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ABMC > SEC Filings for ABMC > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for AMERICAN BIO MEDICA CORP


14-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

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 Interim Financial Statements contained herein and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Certain statements contained in this Quarterly Report on Form 10-Q, 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 United State Securities and Exchange Commission (the "Commission"). 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, in our "Risk Factors" section of our Form 10-K for the year ended December 31, 2012, in our most recent reports on Form 10-Q and Form 8-K and from time to time in our other filings with the Commission, and any amendments thereto. Any forward-looking statement speaks only as of the date on which such statement is made, and 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

Sales in the three months ended March 31, 2013 ("First Quarter 2013") decreased when compared to the three months ended March 31, 2012 ("First Quarter 2012"). Although we experienced short sales growth periods in the year ended December 31, 2012 and even within the First Quarter 2013, conditions in the global economy remain tenuous at best and this uncertainty greatly impacts our core markets of Workplace and Government. We believe that it will be some time before we see significant growth in these core markets.

Given this uncertainty, we continue to examine all expenses closely in efforts to achieve profitability (if sales levels improve) or to minimize losses going forward (if sales remain at current levels or continue to decline). We are also examining other growth opportunities from both a product and market perspective. During the First Quarter 2012, we sustained a net loss of $424,000 from net sales of $2,125,000. We had cash used in operating activities of $743,000 for the First Quarter 2013.

During the First Quarter 2012, we continued to market and distribute our point of collection products to detect the presence or absence of drugs of abuse in a urine or oral fluid specimen 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. We also continued to focus our efforts on the sale of our CLIA waived Rapid TOX® product line (which includes the CLIA WAIVED test to detect Buprenorphine).

Plan of Operations

We continue to focus on selling our point of collection drugs of abuse tests, and growing our business through direct sales (including but not limited to the pursuit of national accounts) and select distributors. We also continue to make efforts to identify and secure new contract work, such as contract manufacturing or contract assembly. Simultaneously with these efforts, we continue to concentrate on: the reduction of manufacturing costs and operating expenses, enhancement of our current products and 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 obtain working capital by selling additional shares of Company common stock and/or securing additional credit facilities, as necessary.

Results of operations for the First Quarter 2013 compared to the First Quarter 2012

NET SALES: Net sales for the First Quarter 2013 decreased 7.4% when compared to net sales in the First Quarter 2012. Workplace sales (some of which are national account oral fluid customers) decreased when comparing First Quarter 2013 to the First Quarter 2012; this was primarily as a result of decreased purchasing by our customers given the uncertainty and unstable nature of the economy.

Government sales also declined in the First Quarter 2013 when compared to the First Quarter 2012. Sales to government accounts continue to be negatively impacted by price pressures caused by competitors selling products manufactured outside of the United States. Foreign manufacturers can offer their products at a lower price due to lower costs related to labor, material, regulatory compliance, insurance, etc.; therefore, it has become increasingly difficult to compete from a cost standpoint. Most government contracts are awarded via an open solicitation process and in most cases, the bidder with the lowest priced product is awarded the contract. In addition, for some of the contracts we currently hold, decreased purchasing levels (in attempts to close budget deficits), have resulted in decreased buying by our customers.

International sales remained relatively flat (with only a slight decline in sales) in the First Quarter 2013 when compared to the First Quarter 2012, as we continue our relationships with our distributors in Latin America as well as our relationship with Dräger Safety.

Contract manufacturing sales improved quarter over quarter due to increased contract manufacturing of a product for fetal amniotic rupture and a product for RSV.

COST OF GOODS SOLD/GROSS PROFIT: Cost of goods sold increased to 63.0% of net sales in the First Quarter 2013, compared to 58.1% of net sales in the First Quarter 2012. Gross profit for the First Quarter 2012 decreased to 37.0% of net sales from 41.9% of net sales in the First Quarter 2012. The increases in cost of goods/decrease in gross profit stems primarily from decreased manufacturing efficiencies in the First Quarter 2013 when compared to the First Quarter 2012. Decreased manufacturing efficiencies stem primarily from a diminished capacity to purchase raw materials in greater quantities and on better terms due to limited cash flow and a decrease in the number of test strips produced (when certain labor and overhead costs remain fixed). Gross profit was also negatively impacted by downward pressure on selling prices as a result of competition from foreign manufacturers.

We continue to closely monitor 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.

OPERATING EXPENSES:Operating expenses increased slightly in the First Quarter 2013, compared to the First Quarter 2012. We continue to assess our operating expenses to ensure they are adequate to elicit growth, support sales levels and address market trends and customer needs. In the First Quarter 2013, research and development and general and administrative expenses increased, while selling and marketing expense increased; more specifically:

Research and Development ("R&D") expense

R&D expense increased 21.1% when comparing the First Quarter 2013 with the First Quarter 2012. Decreases in salaries and employee related benefits were offset by increased costs related to FDA compliance. 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 First Quarter 2013 decreased 8.8% when compared to the First Quarter 2012. This decrease is primarily a result of decreased sales salaries, employment taxes and postage, offset by increases in sales consulting fees, employee related benefits, and marketing consulting fees. The increase in consulting fees in sales and marketing stems from our introduction of a low cost alternative product line that targets cost-conscious customers, including low volume customers and government entities. In the First Quarter 2013, 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, as well as focusing on the Clinical market, primarily physicians and pain management clinics, with our CLIA waived Rapid TOX product line.

General and Administrative ("G&A") expense

G&A expense for the First Quarter 2013 increased 9.3% when compared to the First Quarter 2012. Increases in G&A salaries (due to the return of a member of senior management in operations), brokers fees (in connection with debt financings), bank service fees, patent and licenses and share based payment expense were offset by decreases in SEC reporting fees (due to the timing of costs incurred related to compliance with XBRL filing requirements), consulting fees (due to the same member of senior management's transition from a consultant to an employee), legal fees (due to timing of activities in our current litigation-See Part I, Item 1, Note C - Litigation), and outside service fees (related to compliance with regulatory compliance outside of the United States). Share based payment expense totaled $36,000 in the First Quarter 2013 and $6,000 in the First Quarter 2012.

Liquidity and Capital Resources as of March 31, 2013

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 the year ended December 31, 2012 were prepared assuming we will continue as a going concern. As of the date of filing this report, two of our credit facilities, the First Niagara Mortgage Consolidation Loan and the Series A Debentures, will expire in less than 12 months. The Company extended the First Niagara Mortgage Consolidation Loan in the First Quarter 2013; however, it still expires on March 1, 2014. Our Series A Debentures expire on August 1, 2013. We continue to explore possible financing alternatives to these credit facilities; including but not limited to extension, consolidation and/or refinancing of the current credit facilities.

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.

As of March 31, 2013, we had a Mortgage Consolidation Loan with First Niagara and a Line of Credit with Imperium. The Imperium Line of Credit had a total loan availability of $2,000,000 as of March 31, 2013, with $724,000 of this amount available for borrowing ($285,000 under the revolving line of credit and $439,000 on the supplemental advance). The balance on our Mortgage Consolidation Loan was $553,000.

Working Capital Deficiency / Working Capital

Our working capital decreased $456,000 at March 31, 2013 when compared to working capital at December 31, 2012 primarily as a result of a decrease in cash along with increases in our line of credit balance and accounts payable, offset by an increase in accounts receivable and prepaid expenses and decreases in inventory.

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 ($2,963,000 in net proceeds since August 2001).

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, and therefore, we do not anticipate paying any cash dividends.

Cash Flows

Increases in accounts receivable and prepaid expenses and other current assets along with a substantial decrease in accounts payable partially offset by a decrease in inventory and an increase in the provision for slow moving and obsolete inventory resulted in cash used in operating activities of $743,000. The primary use of cash in the First Quarter 2013 was funding of operations.

Net cash used in investing activities in the First Quarter 2013 was for investment in property, plant and equipment, and net cash used in investing activities in the First Quarter 2012 was for investment in property, plant and equipment and patent application costs.

Net cash provided by financing activities in the First Quarter 2013 consisted of payment on debt financings, debt issuance costs (related to our Imperium Line of Credit), net proceeds from our lines of credit, and proceeds from the issuance of common stock (related to the issuance of 333,333 common shares issued to Monarch Capital Group in the First Quarter 2013 as compensation for financial advisory services). Net cash provided by financing activities in the First Quarter 2012 consisted of payment on debt financing and net proceeds from our lines of credit.

At March 31, 2013, we had cash and cash equivalents of $1,000.

Outlook

Given our current sales levels and results of operations, we expect that we may need to raise additional capital in the year ending December 31, 2013 to be able to continue operations. If events and circumstances occur such that we do not meet our current operating plans, we are unable to raise sufficient additional equity or debt financing, or our 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.

Our primary short-term working capital needs relate to our efforts to increase high volume sales in the drugs of abuse testing market, to refine manufacturing and production capabilities and establish 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 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 departments may be necessary in the future to: develop new products, enhance current products to meet the changing needs of the point of collection drugs of abuse testing market, grow contract manufacturing operations, promote our products in our markets and institute changes that may be necessary to comply with various public company reporting requirements, as well as FDA requirements related to the marketing and use of our products. We continue to take 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.

As of the date of this report, we are not in compliance with the minimum EBITDA requirements for March 31, 2013 under our Imperium Line of Credit (to be measured upon the filing of this Report on 10-Q). This non-compliance constitutes an event of default under our Imperium Line of Credit. Imperium's remedies for an Event of Default, include but are not limited to, a 4% increase in our interest rate for as long as the default occurs, termination or suspension of Imperium's obligation to make further advances to the Company, and declaration of all amounts owed to Imperium due and payable. The increase in interest rate, given our current advances under the Imperium Line of Credit would not be material, however, if Imperium were to suspend or terminate further advances, or declare all amounts due and payable, this would have a material adverse effect on our business and negatively impact our ability to continue operations.

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