AMERICAN BIO MEDICA CORP - Quarter Report: 2010 March (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 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
¨
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: 0-28666
AMERICAN
BIO MEDICA CORPORATION
(Exact
name of registrant as specified in its charter)
|
New
York
|
14-1702188
|
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
|
incorporation
or organization)
|
Identification
No.)
|
|
122 Smith Road, Kinderhook, New York
|
12106
|
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
518-758-8158
(Registrant's
telephone number, including area code)
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 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 x
Yes ¨
No
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) x
Yes ¨
No
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
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act
|
Large
accelerated filer ¨
|
Accelerated
filer
¨
|
|
|
|
|
Non-accelerated filer
¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) ¨
Yes x
No
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
21,744,768
Common Shares as of May 13, 2010
American
Bio Medica Corporation
Index
to Quarterly Report on Form 10-Q
For
the quarter ended March 31, 2010
|
PAGE
|
||
|
PART
I – FINANCIAL INFORMATION
|
||
|
Item
1.
|
Financial
Statements
|
|
|
Balance
Sheets as of March 31, 2010 (unaudited) and December 31,
2009
|
3
|
|
|
Unaudited
Statements of Operations for the three months ended March 31, 2010 and
March 31, 2009
|
4
|
|
|
Unaudited
Statements of Cash Flows for the three months ended March 31, 2010 and
March 31, 2009
|
5
|
|
|
Notes
to Financial Statements
|
6
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
10
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
15
|
|
Item
4.
|
Controls
and Procedures
|
15
|
|
PART
II – OTHER INFORMATION
|
||
|
Item
1.
|
Legal
Proceedings
|
15
|
|
Item
1A.
|
Risk
Factors
|
15
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
16
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
16
|
|
Item
4.
|
(Removed
and Reserved)
|
16
|
|
Item
5.
|
Other
Information
|
16
|
|
Item
6.
|
Exhibits
|
17
|
|
Signatures
|
18
|
|
2
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
|
American
Bio Medica Corporation
|
|
Balance
Sheets
|
|
March 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 56,000 | $ | 35,000 | ||||
|
Accounts
receivable, net of allowance for doubtful accounts of $83,000 at March 31,
2010 and $67,000 at December 31, 2009
|
1,214,000 | 816,000 | ||||||
|
Inventory,
net of allowance for slow moving and obsolete inventory of $246,000 at
March 31, 2010 and $271,000 at December 31, 2009
|
3,989,000 | 4,315,000 | ||||||
|
Prepaid
expenses and other current assets
|
135,000 | 101,000 | ||||||
|
Total
current assets
|
5,394,000 | 5,267,000 | ||||||
|
Property,
plant and equipment, net
|
1,554,000 | 1,624,000 | ||||||
|
Debt
issuance costs
|
106,000 | 118,000 | ||||||
|
Other
assets
|
30,000 | 31,000 | ||||||
|
Total
assets
|
$ | 7,084,000 | $ | 7,040,000 | ||||
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 698,000 | $ | 678,000 | ||||
|
Accrued
expenses and other current liabilities
|
271,000 | 506,000 | ||||||
|
Wages
payable
|
242,000 | 215,000 | ||||||
|
Line
of credit
|
778,000 | 260,000 | ||||||
|
Current
portion of long-term debt
|
939,000 | 107,000 | ||||||
|
Current
portion of unearned grant
|
10,000 | 10,000 | ||||||
|
Total
current liabilities
|
2,938,000 | 1,776,000 | ||||||
|
Other
liabilities
|
138,000 | 136,000 | ||||||
|
Long-term
debt
|
755,000 | 1,606,000 | ||||||
|
Related
party note
|
124,000 | 124,000 | ||||||
|
Unearned
grant
|
20,000 | 20,000 | ||||||
|
Total
liabilities
|
3,975,000 | 3,662,000 | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock; par value $.01 per share; 5,000,000 shares authorized, none issued
and outstanding at March 31, 2010 and December 31, 2009
|
||||||||
|
Common
stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768
issued and outstanding at March 31, 2010 and December 31,
2009
|
217,000 | 217,000 | ||||||
|
Additional
paid-in capital
|
19,306,000 | 19,299,000 | ||||||
|
Accumulated
deficit
|
(16,414,000 | ) | (16,138,000 | ) | ||||
|
Total
stockholders’ equity
|
3,109,000 | 3,378,000 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 7,084,000 | $ | 7,040,000 | ||||
The
accompanying notes are an integral part of the financial
statements
3
American
Bio Medica Corporation
Statements
of Operations
(Unaudited)
|
For The Three Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net
sales
|
$ | 2,426,000 | $ | 2,255,000 | ||||
|
Cost
of goods sold
|
1,475,000 | 1,336,000 | ||||||
|
Gross
profit
|
951,000 | 919,000 | ||||||
|
Operating
expenses:
|
||||||||
|
Research
and development
|
102,000 | 101,000 | ||||||
|
Selling
and marketing
|
487,000 | 498,000 | ||||||
|
General
and administrative
|
581,000 | 524,000 | ||||||
| 1,170,000 | 1,123,000 | |||||||
|
Operating
loss
|
(219,000 | ) | (204,000 | ) | ||||
|
Other
income / (expense):
|
||||||||
|
Interest
income
|
1,000 | |||||||
|
Interest
expense
|
(54,000 | ) | (47,000 | ) | ||||
|
Other
expense
|
(2,000 | ) | ||||||
| (54,000 | ) | (48,000 | ) | |||||
|
Net
loss before tax
|
(273,000 | ) | (252,000 | ) | ||||
|
Income
tax expense
|
(3,000 | ) | ||||||
|
Net
loss
|
$ | (276,000 | ) | $ | (252,000 | ) | ||
|
Basic
and diluted loss per common share
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
|
Weighted
average number of shares outstanding – basic & diluted
|
21,744,768 | 21,744,768 | ||||||
The
accompanying notes are an integral part of the financial
statements
4
American
Bio Medica Corporation
Statements
of Cash Flows
(Unaudited)
|
For
The Three Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (276,000 | ) | $ | (252,000 | ) | ||
|
Adjustments
to reconcile net loss to net cash provided by / (used in) operating
activities:
|
||||||||
|
Depreciation
|
76,000 | 86,000 | ||||||
|
Loss
on disposal of property, plant and equipment
|
2,000 | |||||||
|
Amortization
of debt issuance costs
|
18,000 | 8,000 | ||||||
|
Provision
for bad debts
|
16,000 | |||||||
|
Provision
for slow moving and obsolete inventory
|
(25,000 | ) | ||||||
|
Share-based
payment expense
|
7,000 | |||||||
|
Changes
in:
|
||||||||
|
Accounts
receivable
|
(414,000 | ) | (230,000 | ) | ||||
|
Inventory
|
351,000 | 531,000 | ||||||
|
Prepaid
expenses and other current assets
|
(40,000 | ) | (10,000 | ) | ||||
|
Other
assets
|
1,000 | 3,000 | ||||||
|
Accounts
payable
|
20,000 | (28,000 | ) | |||||
|
Accrued
expenses and other current liabilities
|
(235,000 | ) | 117,000 | |||||
|
Wages
payable
|
27,000 | 33,000 | ||||||
|
Other
liabilities
|
2,000 | (3,000 | ) | |||||
|
Net
cash provided by / (used in) operating activities
|
(472,000 | ) | 257,000 | |||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of property, plant and equipment
|
(6,000 | ) | (24,000 | ) | ||||
|
Net
cash used in investing activities
|
(6,000 | ) | (24,000 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Payments
on debt financing
|
(19,000 | ) | (32,000 | ) | ||||
|
Net
proceeds from line of credit
|
518,000 | 190,000 | ||||||
|
Net
cash provided by financing activities
|
499,000 | 158,000 | ||||||
|
Net
increase in cash and cash equivalents
|
21,000 | 391,000 | ||||||
|
Cash
and cash equivalents - beginning of period
|
35,000 | 201,000 | ||||||
|
Cash
and cash equivalents - end of period
|
$ | 56,000 | $ | 592,000 | ||||
|
Supplemental
disclosures of cash flow information
|
||||||||
|
Cash
paid during period for interest
|
$ | 72,000 | $ | 65,000 | ||||
The
accompanying notes are an integral part of the financial
statements
5
Notes to
financial statements (unaudited)
March
31, 2010
Note
A - Basis of Reporting
The
accompanying unaudited interim financial statements of American Bio Medica
Corporation (the “Company”) have been prepared in accordance with generally
accepted accounting principles in the United States of America (“U.S. GAAP”) for
interim financial information and in accordance with the instructions to Form
10-Q and Regulation S-X. Accordingly, they do not include all information and
footnotes required by U.S. GAAP for complete financial statement presentation.
These unaudited interim financial statements should be read in conjunction with
our audited financial statements and related notes contained in our Annual
Report on Form 10-K for the year ended December 31, 2009. In the opinion of
management, the interim financial statements include all normal, recurring
adjustments, which are considered necessary for a fair presentation of the
financial position of the Company at March 31, 2010, and the results of its
operations and cash flows for the three month periods ended March 31, 2010 and
March 31, 2009.
Operating
results for the three months ended March 31, 2010 are not necessarily indicative
of results that may be expected for the year ending December 31, 2010. Amounts
at December 31, 2009 are derived from our audited financial statements included
in our Annual Report on Form 10-K for the year ended December 31,
2009.
During
the three months ended March 31, 2010, there were no significant changes to our
critical accounting policies, which are included in our Annual Report on Form
10-K for the year ended December 31, 2009.
The
preparation of these interim financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate estimates, including those
related to product returns, bad debts, inventories, income taxes, warranty
obligations, and contingencies and litigation. We base estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
These
unaudited interim financial statements have been prepared assuming that we will
continue as a going concern and, accordingly, do not include any adjustments
that might result from the outcome of this uncertainty. Our independent
registered public accounting firm's report on the financial statements included
in our Annual Report on Form 10-K for the year ended December 31, 2009,
contained an explanatory paragraph regarding our ability to continue as a going
concern. As of the date of this report, we do not believe that our current cash
balances, together with cash generated from future operations and amounts
available under current credit facilities will be sufficient to fund operations
for the next 12 months if we continue to experience current sales levels. If
cash generated from operations is not sufficient to satisfy our working capital
and capital expenditure requirements, we will be required to sell additional
equity or obtain additional credit facilities. There is no assurance that such
financing will be available or that we will be able to complete financing on
satisfactory terms, if at all.
Recently
Adopted Accounting Standards
In January 2010, the
FASB issued Update No. 2010-04, “Accounting for Various Topics; Technical
Corrections to SEC Paragraphs”, (“ASU No. 2010-04”). ASU No. 2010-04 represents
technical corrections to SEC paragraphs that were included in previously issued
accounting standards. The amendments in ASU No. 2010-04 were effective upon
issuance. The adoption of the guidance within ASU No. 2010-04 did not have a
material impact on our interim financial statements.
In February 2010, the
FASB issued Update No. 2010-08, “Technical Corrections to Various Topics”, (“ASU
No. 2010-08”). ASU No. 2010-08 clarifies the new codified guidance on accounting
and reporting in a number of areas. The amendments in ASU No. 2010-08 were
effective for the first reporting period (including interim periods) beginning
after issuance and the adoption of the guidance within ASU No. 2010-06 had no
impact on our interim financial statements.
6
In March 2010, the
FASB issued Update No. 2010-11, “Derivatives and Hedging (Topic 815), Scope
Exception Related to Embedded Credit Derivatives”, (“ASU No. 2010-11”). ASU No.
2010-11 provides clarification and additional examples to resolve potential
ambiguity about the breadth of the embedded credit derivatives scope exception
in the original guidance. The amendments in ASU No. 2010-11 are effective at the
beginning of our first quarter beginning after June 15, 2010. Early adoption is
permitted at the beginning of our first quarter beginning after issuance of ASU
No. 2010-11. We are currently evaluating the impact, if any, the adoption of
this guidance will have on our financial statements.
Note
B – Net Loss Per Common Share
Basic net
loss per common share is calculated by dividing the net loss by the weighted
average number of outstanding common shares during the period. Diluted net loss
per common share includes the weighted average dilutive effect of stock options
and warrants.
7
Potential
common shares outstanding as of March 31, 2010 and 2009:
|
March 31, 2010
|
March 31, 2009
|
|||||||
|
Warrants
|
75,000 | 75,000 | ||||||
|
Options
|
3,561,580 | 3,762,080 | ||||||
The
number of securities not included in the diluted net loss per common share for
the three months ended March 31, 2010 and March 31, 2009 (because the effect
would have been anti-dilutive) were 3,136,580 and 3,837,080,
respectively.
Note
C – Litigation
From time to time, we are named in
legal proceedings in connection with matters that arose during the normal course
of business. While the ultimate result of any such litigation cannot be
predicted, if we are unsuccessful in defending any such litigation, the
resulting financial losses could have an adverse effect on the financial
position, results or operations and cash flows of the Company. We are aware of
no significant litigation loss contingencies for which management believes it is
both probable that a liability has been incurred and that the amount of the loss
can be reasonably estimated. We are unaware of any proceedings being
contemplated by governmental authorities as of the date of this
report.
Note
D – Line of Credit and Debt
Rosenthal and Rosenthal,
Inc. (“Rosenthal”) Line of Credit
On July
1, 2009, we entered into a Financing Agreement (the “Refinancing Agreement”)
with Rosenthal to refinance a line of credit held by First Niagara Bank (“First
Niagara”). Under the Refinancing Agreement, Rosenthal agreed to provide the
Company with up to $1,500,000 under a revolving secured line of credit
(“Rosenthal Line of Credit”) that is collateralized by a first security interest
in all of the Company’s receivables, inventory, and intellectual property, and a
second security interest in our machinery and equipment, leases, leasehold
improvements, furniture and fixtures. The maximum availability of $1,500,000 is
subject to an availability formula based on certain percentages of accounts
receivable and inventory, and elements of the availability formula are subject
to periodic review and revision by Rosenthal. Under the Refinancing Agreement we
pay certain administrative fees and interest is payable monthly and is charged
at variable rates, with minimum monthly interest of $4,000. We must maintain
certain financial covenants so long as any obligations are due under the
Rosenthal Line of Credit. As of the date of this report, we are in compliance
with these covenants. The Rosenthal Line of Credit is payable on demand and
Rosenthal may terminate the Refinancing Agreement at any time by giving the
Company 45 days advance written notice.
The
amount outstanding on the Rosenthal Line of Credit was $778,000 at March 31,
2010 and $260,000 at December 31, 2009. Additional loan availability
as of March 31, 2010 was $372,000, for a total loan availability of $1,150,000
as of March 31, 2010. We incurred $41,000 in costs related to this refinancing,
and these costs are being amortized over the term of the Rosenthal Line of
Credit. For the three months ended March 31, 2010, we have amortized $3,500 in
costs. We use the Rosenthal Line of Credit for working capital.
Mortgage Consolidation
Loan
On
December 17, 2009, we closed on a refinancing and consolidation of an existing
real estate mortgage and term note with First Niagara. The new credit facility
through First Niagara is a fully secured term loan that matures on January 1,
2011, with a 6.5-year (78 month) amortization (the “Mortgage Consolidation
Loan”). The Mortgage Consolidation Loan continues to be secured by our facility
in Kinderhook, New York as well as various pieces of machinery and equipment. We
must comply with a covenant to maintain a certain level of Liquidity (defined as
any combination of cash, marketable securities or borrowing availability under
one or more credit facilities other than the Mortgage Consolidation Loan). As of
the date of this report, we are in compliance with this covenant.
The
annual interest rate of the Mortgage Consolidation Loan is fixed at 8.75%. The
monthly payment of principal and interest is $16,125. Accrued interest totaling
$7,000 was paid at closing. We have incurred approximately $28,000 in costs
associated with this refinancing; including approximately $22,000 in legal fees
incurred by and passed on from First Niagara. These costs, which are included in
prepaid expenses and other current assets, will be amortized over the term of
the Mortgage Consolidation Loan. For the three months ended March 31, 2010, we
have amortized $6,000 of expense. The balance of the Mortgage Consolidation Loan
was $935,000 at March 31, 2010 and $953,000 at December 31,
2009.
8
Copier
Lease
On May 8,
2007, we purchased a copier through an equipment lease with RICOH in the amount
of $17,000. The term of the lease is five (5) years with an interest
rate of 14.11%. The amount outstanding on this lease was $9,000 at March 31,
2010 and $10,000 at December 31, 2009.
Debenture
Financing
In August
2008, we completed an offering of Series A Debentures and received gross
proceeds of $750,000. The net proceeds of the offering of Series A Debentures
were $631,000 after $54,000 of placement agent fees and expenses, legal and
accounting fees of $63,000 and $2,000 of state filing fees. The Series A
Debentures accrue interest at a rate of 10% per annum (payable by the Company
semi-annually) and mature on August 1, 2012. As placement agent Cantone
Research, Inc. (“Cantone”) received a Placement Agent fee of $52,500, or 7% of
the gross principal amount of Series A Debentures sold. In addition, we issued
Cantone a four-year warrant to purchase 30,450 shares of the Company’s common
stock at an exercise price of $0.37 per share (the closing price of the
Company’s common shares on the date of closing) and a four-year warrant to
purchase 44,550 shares of the Company’s common stock at an exercise price of
$0.40 per share (the closing price of the Company’s common stock on the Series A
Completion Date). All warrants issued to Cantone were immediately exercisable
upon issuance. We incurred $131,000 in expenses related to the offering,
including $12,000 in expense related to warrants issued to Cantone. For three
months ended March 31, 2010 and March 31, 2009, we amortized $8,000 of expense
related to these debt issuance costs. We have also accrued interest expense
related to the Series A Debentures of $12,000 at both March 31, 2010 and March
31, 2009.
Note
E – Stock Option Grants
As a
condition to the Rosenthal Refinancing Agreement, our Chief Executive Officer,
Stan Cipkowski (“Cipkowski”) was required to execute a Validity
Guarantee (the “Validity Guarantee”). Under the Validity Guarantee, Cipkowski
provides representations and warranties with respect to the validity of our
receivables and guarantees the accuracy of our reporting to Rosenthal related to
our receivables and inventory. The Validity Guarantee places Cipkowski’s
personal assets at risk in the event of a breach of such representations,
warranties and guarantees. As part of the compensation for his execution of the
Validity Guarantee, on July 1, 2009, Cipkowski was awarded an option grant
representing 500,000 common shares of the Company under our Fiscal 2001 Stock
Option Plan (the “2001 Plan”), at an exercise price of $0.20, the closing price
of the Company’s common shares on the date of the grant. The option grant vests
over 3 years in equal installments. In accordance with the provisions of ASC
Topic 718, “Accounting for
Stock Options and Other Stock Based Compensation”, previously referred to
as SFAS 123(R), we will recognize $78,000 in share-based payment expense
amortized over the required service period of 3 years. We recognized $7,000 in
share-based payment expense for this grant in the three months ended March 31,
2010 and as of March 31, 2010; there was $59,000 in unrecognized expense with 27
months remaining.
As
another condition to the Rosenthal Refinancing Agreement, our President and
Chairman of the Board, Edmund Jaskiewicz (“Jaskiewicz”) was required to execute
an Agreement of Subordination and Assignment (“Subordination Agreement”) related
to $124,000 owed to Jaskiewicz by the Company as of June 29, 2009 (the
“Jaskiewicz Debt”). Under the Subordination Agreement, the Jaskiewicz Debt is
not payable, is junior in right to the Rosenthal Line of Credit and no payment
may be accepted or retained by Jaskiewicz unless and until we have paid and
satisfied in full any obligations to Rosenthal. Furthermore, the Jaskiewicz Debt
was assigned and transferred to Rosenthal as collateral for the Rosenthal Line
of Credit.
As
compensation for his execution of the Subordination Agreement, on July 1, 2009
Jaskiewicz was awarded an option grant representing 50,000 common shares of the
Company under our 2001 Plan, at an exercise price of $0.20, the closing price of
the Company’s common shares on the date of the grant. The option grant was
immediately exercisable. In accordance with ASC Topic 718, “Accounting for Stock Options and
Other Stock Based Compensation”, previously referred to as SFAS 123(R),
we recognized $8,000 during the year ended December 31, 2009 in share-based
payment expense related to the grant of Jaskiewicz’s options upon issuance of
the grant.
9
Furthermore,
upon the 2nd and 3rd anniversary of the original stock option grant, Jaskiewicz
will be awarded additional option grants of 50,000 each (“Additional Grants”).
The exercise prices of the Additional Grants will be the closing price of the
Company’s common shares on the date of each grant, and the Additional Grants
will be immediately exercisable. The Additional Grants shall only be awarded if
the Jaskiewicz Debt, or any remaining portion thereof, has not been repaid. If
the Jaskiewicz Debt has been repaid in full, no Additional Grants will be
issued.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
The
following discussion of our financial condition and the results of operations
should be read in conjunction with the interim Financial Statements and Notes
thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This
discussion contains, in addition to historical statements, forward-looking
statements that involve risks and uncertainties. Our actual future results could
differ significantly from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, the factors discussed in the section titled “Risk
Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009
and in this Quarterly Report on Form 10-Q. Any forward-looking statement speaks
only as of the date on which such statement is made and we do not intend to
update any such forward-looking statements.
Overview
During the three months ended March 31,
2010, we sustained a net loss of $276,000 from net sales of $2,426,000. We had
net cash used in operating activities of $472,000 for the three months ended
March 31, 2010. During the three months ended March 31, 2010, we continued to
market and distribute our urine and oral fluid-based point of collection tests
for drugs of abuse (“DOA”) and our Rapid Reader® drug screen result and data
management system, and we also performed bulk test strip contract manufacturing
services for unaffiliated third parties.
10
During
the three months ended March 31, 2010, we continued to be negatively impacted by
global economic conditions. Although we are somewhat encouraged by sales results
in the three months ended March 31, 2010, we believe it will be some time before
significant economic growth occurs allowing employment rates to return to
pre-recession levels and government budgets to return to pre-recession levels.
In response to the uncertainties associated with the state of the global
economy, we previously initiated cost-cutting measures to reduce operating
expenses; and we expect to continue measures to minimize any losses going
forward. We also continue to take steps to reduce manufacturing costs
related to our products to improve gross profit margins.
Plan
of Operations
Our sales
strategy continues to be a focus on direct sales, while identifying new contract
manufacturing opportunities and pursuing new national accounts. Simultaneously
with these efforts, we will continue to focus on the reduction of manufacturing
costs and operating expenses, the enhancement of our current products and the
development of new product platforms and configurations to address market
trends.
Our
continued existence is dependent upon several factors, including our ability to
raise revenue levels and reduce costs to generate positive cash flows, and to
sell additional shares of Company common stock to fund operations and/or obtain
additional credit facilities, if and when necessary.
Results
of operations for the three months ended March 31, 2010 compared to the three
months ended March 31, 2009
NET SALES: Net sales for the
three months ended March 31, 2010 increased 7.6% when compared to net sales for
the three months ended March 31, 2009. National accounts and other
non-government direct sales increased in the three months ended March 31, 2010
when compared to the three months ended March 31, 2009, however, sales are still
depressed from pre-recession levels of 2008. We believe this is a result of
positive movement in our Workplace market as unemployment rates improve in many
areas throughout the country, although according to published reports, much of
the country has yet to improve.
Coupled
with this improvement in the Workplace market, sales to the Clinical market,
including pain management and drug rehabilitation, have increased. The Clinical
Laboratory Improvement Amendments (CLIA) of 1988 established quality standards
for laboratory testing to ensure the accuracy, reliability and timeliness of
patient test results regardless of where the test was performed. As a result,
those using CLIA waived tests are not subject to the more stringent and
expensive requirements of moderate or high complexity laboratories. Our Rapid
TOX® product line is CLIA waived and presently is the only product that includes
a CLIA waived assay for Burprenorphine. Burprenorphine is used to treat certain
types of drug dependency, including opioid addiction, as well as being used in
pain management. Rehabilitation centers and physicians specializing in pain
management need a quality DOA testing kit to assist them in monitoring patient
usage to ensure the narcotics are being used as prescribed and to identify
possible medication usage from other sources that can complicate a patient’s
plan of treatment.
Contract
manufacturing sales improved in the three months ended March 31, 2010 when
compared to the three months ended March 31, 2009. Contract manufacturing sales
for the three months ended March 31, 2010 totaled $119,000, compared to $94,000
in the three months ended March 31, 2009. This increase is primarily as a result
of increased sales of a RSV (Respiratory Syncytial Virus) product that we
manufacture. RSV is the most common cause of lower respiratory tract infections
in children worldwide. In addition to the RSV product, we manufacture a product
for fetal amniotic membrane rupture.
The
improvements in national accounts, non-government direct sales and contract
manufacturing were partially offset by decreased sales in our Government and
International markets. Sales in our Government market continue to be negatively
impacted as government entities decrease purchasing levels in attempts to close
deficits in their budgets, resulting in decreased buying under the contracts we
currently hold. At the same time, we continue to face price pressures from
foreign manufacturers, which make it more difficult to secure new government
contracts. The decline in International Sales resulted from sales decreases in
all areas outside of the United States as poor economic conditions continue to
be of a global nature.
11
We will
continue to focus our sales efforts on national accounts, non-government direct
sales and contract manufacturing, while striving to reduce manufacturing costs,
which could enable us to be more cost competitive in the Government market which
is extremely price sensitive. To that end, we now offer the Rapid TOX Cup® II;
certain raw material costs associated with the Rapid TOX Cup II are lower, which
means we can offer the Rapid TOX Cup II at a reduced cost to our customers. We
have obtained a number of new accounts in the Government market as a result of
offering the Rapid TOX Cup II, however, as discussed above, current contracts
are being reduced by budget cuts. We remain hopeful that we may be able to
mitigate the negative impact of foreign price pressures and decreased budgets
with the Rapid TOX Cup II.
While we
remain encouraged by reports of improvement in certain aspects of global
economic conditions, until the economy fully recovers, we do not expect to see
significant growth in sales, if any growth at all. However, we remain hopeful
that sales will continue to improve.
COST OF GOODS SOLD/GROSS
PROFIT: Cost of goods sold for the three months ended March 31, 2010 was
60.8% of net sales, compared to 59.2% of net sales for March 31, 2009. In the
year ended December 31, 2009, we decreased product manufacturing and reduced
labor and overhead costs in an effort to bring production output in line with
anticipated demand. In the latter part of the year ended December 31, 2009, we
did experience sporadic periods of sales improvement, leading us to increase
production personnel levels (from lower levels maintained earlier in the year
ended December 31, 2009). Due to the uncertainty of our markets, we have not
reverted to those lower production personnel levels. In addition, although we
have cut back on the amount of product being manufactured, certain direct labor
and overhead costs are fixed and such fixed costs are now being allocated to a
reduced amount of manufactured product, which resulted in manufacturing
inefficiency charges, thus increasing our manufacturing cost of sales. We
continue to evaluate our production personnel levels as well as our product
manufacturing levels to ensure they are adequate to meet current and anticipated
sales demands.
In
addition, gross profit in the three months ended March 31, 2010 and March 31,
2009 continues to be affected by lower margin rates for new contracts in the
Government market due to price pressures from foreign manufacturers, as well as
continued price pressures in all markets.
OPERATING EXPENSES: Operating
expenses increased 4.2% for the three months ended March 31, 2010, compared to
the same period a year ago. Although operating expenses increased in the three
months ended March 31, 2010, operating expenses are still significantly reduced
from pre-recession levels (in 2008) as a result of cost cutting initiatives
implemented in response to the unprecedented downturn of the global economy. The
increase in operating expenses is due to increased general and administrative
expense, partially offset by a decrease in selling and marketing expense; more
specifically:
Research and Development
(“R&D”) expense
R&D
expense for the three months ended March 31, 2010 was virtually unchanged when
compared to the three months ended March 31, 2009. Our R&D department
continues to focus their efforts on the enhancement of current products,
development of new product platforms and exploration of contract manufacturing
opportunities.
Selling and Marketing
expense
Selling
and marketing expense for the three months ended March 31, 2010 decreased
slightly by 2.2% when compared to the three months ended March 31, 2009.
Reductions in sales and marketing salaries, advertising and promotional costs,
and postage were partially offset by increases in sales commissions and sales
and marketing travel related costs.
In the three months ended March 31,
2010, we continued to promote our products through selected advertising,
participation at high profile trade shows and other marketing activities. Our
direct sales force continued to focus their selling efforts in our target
markets, which include, but are not limited to, Workplace and Government. Our
direct sales team continues to focus more efforts on the Clinical market, as a
result of the receipt of our CLIA waiver for our Rapid TOX product line in
August 2008. As discussed above, we have seen some positive impact on sales in
the Clinical market, primarily through physicians and pain management clinics,
as a result of these efforts.
General and Administrative
(“G&A”) expense
G&A
expense for the three months ended March 31, 2010 increased 10.9% when compared
to the three months ended March 31, 2009. Increases in quality assurance costs,
legal and patent fees, repairs and maintenance, miscellaneous expense, bank and
payroll service fees and share-based payment expense were partially offset by
reductions in investor relations expense, insurance expense and accounting fees.
The share-based payment expense of $7,000 in the three months ended March 31,
2010 was related to the issuance of two stock option grants in the third quarter
of 2009 (see Part I, Item 1, Note E) and this expense did not occur in the three
months ended March 31, 2009. Although G&A expense increased in the three
months ended March 31, 2010 when compared to the same period last year, G&A
expense remains reduced by 14.9% when compared to the same period in 2008 as a
result of our cost-cutting initiatives.
12
Liquidity
and Capital Resources as of March 31, 2010
Our cash
requirements depend on numerous factors, including product development
activities, sales and marketing efforts, market acceptance of new products, and
effective management of inventory and production personnel and output levels in
response to sales forecasts. We expect to devote substantial capital resources
to continue product development and/or enhancement, refine manufacturing
efficiencies and support direct sales efforts. We will examine other growth
opportunities including strategic alliances, and expect such activities will be
funded from existing cash and cash equivalents, issuance of additional equity or
debt securities or additional borrowings subject to market and other conditions.
Our financial statements for the fiscal year ended December 31, 2009 were
prepared assuming we will continue as a going concern. As of the date of this
report, we do not believe that our current cash balances, together with cash
generated from future operations and amounts available under current credit
facilities will be sufficient to fund operations for the next 12 months if we
continue to experience current sales levels. If cash generated from operations
is not sufficient to satisfy our working capital and capital expenditure
requirements, we will be required to sell additional equity or obtain additional
credit facilities. There is no assurance that such financing will be available
or that we will be able to complete financing on satisfactory terms, if at
all.
As of
March 31, 2010, we had a Mortgage Consolidation Loan with First Niagara and a
Line of Credit with Rosenthal. (See Part 1, Item 1, Note D).
13
Working
capital
Our
working capital decreased $1,035,000 at March 31, 2010, when compared to working
capital at December 31, 2009. At December 31, 2009, our Mortgage Consolidation
Loan with First Niagara was classified as a long-term liability. As of March 31,
2010, we reclassified our Mortgage Consolidation Loan with First Niagara from
long-term to short-term, as the maturity date of the Mortgage Consolidation Loan
is January 2011. The balance of the Mortgage Consolidation Loan was $935,000 at
March 31, 2010 and $953,000 at December 31, 2009. (See Part I, Item 1, Note
D).
We have
historically satisfied net working capital requirements through cash from
operations, bank debt, occasional proceeds from the exercise of stock options
and warrants (approximately $623,000 since 2002) and through the private
placement of equity securities ($3,299,000 in gross proceeds since August 2001,
with net proceeds of $2,963,000 after placement, legal, transfer agent,
accounting and filing fees).
Dividends
We have
never paid any dividends on our common shares and anticipate that all future
earnings, if any, will be retained for use in our business, therefore, we do not
anticipate paying any cash dividends.
Cash
Flows
Increases
in prepaid expenses and accounts receivable and decreases in accrued expenses,
offset by decreases in inventory and increases in accounts payable and wages
payable resulted in cash used in operating activities of $472,000 for the three
months ended March 31, 2010. The primary use of cash in the three months ended
March 31, 2010 and March 31, 2009 was funding of operations.
Net cash
used in investing activities in the three months ended March 31, 2010 and March
31, 2009 was for investment in property, plant and equipment.
Net cash
provided by financing activities in the three months ended March 31, 2010 and
March 31, 2009 consisted of net proceeds from our line of credit, offset by
payments on debt financing. Net proceeds from the line of credit for the three
months ended March 31, 2010 was $518,000, compared to $190,000 during the three
months ended March 31, 2009. In the three months ended March 31, 2010, our loan
availability under the Rosenthal Line of Credit was greater than the loan
availability under the prior line of credit with First Niagara in the three
months ended March 31, 2009, and we used this increased loan availability to
fund operations. Our increased use of the Rosenthal Line of Credit was due to an
increase in receivables during the three months ended March 31, 2010, when
compared to the three months ended March 31, 2009, which required the Company to
drawdown more frequently on the Rosenthal line of Credit to fund
operations.
At March
31, 2010, we had cash and cash equivalents of $56,000.
Outlook
Our
primary short-term working capital needs relate to sales efforts in the DOA
testing market that will yield high volume sales, refining manufacturing and
production capabilities and establishing adequate inventory levels to support
expected sales, while continuing support of research and development activities.
We believe that our current infrastructure is sufficient to support our
business; however, if at some point in the future we experience renewed growth
in sales, we may be required to increase our current infrastructure to support
sales. It is also possible that additional investments in research and
development, and increased expenditures in selling and marketing and general and
administrative may be necessary in the future to: develop new products, enhance
current products to meet the changing needs of the point of collection DOA
testing market, grow contract manufacturing operations, promote our products in
our markets and institute changes that may be necessary to comply with various
new public company reporting requirements, including but not limited to
requirements related to internal controls over financial reporting as well as
FDA requirements related to the marketing and use of our products. We have taken
measures to attempt to control the rate of increase of these costs to be
consistent with any sales growth rate we may experience in the near
future.
We
believe that we may need to raise additional capital in the future to continue
operations. If events and circumstances occur such that we do not meet our
current operating plans, or we are unable to raise sufficient additional equity
or debt financing, or credit facilities are insufficient or not available, we
may be required to further reduce expenses or take other steps which could have
a material adverse effect on our future performance.
14
Item
3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are
not required to provide the information required by this item.
Item
4. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
Our Chief
Executive Officer (Principal Executive Officer) and Chief Financial Officer
(Principal Financial Officer), together with other members of management, have
reviewed and evaluated the effectiveness of our “disclosure controls and
procedures” (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this report. Based on this
review and evaluation, our Principal Executive Officer and Principal Financial
Officer have concluded that our disclosure controls and procedures are effective
to ensure that material information relating to the Company is recorded,
processed, summarized, and reported in a timely manner.
(b)
Changes in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting during the
last quarterly period covered by this report that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
See Part
I, Item 1, Note C in the Notes to interim Financial Statements included in this
report for a description of pending legal proceedings in which we may be a
party.
Item
1A. Risk Factors
There have been no material changes to
our risk factors set forth in Part I, Item 1A, in our Annual Report on Form 10-K
for the year ended December 31, 2009 except as set forth below:
Any
adverse changes in our regulatory framework could negatively impact our
business.
Our urine
point of collection products have received 510(k) marketing clearance from the
FDA, and have therefore met FDA requirements for professional use. Our oral
fluid point of collection products have not received 510(k) marketing clearance
from the FDA. We have also been granted a CLIA waiver from the FDA related to
our Rapid TOX product line. Workplace and Government are our primary markets,
and it has been our belief that marketing clearance from the FDA is not required
to sell our products in non-clinical markets (such as Workplace and Government),
but is required to sell our products in the Clinical and over-the-counter
(consumer) markets. However, in July 2009, we received a warning letter from the
FDA, which alleges we are marketing our point of collection oral fluid drug
test, OralStat, in workplace settings without marketing clearance or approval
(see Current Report on Form 8-K filed with the United States Securities and
Exchange Commission (“SEC”) on August 5, 2009).
On August
18, 2009 we responded to the FDA warning letter received in July 2009, setting
forth our belief that FDA clearance was not required in non-clinical markets;
such belief is based upon legal advice from our FDA counsel. On October 27,
2009, we received another letter from the FDA (“October 2009 Letter”), which
stated that they did not agree with our interpretation of certain FDA
regulations. We responded to the October 2009 Letter on December 8, 2009. After
additional communications with the FDA, both directly and through our FDA
counsel, in March 2010, we elected to file a pre-IDE marketing submission in
efforts to obtain FDA 510(k) marketing clearance, although we continue to
maintain that 510(k) is not required to market our oral fluid point of
collection drug tests in the Workplace market. A pre-IDE marketing submission is
a process that allows us to provide the FDA with the design of our clinical
protocol for studies that will be used to support our 510(k)
submission. As of the date of this report, we are awaiting a response
from the FDA.
Currently
there are many other oral fluid point of collection drug tests being sold in the
Workplace market by our competitors, none of which have received FDA marketing
clearance. Therefore, we are one of the first companies, if not the first
company to file a submission to obtain FDA marketing clearance to sell our point
of collection oral fluid drug tests in the Workplace market, and the cost of
obtaining such clearance could be material and incurring such cost could have a
negative impact on our efforts to improve our performance and to achieve
profitability. Furthermore, there can be no assurance that we will obtain
marketing clearance from the FDA. Our point of collection oral fluid drug tests
currently account for approximately 20% of our sales; if we were unable to
market and sell our point of collection oral fluid drug tests in the Workplace
market, this could negatively impact our revenues.
15
Although
we are currently unaware of any additional changes in regulatory standards
related to any of our markets, if regulatory standards were to further change in
the future, there can be no assurance that the FDA will grant us appropriate
marketing clearances required to comply with the changes, if and when we apply
for them.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. (Removed and Reserved)
Item
5. Other Information
None.
16
Item
6. Exhibits
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
|
32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
17
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
AMERICAN
BIO MEDICA CORPORATION
|
||
|
(Registrant)
|
||
|
By: /s/ Stefan Parker
|
|
|
|
Stefan
Parker
|
||
|
Chief
Financial Officer/Executive Vice President, Finance
|
||
|
Principal
Financial Officer
|
||
|
Principal
Accounting
Officer
|
||
Dated:
May 14, 2010
18