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| ABMC > SEC Filings for ABMC > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-2008
Quarterly Report
General
The following discussion of the Company's financial condition and the results of operations should be read in conjunction with the 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-KSB for the year ended December 31, 2007. Any forward-looking statement speaks only as of the date on which such statement is made and we do not assume any responsibility to update any such forward-looking statement, nor we do intend to update any such forward-looking statements.
Overview
During the year ended December 31, 2007, the Company sustained a net loss of $990,000 from net sales of $13,872,000, and had net cash used in operating activities of $605,000. During the three months ended March 31, 2008, the Company sustained a net loss of $199,000 from net sales of $3,299,000. The Company had net cash provided by operating activities of $78,000 for the first three months of 2008.
During the six months ended June 30, 2008, the Company continued to take steps to improve its financial position. More specifically, beginning in April 2008 and through the three months ended June 30, 2008, the Company implemented a number of cost cutting initiatives including, but not limited to, employee reductions in its selling and marketing, research and development and general and administrative departments. The Company also continues to make efforts, and take steps, to reduce manufacturing costs related to its products to increase the Company's gross margin. Simultaneously with these efforts, the Company continues to focus on the development of new products to address market trends and needs.
The Company's continued existence is dependent upon several factors, including its ability to raise revenue levels and reduce costs to generate positive cash flows, and to sell additional shares of the Company's common stock to fund operations and/or obtain additional credit facilities, if and when necessary.
In April 2008, the Company's distributor in the Dominican Republic (DR), signed an exclusive contract with the National Network of Transportation to provide drug testing services for all dock personnel and all drivers delivering and receiving at the country's three major ports. The first 15,000 tests were shipped in the second quarter of 2008, and it is expected that a minimum of approximately 40,000 tests will be required each year under this contract.
In June 2008, the US Food and Drug Administration (FDA) granted the Company 510(k) clearance on its Rapid TOX Cup®, a patent pending drug screen in an all-inclusive cup platform. The clearance allows the Company to provide the Rapid TOX Cup to customers in clinical markets.
Plan of Operations
The Company's sales strategy continues to be a focus on direct sales, while identifying new contract manufacturing operations and pursuing new national accounts. During the six months ended June 30, 2008, the Company continued its program to market and distribute its urine and oral fluid based point of collection tests for drugs of abuse and its Rapid Reader® drug screen results and data management system. Contract manufacturing operations also continued in the first half of 2008.
Results of operations for the six months ended June 30, 2008 compared to the six months ended June 30, 2007
NET SALES: Net sales for the six months ended June 30, 2008 were $6,764,000, compared to $6,611,000 for the six months ended June 30, 2007. This represents an increase of 153,000, or 2.3%. When comparing the first half of 2008 with the first half of 2007, national account and contract manufacturing sales increased, however, these increases were offset by decreases in outside sales, in-house sales, and international sales. Our outside and in-house sales divisions continue to be affected by price pressures in the criminal justice market caused by general economic conditions and foreign manufacturers. International sales continued to be affected in the first half of 2008 due to the loss of one of our international distributors as well as decreased sales to one of our top distributors as a result of the slowing economy.
Our Rapid Reader® (drug screen interpretation and data management system), Rapid TOX® (urine based testing cassette), and Rapid TOX Cup (urine based all inclusive testing cup) product line sales increased along with a slight increase in our Rapid Drug Screen® ("RDS®")/Rapid ONE® (urine based drug test kit/dipstick) and Rapid STAT™ (oral fluid based test device) product line sales. The Rapid TOX Cup and Rapid STAT product lines were officially launched in the third quarter of 2007 therefore there were no sales of these product lines in the first half of 2007. Increases in these product lines were offset by decreases in our OralStat® (oral fluid based test device), Rapid TEC® (urine based multi-line dipstick), and RDS InCup® (urine based all inclusive testing cup) product lines. The Company believes that the attrition in these product lines is a result of customers switching from one product line to another due to either increased ease of use (in the case of the OralStat and Rapid STAT) or lower cost (in the case of RDS InCup and Rapid TOX Cup and Rapid TEC and Rapid TOX).
The Company's contract manufacturing operations currently include the manufacture of a HIV test, a test for fetal amniotic membrane rupture, a test for RSV and other infectious disease and agricultural testing products. The Company also provides its drug testing strips to an unaffiliated third party for incorporation into one of the party's tests that is used in hospitals, emergency rooms and clinics. Contract manufacturing sales during the first half of 2008 totaled $233,000, up from $82,000 in the same period a year ago.
COST OF GOODS: Cost of goods sold for the six months ended June 30, 2008 was $3,719,000, or 55.0% of net sales, compared to $3,890,000, or 58.8% of net sales for the six months ended June 30, 2007. This improvement in cost of goods is as a result of a one-time inventory disposal charge of $123,000 that occurred in the first quarter of 2007, which did not occur in the first quarter of 2008. Also contributing to this improvement is increased manufacturing efficiencies as a result of automation of the Company's Rapid TOX product line and a shift in product sales with more sales to non-government markets at higher profit margins than in government sales, which are at lower profit margins.
OPERATING EXPENSES: Operating expenses were $3,241,000, or 47.9% of net sales in the first half of 2008, compared to $3,371,000, or 51.0% of net sales in the first half of 2007. Decreases in costs associated with our CLIA waiver application as well as the implementation of cost cutting initiatives in research and development, selling and marketing and general and administrative resulted in expense reductions in all three divisions.
Research and Development (R&D) expense
R&D expenses for the first half of 2008 were $316,000, or 4.7% of net sales compared to $347,000, or 5.2% of net sales for the same period in 2007. Savings in supplies and materials, travel, depreciation and telephone costs were offset by increases in salaries and employee related benefits, facilities utility costs, and FDA compliance costs. Effective June 30, 2008, the Company's Vice President of Product Development, employed at an annual salary of $70,000, retired. The former vice president will receive a payment equal to half his annual salary, or $35,000, to be paid in three equal monthly installments of approximately $11,666 each beginning July 31, 2008. These payments have been accrued as of June 30, 2008. The Company does not expect to fill this position in the future, therefore, although there were slight increases in salaries and employee related benefits in the first half of 2008 when compared to the first half of 2007, the Company expects to see savings from this personnel reduction beginning in the third quarter of 2008. In the first half of 2008, the Company's R&D department continued to focus its efforts on development of new products, exploration of contract manufacturing opportunities and enhancement of its current products.
Selling and marketing expense
Selling and marketing expenses in the first six months of 2008 were $1,484,000, or 21.9% of net sales compared to $1,516,000, or 22.9% of net sales in the first six months of 2007. This decrease in expense results from reductions in sales salaries, sales employee related benefits and sales commissions, travel, and trade show expenses and dues and equipment depreciation. These decreases were partially offset by increases in postage, customer relations and royalty expense as a result of increased sales of RSV tests. The reduction in sales salaries, commissions and other employee related benefits were as a result of the reduction in sales personnel as part of the Company's implementation of cost cutting initiatives.
General and administrative (G&A) expense
G&A expenses were $1,441,000, or 21.3% of net sales in the six months ended June 30, 2008 compared to $1,508,000, or 22.8% of net sales in the six months ended June 30, 2007. Expenses in the first half of 2007 included approximately $190,000 of costs associated with the Company's CLIA waiver application; these costs significantly decreased to $13,000 in the first half of 2008. The first six months of 2007 also included $26,000 in non-cash compensation expense that did not recur in the first half of 2008. Additional decreases in investor relations, insurance, outside service costs, and repairs and maintenance expenses were partially offset by increases in quality assurance, accounting and legal fees, patents and licenses, and bad debts.
Results of operations for the three months ended June 30, 2008 compared to the three months ended June 30, 2007
NET SALES: Net sales for the quarter ended June 30, 2008 were $3,465,000, compared to $3,436,000 for the quarter ended June 30 2007. This represents an increase of $29,000, or 1.0%. Increase in national accounts, international sales, and contract manufacturing were offset by decreases in outside sales and in-house sales. Sales to our distributors/customers in Latin America increased in the quarter ended June 30, 2008 and this is offset by declines in sales due to the loss of another international distributor.
In the second quarter of 2008, Rapid Reader, Rapid TOX, and Rapid TOX Cup product line sales increased along with a slight increase in the Rapid STAT product line sales. The Rapid TOX Cup and Rapid STAT product lines were officially launched in the third quarter of 2007 therefore there were no sales of these product lines in the second quarter of 2007. Increases in these product lines were offset by decreases in the OralStat and RDS InCup product lines. The Company believes that the attrition in these product lines is a result of customers switching from one product line to another due to either increased ease of use (in the case of the OralStat and Rapid STAT) or lower cost (in the case of RDS InCup and Rapid TOX Cup).
The Company's contract manufacturing operations currently include the manufacture of a HIV test, a test for fetal amniotic membrane rupture, a test for RSV and other infectious disease and agricultural testing products. The Company also provides its drug testing strips to an unaffiliated third party for incorporation into one of the party's tests that is used in hospitals, emergency rooms and clinics. Contract manufacturing sales during the second quarter of 2008 totaled $139,000, up from $14,000 in the same period a year ago.
COST OF GOODS: Cost of goods sold for the three months ended June 30, 2008 was $1,847,000, or 53.3% of net sales, compared to $1,974,000, or 57.5% of net sales for the three months ended June 30, 2007. Increased manufacturing efficiencies as a result of automation of the Company's Rapid TOX product line and a shift in product sales with more sales to non-government markets at higher profit margins than in government sales (which are at lower profit margins) both contributed to this improvement in cost of goods. These improvements were partially offset by increases in material costs.
OPERATING EXPENSES: Operating expenses were $1,652,000, or 47.7% of net sales, in the second quarter of 2008, compared to $1,838,000, or 53.5% of net sales, in the second quarter of 2007. Decreases in costs associated with our CLIA waiver application as well as the implementation of cost cutting initiatives in research and development, selling and marketing and general and administrative resulted in expense reductions in all three divisions as evidenced by the decrease in selling and marketing and general administrative expenses when compared to second quarter of 2008. Research and development expenses were unchanged when comparing the second quarter of 2008 and the second quarter of 2007, as the Company will not realize the effect of cost reductions in this division until future quarters.
Research and development (R&D) expense
R&D expenses for the three months ended June 30, 2008 and 2007 were $178,000, or 5.1% of net sales and 5.2% of net sales, respectively. Effective June 30, 2008, the Company's Vice President of Product Development, employed at an annual salary of $70,000, retired. The former vice president will receive a payment equal to half his annual salary, or $35,000, to be paid in three equal monthly installments of approximately $11,666 each beginning July 31, 2008. These payments have been accrued as of June 30, 2008. The Company does not expect to fill this position in the future therefore; the Company expects to see savings from this personnel reduction beginning in the third quarter of 2008. In the three months ended June 30, 2008, the Company's R&D department continued to focus its efforts on development of new products, exploration of contract manufacturing opportunities and enhancement of its current products.
Selling and marketing expense
Selling and marketing expenses were $716,000, or 20.7% of net sales, in the second quarter of 2008, compared to $825,000, or 24.0% of net sales, in the same period a year ago. This decrease in selling and marketing expense is a result of savings in sales salaries, sales commissions, sales related employee benefits, travel costs, and trade-show related expenses. These savings were partially offset by increases in postage, customer relations and royalty expense.
General and administrative (G&A) expense
G&A expense were $758,000 or 21.9% of net sales in the three months ended June 30, 2008 compared to $835,000, or 24.3% of net sales in the three months ended June 30, 2007. Expenses in the second quarter of 2007 included approximately $190,000 of costs associated with our CLIA waiver application; these costs significantly decreased to $4,000 in the second quarter of 2008. The second quarter of 2007 also included $11,000 in non-cash compensation expense that did not recur in the second quarter of 2008. Additional decreases in investor relations, insurance, and repairs and maintenance were partially offset by increases in quality assurance, consulting fees, legal fees, patent and license fees, and bad debts.
Liquidity and Capital Resources as of June 30, 2008
The Company has working capital of $3,900,000 at June 30, 2008 compared to working capital of $4,017,000 at December 31, 2007. The Company has historically satisfied its net working capital requirements, if needed, through operations, cash generated by proceeds from private placements of equity securities with institutional investors and debt financing. The Company has never paid any dividends on its common shares and anticipates that all future earnings, if any, will be retained for use in the Company's business and it does not anticipate paying any cash dividends.
The Company's cash requirements depend on numerous factors, including product development activities, sales and marketing efforts, market acceptance of its new products, and effective management of inventory levels in response to sales forecasts. The Company expects to devote substantial capital resources to continue its product development, refine manufacturing efficiencies, and support its direct sales efforts. The Company will examine other growth opportunities including strategic alliances and expects 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. The Company does not believe that its current cash balances, and cash generated from future operations, will be sufficient to fund operations for the next twelve months. The Company may be required to sell additional equity or obtain additional credit facilities. There is no assurance that such financing will be available or that the Company will be able to complete financing on satisfactory terms, if at all.
Despite implementation of cost cutting initiatives in the second quarter of 2008, management believes that increases in research and development, selling and marketing and general and administrative expense may be required in the future as the Company continues its investment in long-term growth and creates the necessary infrastructure to: achieve its worldwide drug test marketing and sales goals, continue its penetration of the direct sales market, support research and development projects and leverage new product initiatives. However, management has taken measures to control the rate of increase of these costs to be consistent with the expected sales growth rate of the Company.
Net cash used in operating activities was $3,000 for the six months ended June 30, 2008, compared to net cash used in operating activities of $805,000 for the six months ended June 30, 2007. The net cash used in operating activities for the six months ended June 30, 2008 resulted primarily from increases in accounts receivable and inventory balances and offset by increases in accrued expenses, accounts payable and wages payable.
Net cash used in investing activities was $25,000 for the six months ended June 30, 2008, compared to net cash used in investing activities of $564,000 for the six months ended June 30, 2007. Net cash used in both years was for investment in property, plant and equipment. Included in the six months ended June 30, 2007 was $270,000 representing the cost of equipment for use in the Company's New Jersey facility for the automation of the Company's Rapid TOX product line.
Net cash used in financing activities was $216,000 for the six months ended June 30, 2008, which consisted of debt and line of credit payments offset by proceeds from line of credit. Net cash provided by financing activities for the six months ended June 30, 2007 was $1,088,000 and consisted of proceeds of $539,000 from a five year term note, $800,000 from the Company's lines of credit and $23,000 in proceeds from the exercise of stock options. These proceeds were offset by debt and line of credit payments.
At June 30, 2008, the Company had cash and cash equivalents of $92,000.
The Company's primary short-term capital and working capital needs relate to continued support of its research and development programs, focusing sales efforts on segments of the drugs of abuse testing market that will yield high volume sales, refining its manufacturing and production capabilities, and establishing adequate inventory levels to support expected sales.
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