.8 million for the same
period in 2009. Gross margins were 59% and 55% for the three month periods ended
March 31, 2010 and 2009, respectively.  The increase in gross margins
is primarily attributable to effective cost control and more efficient
manufacturing in kit products production.
  13
  Research
and development expenses were $676,000 or 10% of revenues for the
three month period ended March 31, 2010, compared to $663,000 or 10% of revenues
in the three month period ended March 31, 2009.
  Selling,
general and administrative expenses were $3.7 million in both of the three month
periods ended March 31, 2010 and 2009.
  The
Company had net interest expense of $12,000 for the three month period
ended March 31, 2010 compared to net interest income of $5,000 in the three
month period ended March 31, 2009. The decrease was primarily due to lower
interest rates received on decreased levels of invested cash and cash
equivalents during the 2010 period.
  The
Company has full valuation allowances placed against U.S. federal and state
deferred tax assets.
  Net loss
was $459,000, or $0.02 per diluted share, for the three month period ended
March 31, 2010, compared to a net loss of $561,000, or $0.03 per diluted share,
for the same period in 2009. Diluted shares utilized in these computations were
20.2 million and 20.0 million for the 2010 and 2009 periods,
respectively.
  Liquidity
and Capital Resources
  The net
cash provided by operating activities was $275,000 for the first three months of
2010 compared to net cash used in operating activities of $564,000 for the first
three months of 2009.  The net cash provided by operating activities
for the 2010 period was primarily the result of the net loss recorded in the
period, increases in accrued expenses and decreases in accounts
receivable.  The net cash used in operating activities for the 2009
period was primarily the result of the net loss recorded in the period, an
increase in other current assets and a decrease in accrued
expenses.
  Net cash
used in investing activities of $27,000 for the first three months of 2010
related primarily to the capital expenditures for the period. This compares to
net cash used in investing activities of $193,000 for the first three months of
2009. Capital expenditures for 2010 and 2009 were primarily
related to purchases of computer and electronic equipment.
  Net cash
used in financing activities of $86,000 for the first three months of 2010
was primarily attributable to scheduled debt repayments.  Net cash
used in financing activities of $149,000 for the first three months of 2009 was
primarily the result of scheduled debt repayments.
  The
Company’s working capital (current assets less current liabilities) was $14.4
million at March 31, 2010 compared to $14.7 million at December 31,
2009.
  On May 5,
2000, the Company entered into a financing agreement with a commercial bank
which was amended on August 12, 2009 (as amended, the “Credit
Agreement”).
  On August
21, 2007, the Company received a term loan under the Credit Agreement to finance
the construction of new facilities at its Windham, Maine location. This
agreement provided for up to $2 million in financing, $1.0 million of which was
outstanding at March 31, 2010, and is repayable over five years, with principal
payments that began on October 1, 2007. The loan bears a fixed interest rate of
5.96% with equal amortization of principal payments plus interest.
  This indebtedness is secured by $1.25
million in restricted cash as required by the Credit Agreement.
  14
  For the
three months ended March 31, 2010, the Company satisfied all of its cash
requirements from cash available and on-hand.  At March 31, 2010, the
Company had $1 million in debt and $19.7 million in stockholders’
equity.
  Based
upon its cash and cash equivalents on hand, credit facilities, current product
sales and the anticipated sales of new products, the Company believes it has, or
has access to, sufficient resources to meet its operating requirements through
at least the next 12 months. The Company’s ability to meet its long-term capital
needs will depend on a number of factors, including compliance with new loan
covenants, the success of its current and future products, the focus and
direction of its research and development programs, competitive and
technological advances, future relationships with corporate partners, government
regulation, the Company’s marketing and distribution strategy, its successful
sale of additional common stock and/or the Company successfully locating and
obtaining other financing, and the success of the Company’s plan to make future
acquisitions. Accordingly, no assurance can be given that the Company will be
able to meet the future liquidity requirements that may arise from these
inherent and similar uncertainties.
  Item
3. Quantitative and Qualitative Disclosures About Market Risk
  The
Company conducts operations in the United Kingdom. The consolidated financial
statements of the Company are denominated in U.S. dollars and changes in
exchange rates between foreign countries and the U.S. dollar will affect the
translation of financial results of foreign subsidiaries into U.S. dollars for
purposes of recording the Company’s consolidated financial results.
Historically, the effects of translation have not been material to the
consolidated financial results.
  Item
4. Controls and Procedures
  (a)
                Evaluation
      of Disclosure Controls and
Procedures
  Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended, as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of March 31, 2010, our disclosure controls and procedures
were effective to provide reasonable assurance that the information required to
be disclosed by us in reports filed under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that information required to
be disclosed by us in the reports we file or submit under the Securities
Exchange Act of 1934, as amended, is accumulated and communicated to our
management, including our principal executive and financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
  (b)
                Change
      in Internal Control over Financial
Reporting
  No change
in the Company’s internal control over financial reporting occurred during the
most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the internal control over financial
reporting.
  15
  PART
II – OTHER INFORMATION
  Item
6. Exhibits
 
 31.1
                
                Certifications
      of the Chief Executive Officer of Strategic Diagnostics Inc. required by
      Rule 13a-14(a) under the Securities Exchange Act of
193431.2
                
                Certifications
      of the Chief Financial Officer of Strategic Diagnostics Inc. required by
      Rule 13a-14(a) under the Securities Exchange Act of
193432.1
                
                Certification
      of the Chief Executive Officer of Strategic Diagnostics Inc. pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      Sarbanes-Oxley Act of 200232.2
                
                Certification
      of the Chief Financial Officer of Strategic Diagnostics Inc. pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      Sarbanes-Oxley Act of 2002
  16
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
 STRATEGIC
      DIAGNOSTICS INC.Date:
      May 7, 2010
                
                /s/
      Francis M. DiNuzzoFrancis
      M. DiNuzzo
                  President,
      Chief Executive Officer
                  (Principal
      Executive Officer)
 
 Date:
      May 7, 2010
                
                /s/
      Kevin J. BrattonKevin
      J. Bratton
                  Vice
      President – Finance and Chief Financial Officer
                  (Principal
      Financial and Accounting Officer)