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| ABMC > SEC Filings for ABMC > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-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 nine months ended September 30, 2008, the Company sustained a net loss of $177,000 from net sales of $10,368,000. The Company had net cash used in operating activities of $134,000 for the nine months ended September 30, 2008.
During the nine months ended September 30, 2008, the Company continued to take steps to improve its financial position. Beginning in April 2008, the Company implemented a number of cost cutting initiatives including, but not limited to, reducing the number of employees in its selling and marketing, research and development and general and administrative departments. The Company also continues to 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 July 2008, the Company shipped their first order of its OralStat® oral fluid drug tests to Save Mart Supermarkets of Modesto, California, a privately held food store chain.
In August 2008, the Company completed its private placement of Series A Debentures.
In August 2008, the Company was granted CLIA waived status from the US Food and Drug Administration ("FDA") of its Rapid TOX® point of collection drug test product line. The waiver applies to all 14 drugs that the Company's products currently test, and to two different cut-off levels for its opiate and cocaine tests. CLIA waived tests are recognized by FDA to be so simple to use and so accurate that there is little risk of error. CLIA waived tests are the most widely used tests in the clinical market (hospitals and physicians), and are in-demand for occupational health and criminal justice applications.
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 nine months ended September 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 nine months ended September 30, 2008.
Results of operations for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
NET SALES: Net sales for the nine months ended September 30, 2008 were $10,368,000, compared to $10,523,000 for the nine months ended September 30, 2007. This represents a decrease of 155,000, or 1.5%. When comparing the nine months ended September 30, 2008 with the nine months ended September 30, 2007, international and contract manufacturing sales increased. These increases were offset by decreases in national accounts, outside sales, and in-house 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 competition. Historically, sales in our national account division have increased, but general economic conditions have depressed the employment levels of these customers. Decreases in national account sales in the third quarter of 2008 have thus negatively impacted the sales results for the nine months ended September 30, 2008. International sales were positively impacted by increased sales to Latin America, which were offset by the loss of one of our international distributors as well as decreased sales to other areas of the world 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 an increase in our Rapid STAT™ (oral fluid based test device) product line sales. The Rapid TOX Cup and Rapid STAT product lines were launched late in the third quarter of 2007, so there were no sales of these product lines included in the nine months ended September 30, 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), RDS InCup® (urine based all inclusive testing cup), and Rapid Drug Screen 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).
In the second quarter of 2008, the Company began marketing and selling a new version of its Rapid ONE® dipstick product, the Rapid ONE cassette. The Rapid ONE cassette utilizes the same drug-testing strip as the Rapid ONE, which is inserted into the cassette platform used for the Company's Rapid TOX product line. It is the Company's intention to transition the Rapid ONE dipstick product to the Rapid ONE cassette platform. This product transition will enable the Company to assemble and package the device on the Company's automated production equipment in its New Jersey facility, thereby making the manufacturing process more efficient in time and cost, while still providing its customers with the same single testing options.
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 diseases, and agricultural testing products. The Company was notified during the third quarter of 2008 that its agreement with an unaffiliated third party to provide drug testing strips for incorporation into the party's tests used in hospitals, emergency rooms and clinics will terminate, effective December 24, 2008. This termination is a result of the party's merger with another entity, but the Company is currently negotiating to continue this contract relationship with the merger successor. The outcome of these negotiations will not have a material impact on the Company's current contract manufacturing operations. Contract manufacturing sales for the nine months ended September 30, 2008 totaled $414,000, up from $218,000 for the nine months ended September 30, 2007.
COST OF GOODS: Cost of goods sold for the nine months ended September 30, 2008 was $5,822,000, or 56.2% of net sales, compared to $6,383,000, or 60.7% of net sales, for the nine months ended September 30, 2007. While the Company has seen increased costs in raw materials related to the manufacture of its products, the Company has been able to improve its cost of goods sold because of increased manufacturing efficiencies resulting from automation of its Rapid TOX product line and a shift in product sales to non-government markets at higher gross profit margins. This improvement in cost of goods sold is also a result of inventory disposals that occurred during the nine months ended September 30, 2007 that did not occur during the nine months ended September 30, 2008. The inventory disposals in 2007 consisted of expired products and components enhanced as a result of product development.
OPERATING EXPENSES: Operating expenses were $4,615,000, or 44.5% of net sales in the nine months ended September 30, 2008, compared to $5,003,000, or 47.5% of net sales in the nine months ended September 30, 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 nine months ended September 30, 2008 were $445,000, or 4.3% of net sales compared to $520,000, or 4.9% of net sales for the nine months ended September 30, 2007. Savings in consulting fees, supplies and materials, travel, depreciation and telephone costs were offset by increases in salaries and employee related benefits, FDA compliance costs, facility utility costs, and repairs and maintenance. Effective June 30, 2008, the Company's Vice President of Product Development retired. The former vice president received a payment of $35,000, equal to half his annual salary of $70,000, paid in 3 equal monthly installments of approximately $11,666 each beginning July 31, 2008, with the last payment being made on September 30, 2008. The Company does not expect to fill this position in the future. Although there were increases in salaries and employee related benefits in the nine months ended September 30, 2008 when compared to the nine months ended September 30, 2007, the Company expects to see the full savings from this personnel reduction beginning in the fourth quarter of 2008. In the nine months ended September 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 in the nine months ended September 30, 2008 were $2,197,000, or 21.2% of net sales, compared to $2,334,000, or 22.2% of net sales, in the nine months ended September 30, 2007. This decrease in expense results from reductions in sales salaries and commissions, sales employee related benefits, travel and customer relations, trade show related expenses, advertising and marketing consulting fees. These decreases were partially offset by increases in postage, marketing salaries, and royalty expense as a result of increased sales of RSV. The reduction in sales salaries, commissions and other employee related benefits resulted from a 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 $1,973,000, or 19.0% of net sales in the nine months ended September 30, 2008 compared to $2,149,000, or 20.4% of net sales in the nine months ended September 30, 2007. Expenses in the nine months ended September 30, 2007 included $204,000 of costs associated with the Company's CLIA waiver application and $26,000 in non-cash compensation expense. Costs associated with the CLIA waiver application significantly decreased to $13,000, and there was no non-cash compensation expense in the nine months ended September 30, 2008. Also contributing to the decrease in G&A expense were decreases in investor relations, consulting fees, insurance, travel related expenses, outside service fees, and repairs and maintenance. These decreases were partially offset by increases in quality assurance related expenses, accounting and legal fees, patents and licenses, bad debts and bank service fees.
Results of operations for the three months ended September 30, 2008 compared to the three months ended September 30, 2007
NET SALES: Net sales for the quarter ended September 30, 2008 were $3,604,000, compared to $3,912,000 for the quarter ended September 30 2007. This represents a decrease of $308,000, or 7.9%. Decreases in national accounts and outside sales were offset by increases in contract manufacturing and international sales. The Company's 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 competition. Historically, sales in our national account division have increased, but general economic conditions have depressed the employment levels of these customers, causing the decrease in sales in the third quarter of 2008. International sales were positively impacted by increased sales to our master distributors and customers in Latin America, as well as by increases in sales to our European master distributor.
In the third quarter of 2008, sales of the Rapid Reader, Rapid TOX, Rapid TOX Cup and Rapid STAT product lines increased while sales of the RDS InCup, Rapid Drug Screen, OralStat and Rapid TEC product lines decreased. The Rapid TOX Cup and Rapid STAT product lines were launched late in the third quarter of 2007, so there were no sales of these product lines included in the third 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 and Rapid TEC and Rapid TOX).
In the second quarter of 2008, the Company began marketing and selling a new version of its Rapid ONE® dipstick product, the Rapid ONE cassette. The Rapid ONE cassette utilizes the same drug-testing strip as the Rapid ONE, which is inserted into the cassette platform used for the Company's Rapid TOX product line. It is the Company's intention to transition the Rapid ONE dipstick product to the Rapid ONE cassette platform. This product transition will enable the Company to assemble and package the device on the Company's automated production equipment in its New Jersey facility, thereby making the manufacturing process more efficient in time and cost, while still providing its customer with the same single testing options.
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 diseases, and agricultural testing products. The Company was notified during the third quarter of 2008 that its agreement with an unaffiliated third party to provide drug testing strips for incorporation into the party's tests used in hospitals, emergency rooms and clinics will terminate, effective December 24, 2008. This termination is a result of the party's merger with another entity, and the Company is currently negotiating to continue this contract relationship with the merger successor. The outcome of these negotiations will not have a material impact on the Company's current contract manufacturing operations. Contract manufacturing sales for the third quarter of 2008 totaled $181,000, up from $136,000 for the third quarter of 2008.
COST OF GOODS: Cost of goods sold for the three months ended September 30, 2008 was $2,104,000, or 58.4% of net sales, compared to $2,493,000, or 63.7% of net sales for the three months ended September 30, 2007. While the Company has seen increased costs in raw materials related to the manufacture of its products, the Company has been able to improve its cost of goods because of increased manufacturing efficiencies resulting from automation of its Rapid TOX product line and a shift in product sales to non-government markets at higher gross profit margins.
OPERATING EXPENSES: Operating expenses were $1,373,000, or 38.1% of net sales, in the third quarter of 2008, compared to $1,632,000, or 41.7% of net sales, in the third 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.
Research and development (R&D) expense
R&D expenses for the three months ended September 30, 2008 and 2007 were $128,000, or 3.6% of net sales and $173,000, or 4.4% of net sales, respectively. Savings in salaries and employee related benefits, consulting fees, supplies and materials, telephone and depreciation were partially offset by increases in utility costs, FDA compliance costs, and repairs and maintenance. Effective June 30, 2008, the Company's Vice President of Product Development, retired. The former vice president received a payment of $35,000, equal to half his annual salary of $70,000, paid in 3 equal monthly installments of approximately $11,666 each beginning July 31, 2008, with the last payment being made on September 30, 2008. The Company does not expect to fill this position in the future; therefore, the Company expects to see the full savings from this personnel reduction beginning in the fourth quarter of 2008. In the third quarter 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 were $713,000, or 19.8% of net sales, in the third quarter of 2008, compared to $818,000, or 20.9% 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 and employer related payroll taxes, travel costs, trade-show related expenses, depreciation, marketing salaries (as a result in the reduction in marketing personnel in the third quarter of 2008), and marketing consulting fees. These savings were partially offset by increases in postage, sales employee related benefits and insurance, dues and subscriptions and royalty expense as a result of increased sales of RSV.
General and administrative (G&A) expense
G&A expense were $532,000 or 14.8% of net sales in the three months ended September 30, 2008 compared to $641,000, or 16.4% of net sales in the three months ended September 30, 2007. The third quarter of 2007 included $15,000 of costs associated with our CLIA waiver application; there were no CLIA related costs in the third quarter of 2008. Decreases in investor relations, salaries, legal fees, travel costs, insurances, bank service fees and bad debts, due to a recovery of previously written off account, were partially offset by increases in patents and licenses, auto expense, ISO related expenses, outside service fees, utilities and contributions.
Liquidity and Capital Resources as of September 30, 2008
The Company has working capital of $4,658,000 at September 30, 2008 compared to working capital of $4,017,000 at December 31, 2007. The Company has historically satisfied its net working capital requirements through operations, cash generated by proceeds from private placements of equity securities 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 conditions. The Company believes that its current cash balances, together with cash generated from future operations, maybe sufficient to fund operations for the next twelve months, but there can be no assurance of the Company's continued liquidity. The Company is required to comply with certain financial covenants under its Credit Facilities with FNFG (see Note D), and while the Company is in compliance with these financial covenants at September 30, 2008, there can be no assurance that such compliance will continue in the future. Non-compliance would constitute a default and FNFG may declare all sums outstanding under the Credit Facilities due and payable without notice or demand. 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 beginning 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 $134,000 for the nine months ended September 30, 2008, compared to $748,000 for the nine months ended September 30, 2007. The net cash used in operating activities for the nine months ended September 30, 2008 resulted primarily from increases in accounts receivable, inventory balances and liabilities, including accounts payable, accrued expenses and wages payable.
Net cash used in investing activities was $48,000 for the nine months ended September 30, 2008, compared to $632,000 for the nine months ended September 30, 2007. Net cash used in both years was for investment in property, plant and equipment. Included in the nine months ended September 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 provided by financing activities was $237,000 for the nine months ended September 30, 2008, which consisted of proceeds from debenture financing and the Company's line of credit offset by debt issuance costs and payments on the Company's outstanding debt and line of credit facilities. Net cash provided by financing activities for the nine months ended September 30, 2007 was $1,115,000 and consisted of proceeds from a 5-year term note, the Company's lines of credit and exercise of stock options offset by debt and line of credit payments.
At September 30, 2008, the Company had cash and cash equivalents of $391,000.
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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