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ABMC > SEC Filings for ABMC > Form 10-K on 28-Mar-2013All Recent SEC Filings

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Form 10-K for AMERICAN BIO MEDICA CORP


28-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS of Operations

The following discussion and analysis provides information, which we believe is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with the financial statements contained herein and the notes thereto. Certain statements contained in this Annual Report on Form 10-K, including, without limitation, statements containing the words "believes", "anticipates", "estimates", "expects", "intends", "projects", and words of similar import, are forward-looking as that term is defined by the Private Securities Litigation Reform Act of 1995 ("1995 Act"), and in releases issued by the SEC. These statements are being made pursuant to the provisions of the 1995 Act and with the intention of obtaining the benefits of the "Safe Harbor" provisions of the 1995 Act. We caution that any forward-looking statements made herein are not guarantees of future performance and that actual results may differ materially from those in such forward-looking statements as a result of various factors, including, but not limited to, any risks detailed herein, including the "Risk Factors" section contained in Part I, Item 1A of this Form 10-K, or detailed in our most recent reports on Form 10-Q and Form 8-K and from time to time in our other filings with the SEC and amendments thereto. We are not undertaking any obligation to publicly update any forward-looking statements. Readers should not place undue reliance on these forward-looking statements.

Overview and Plan of Operations

During the year ended December 31, 2012, we sustained a net loss of $1,111,000 from net sales of $9,343,000, and had net cash provided by operating activities of $236,000. During the year ended December 31, 2011, we sustained a net loss of $345,000 from net sales of $9,272,000, and had net cash provided by operating activities of $449,000.

During the year ended December 31, 2012, we continued to market and distribute our urine and oral fluid-based point of collection tests for 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. Throughout the year ended December 31, 2012, we continued to take steps to reduce manufacturing costs to increase our gross margin. The recession continued to have a negative impact on our sales throughout the year ended December 31, 2012, although we were able to achieve a moderate increase in sales in the year ended December 31, 2012 when compared to the year ended December 31, 2011. In response to the uncertainties associated with the state of the global economy, we have continued to implement cost-cutting measures to reduce our operating expenses. Although these measures did not prevent us from sustaining a net loss in the year ended December 31, 2012, these measures did enable the Company to minimize our net loss.

Our sales strategy continues to be a focus on direct sales, while identifying new contract manufacturing opportunities and pursuing new national and international accounts. Simultaneously with these efforts, we continue to focus on the development of new product platforms and configurations to address market trends and needs.

Our continued existence is dependent upon several factors including, but not limited to, our ability to raise revenue levels, to continue to reduce costs to generate positive cash flows, and to sell additional shares of our common stock to fund operations and/or obtain additional credit facilities, if and when necessary.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or "U.S. GAAP". Part IV, Item 15, Note A to our financial statements describes the significant accounting policies and methods used in the preparation of our financial statements. The accounting policies that we believe are most critical to aid in fully understanding and evaluating the financial statements include the following:

Use of Estimates: The preparation of these 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 our estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations, contingencies and litigation. Estimates are based 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.

Revenue: Revenue is recognized upon shipment to customers.

Accounts Receivable and Allowance for Doubtful Accounts: We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional allowance may be required.

Inventory and Allowance for Slow Moving and Obsolete Inventory: We maintain an allowance for slow moving and obsolete inventory. If necessary, actual write-downs to inventory are made for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory allowances or write-downs may be required.

Deferred Income Tax Asset Valuation Allowance: We record a valuation allowance to reduce our deferred income tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the deferred income tax asset valuation allowance, in the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of our net recorded amount, an adjustment to the deferred income tax asset would increase income in the period such determination was made.

Results of operations for the year ended December 31, 2012, compared to the year ended December 31, 2011

Net Sales: Net sales increased 1.0% to $9,343,000 in the year ended December 31, 2012 ("Fiscal 2012") from $9,272,000 in the year ended December 31, 2011 ("Fiscal 2011").

Throughout most of Fiscal 2012, the Company sales to our core market of Workplace increased as unemployment rates continue to improve (although at a somewhat slow rate). In addition, Workplace sales were negatively impacted in the first quarter of Fiscal 2011 by our temporary and voluntary cessation of marketing and selling of our oral fluid product in the Workplace market. Contract manufacturing sales consistently improved throughout Fiscal 2012 due to increased contract manufacturing of a product to detect fetal amniotic rupture and a product to detect RSV (respiratory syncytial virus). International sales declined through the second quarter of 2012 but we saw some improvement in the third quarter of 2012, primarily as a result of increased sales to Europe and Latin America.

Government sales declined throughout Fiscal 2012. The economic turmoil has resulted in decreased purchasing levels on some of the government contracts we currently hold; as many of our government customers are attempting to close budget deficits. We continue to find it challenging to compete against foreign manufacturers when attempting to secure contracts with the government. Most government contracts are awarded via an open solicitation process and in most cases, the company with the lowest priced product is awarded the contract. Since foreign manufacturers can offer their products at a lower price due to lower costs, including but not limited to, lower labor, material, regulatory and insurance costs, it has become increasingly difficult to compete from a cost standpoint. However, we have been successful in garnering government contracts, especially in those cases when an emphasis is placed on quality, customer service, technical support and "Made in America" requirements.

While we remain encouraged by reports of improvement in certain aspects of domestic and global economic conditions, until the rate of economic recovery substantially increases, any sales improvement we may experience in our core markets of Workplace and Government is expected to be minimal, however, as a result of signs of improving economic activity, in the fourth quarter of Fiscal 2011, we added two additional sales people to aggressively pursue additional sales opportunities. We are hopeful that future improvement in sales will be more consistent and that we will begin to see improvement in sales in our core markets. If we continue to experience sales declines, we are hopeful such declines will be minimal. We are optimistic that sales in our International market and Contract Manufacturing sales will either continue to improve or decline at minimal rates.

Cost of goods sold/gross profit: Cost of goods sold increased to 64.2% of net sales in Fiscal 2012 from 58.2% of sales in Fiscal 2011. Negatively impacting cost of goods in Fiscal 2012 were inventory disposals and a limited cash flow diminished our capacity to purchase raw materials in greater quantities (and on better terms). Cost of goods in Fiscal 2011 was also negatively impacted by increased costs of raw materials and downward pressure on selling prices as a result of competition from foreign manufacturers.

In response to uncertain market conditions, we have reduced our inventory levels and the amount of product being manufactured; however, certain direct labor and overhead costs are fixed and such fixed costs are now being allocated to a reduced number of manufactured strips, thus increasing our manufacturing cost per unit. We continuously evaluate our production personnel levels as well as our product manufacturing levels to ensure they are adequate to meet current and anticipated sales demands.

Gross profit in the year ended December 31, 2012 continued to be negatively affected by decreased sales margins due to price pressure from foreign manufacturers and general price pressure in our markets in response to the recession.

Operating Expenses: Operating expenses for Fiscal 2012 increased $251,000, or 6.2% when compared to operating expenses in Fiscal 2011. Research and Development expense decreased while selling and marketing and general and administrative increased as noted below:

Research and development ("R&D")

R&D expenses for Fiscal 2012 decreased $16,000, or 7.2%, when compared to R&D expenses incurred in Fiscal 2011. The reduction was primarily a result of decreased salaries and benefits. Throughout Fiscal 2012, our R&D department continued to focus their efforts on the enhancement of current products, development of new product platforms and exploration of contract manufacturing opportunities.

Selling and marketing

Selling and marketing expenses for Fiscal 2012 increased $52,000, or 2.9% when compared to selling and marketing expenses incurred in Fiscal 2011. The increase in expense primarily results from an increase in sales commissions partially offset by a decrease in travel expenses and a reduction of royalties payable. Throughout Fiscal 2012, we promoted our products through various marketing activities, including but not limited to selected advertising and participation at trade shows. Our direct sales force continued to focus their selling efforts in our core markets of Workplace and Government, as well as in the Clinical market with our CLIA waived Rapid TOX product line.

General and administrative ("G&A")

G&A expenses for Fiscal 2012 increased $215,000, or 10.6% when compared to Fiscal 2011. Increases in legal fees, patents and licenses, SEC reporting costs, travel and non-cash compensation were partially offset by reductions in financing costs, auditing expenses and consulting fees.

We believe that our current infrastructure is sufficient to support our business. However, additional investments in research and development, selling and marketing and general and administrative may be necessary to develop new products in the future and enhance our current products to meet the customer needs in the POCT market, to grow our contract manufacturing operations, to promote our products in our markets and to institute changes that may be necessary to comply with various regulatory and public company reporting requirements.

Other income and expense: Other income during Fiscal 2012 consisted of grant income. The grant was originally received from the Columbia Economic Development Corporation and totaled $100,000. The grant was convertible to a loan based upon a percentage of the grant declining from 90% of the grant amount in 2003 to 0% in 2012. The grant was convertible to a loan only if the employment levels in the Kinderhook facility dropped below 45 employees at any time during the year. The employment levels in the Kinderhook facility were 47 and 49 at the years ended December 31, 2012 and December 31, 2011, respectively. The amount of grant income was $10,000 in both Fiscal 2012 and Fiscal 2011.

During Fiscal 2012 and Fiscal 2011 we incurred interest expense of $194,000 and $198,000, respectively, related to our loans and lines of credit with First Niagara Bank, Rosenthal & Rosenthal, Inc., and Medallion Business Credit.

LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 2012

Our cash requirements depend on numerous factors, including product development activities, penetration of our core markets, and effective management of inventory levels and production levels in response to sales forecasts. We expect to devote capital resources to continue product development and research and development activities. 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 additional borrowings, subject to market and other conditions. Our financial statements for Fiscal 2012 have been 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 our credit facilities will be sufficient to fund operations for the next twelve months. 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.

In Fiscal 2012, the Company had a real estate mortgage with First Niagara, a line of credit with Medallion Business Credit (which refinanced a line of credit with Rosenthal and Rosenthal, Inc.).

Real Estate Mortgage with First Niagara

On December 17, 2009, we closed on a refinancing and consolidation of our existing real estate mortgage and term note with First Niagara (the "Mortgage Consolidation Loan"). The Mortgage Consolidation Loan was secured by our facility in Kinderhook, New York as well as various pieces of machinery and equipment. We had to comply with a covenant to maintain Liquidity of at least $50,000 (Liquidity is defined as any combination of cash, marketable securities or borrowing availability under one or more credit facilities other than the Mortgage Consolidation Loan), and we maintained compliance with this covenant through the term of the Mortgage Consolidation Loan.

The annual interest rate of the Mortgage Consolidation Loan was fixed at 8.75%. The monthly payment of principal and interest was $16,125. Accrued interest was paid at closing totaling $7,000. In addition, we were required to make a $25,000 principal payment at the time of closing on the prior existing Term Note. We incurred approximately $28,000 in costs associated with the Mortgage Consolidation Loan, which were included in prepaid expenses and other current assets, and were amortized over the term of the Mortgage Consolidation Loan. For the year ended December 31, 2011 we amortized the final $2,000 of these costs. Payments commenced on the Mortgage Consolidation Loan on February 1, 2010, and the loan matured on January 1, 2011.

On February 23, 2011, we amended and extended the Mortgage Consolidation Loan. The amended Mortgage Consolidation Loan has a maturity date of March 1, 2013, and has a 6-year (72 month) amortization. The principal amount of the amended Mortgage Consolidation Loan is $815,000 with a fixed interest rate of 8.25%. The monthly payment of principal and interest is $14,000 and payments commenced on March 1, 2011. We were required to make a $15,000 principal payment at the time of closing of the amended Mortgage Consolidation Loan. We also incurred approximately $2,000 in costs associated with this amendment, which were legal costs incurred by First Niagara and passed on to the Company. These costs were fully amortized as of September 30, 2012. The amended Mortgage Consolidation Loan continues to be secured by our facility in Kinderhook, New York as well as various pieces of machinery and equipment. All other terms of the Mortgage Consolidation Loan remain unchanged, including compliance with the Liquidity covenant previously discussed. As of the date of this report, we are in compliance with this covenant. The balance on the Mortgage Consolidation Loan was $608,000 and $725,000 for the years ended December 31, 2012 and December 31, 2011, respectively. Interest expense recognized was $56,000 and $66,000 for Fiscal 2012 and Fiscal 2011, respectively.

Refinance/Extension of Mortgage Consolidation Loan

On March 8, 2013, the Company entered into a Second Amendment to Loan Agreement (the "Second Mortgage Consolidation Loan Amendment") with First Niagara Bank related to the Company's Mortgage Consolidation Loan. Under the Second Mortgage Consolidation Loan Amendment, the Mortgage Consolidation Loan was recast into a 4-year fully amortizing note with a one-year term through March 1, 2014. The interest rate was increased from 8.25% to 9.25% and the monthly payment was reduced to $14,115 from $14,437. The Company was required to make a principal reduction payment of $25,000 at the time of closing. All other terms of the Mortgage Consolidation Loan remained unchanged.

Loan and Security Agreement with Medallion Financial Corp ("Medallion")

On April 20, 2012 (the "Closing Date"), we entered into a Loan and Security Agreement (the "Loan Agreement") with Medallion, a Senior Lender, to refinance the Company's Line of Credit with Rosenthal and Rosenthal, Inc ("Rosenthal"; see below for information on Rosenthal Line of Credit).

Under the Loan Agreement, Medallion provided the Company with up to $1,000,000 under a revolving secured line of credit (the "Medallion Line of Credit"), which is secured by a first security interest in all of the Company's receivables, inventory, and intellectual property rights along with a second security interest in the Company's machinery and equipment. The maximum amount available under the Medallion Line of Credit is subject to an Advance Rate that consists of: 85% of eligible accounts receivable and up to 30% of eligible inventory (not to exceed $150,000). "Eligible Receivables" are defined as those receivables that are paid within ninety (90) days of the invoice date. Eligible Receivables consists of both domestic sales and those international sales made in North America. An Eligible Receivable becomes ineligible if more than 25% of the aggregate receivables due from a customer are more than ninety (90) days past due or the aggregate receivables from a customer exceed 25% of the then total outstanding Eligible Receivables. "Eligible Inventory" is defined as raw materials and finished goods that are not obsolete or unmerchantable and are acceptable to Medallion.

From the loan availability on the Closing Date, we drew approximately $566,000 to pay off our Line of Credit with Rosenthal. We were charged a facility fee of 1% of the balance of the Medallion Line of Credit on the Closing Date and will be charged the same facility fee of 1% on each anniversary of the Closing Date thereafter. Under the Loan Agreement, interest on outstanding borrowings is payable monthly and is charged at an annual rate equal to 4% above a base rate (which is the Wall Street Journal Prime as published from time to time; as of December 31, 2012, the Wall Street Journal Prime was 3.25%). If we were to default under the Loan Agreement, interest on outstanding borrowings under the Medallion Line of Credit would be charged at an annual rate of 2% above the interest rate in effect at the time of such default. We are subject to two audits per year by Medallion (provided we are not in default) at a rate of $950.00 per person per day. Prior to closing, we also paid a non-refundable fee in the amount of $10,000 to Medallion for field exam and due diligence costs.

We incurred $20,000 in costs related to the Medallion Line of Credit. These costs were fully expensed in Fiscal 2012. We incurred $42,000 in interest expense in Fiscal 2012 (no interest expense was incurred in Fiscal 2011 as we did not close on the Medallion Line of Credit until April 2012). We had accrued interest of $3,000 at December 31, 2012.

The amount outstanding on the Medallion Line of Credit at December 31, 2012 was $321,000. Additional loan availability was $67,000, for a total Loan Availability of $388,000 as of December 31, 2012. No amounts were outstanding or available at December 31, 2011, as we did not close on the Medallion Line of Credit until April 2012.

So long as any obligations are due to Medallion under the Medallion Line of Credit, we must maintain stockholders' equity of at least $1,750,000. The Company was not in compliance with this requirement as of the year ended December 31, 2012, however, on January 16, 2013, the Company entered into a three-year Loan and Security Agreement ("LSA") with Imperium Commercial Finance, LLC ("Imperium"), a new Senior Lender, to refinance the Medallion Line of Credit. Given the termination (and refinancing) of the Medallion Line of Credit, this default did not result in any triggers under the Medallion Line of Credit and did not result in any financial implications for the Company.

(Imperium Line of Credit - Subsequent Event)

Under the LSA, Imperium has agreed to provide the Company with up to a maximum amount of $1,500,000 ("Maximum Funding Amount") under a revolving secured loan facility (the "Imperium Line of Credit"), which is secured by a first security interest in all of the Company's receivables, inventory, and intellectual property rights along with a second security interest in the Company's machinery and equipment (together the "Collateral"). The Maximum Funding Amount is subject to a discretionary borrowing base comprised of: 85% of eligible accounts receivables (excluding, without limitation, receivables remaining unpaid for more than 90 days from invoice date or 60 days from due date, contra receivables, and affiliated receivables), up to the lesser of 60% of eligible finished goods inventory at cost or 75% of appraised net orderly liquidation value of inventory, and a receivable dilution rate of less than 5% (the "Borrowing Base").

In addition to the Imperium Line of Credit, the Imperium facility includes a discretionary Supplemental Advance of up to $500,000 (the "Imperium Supplemental Advance"). Supplemental advances, once repaid, cannot be re-borrowed, and is secured with the same Collateral as the Imperium Line of Credit.

The Imperium Line of Credit is to be used for working capital and general corporate purposes, and the Imperium Supplemental Advance is to be used for costs associated with obtaining marketing clearance of the Company's oral fluid products and costs associated with other new market opportunities.

On the Closing Date, the Company paid a closing fee of $10,000 to Imperium, and granted Imperium a 7-year warrant to purchase 2,000,000 common shares of the Company at an exercise price of $0.18 (the "Imperium Warrants"). The Imperium Warrants will be valued using the Black-Scholes pricing model. The Company also paid an early termination fee of $25,000 to Medallion on the Closing Date, and a finder's fee of 3% of the gross proceeds from the Imperium financing, or $60,000, to Monarch Capital Group, LLC.

The Company will also pay Imperium an Unused Line Fee in an amount equal to 2%
(a) from and after the Closing Date through and including March 31, 2013, the Maximum Revolving Amount of $1,500,000 less the aggregate amounts outstanding to Imperium and (b) at all time from and after April 1, 2013, the Maximum Amount of $2,000,000 less the aggregate amounts outstanding to Imperium. The Unused Line Fee for each month (except for the month in which the termination occurs) is payable on the first day of each calendar month following the Closing Date; the final monthly installment of the Unused Line Fee is payable on the termination date. The Company will also pay to Imperium a Collateral monitoring fee of $2,500 on the first day of each month during the term of the LSA.

A success fee of $175,000 ("Success Fee") is due and payable if Imperium terminates due to an event of default, or if the Company terminates and pre-pays all amounts due to Imperium prior to the stated expiration date of January 16, 2016, however, the Success Fee is not due and payable if Imperium has exercised all its rights under the Imperium Warrant and sells all of the common shares underlying the Imperium Warrant on or before January 16, 2016 and if on the date that Imperium completes such sale(s), the price per share of the Company's common shares is at least $0.70 per common share.

Under the LSA, interest on the Imperium Line of Credit and the Imperium Supplemental Advance is in cash at a rate equal to eight percent (8%) per annum and (ii) in kind (i.e., "PIK" interest) at a rate equal to two percent (2%) per annum (collectively, the "Interest Rate"), all of which "PIK" interest shall be added to and constitute a part of the aggregate principal amount of outstanding Line of Credit borrowing or aggregate principal amount of outstanding Supplemental Advances, as applicable, as and when such "PIK" interest becomes due and payable hereunder. Interest is payable on the Line of Credit and Supplemental Advance in arrears for the preceding calendar month on the first day of each calendar month.

So long as any obligations are due to Imperium under the LSA, the Company must maintain Net Borrowing Availability of not less than $100,000 (Net Borrowing Availability is defined as borrowing availability less the amounts due under the Imperium Line of Credit). There are also certain minimum EBITDA (Earnings Before Interest, Taxes Depreciation and Amortization) requirements. More specifically, the Company must have EBITDA of not less than (a) $25,000 for the Fiscal Quarter ending on or about March 31, 2013, (b) $100,000 for the Fiscal Quarter ending on or about June 30, 2013, (c) $200,000 for the Fiscal Quarter ending on or about September 30, 2013, and (d) $300,000 for the Fiscal Quarter ending on or about December 31, 2013 and for each of the Fiscal Quarters thereafter.

In an event of default, which includes but is not limited to, failure of the Company to make any payment when due, and non-compliance with the Net Borrowing Availability and minimum EBITDA requirements, the interest rate will be increased by 4% for as long as the event of default occurs. Imperium's other remedies include, but are not limited to, termination or suspension of Imperium's obligation to make further advances to the Company, declaration of all amounts owed to Imperium due and payable.

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