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ABMC > SEC Filings for ABMC > Form 10-Q on 19-Nov-2013All Recent SEC Filings

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Form 10-Q for AMERICAN BIO MEDICA CORP


19-Nov-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 Condensed 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 nine and three months ended September 30, 2013 decreased when compared to the nine and three months ended September 30, 2012. Private and public sector drug testing budgets continue to be negatively affected by uncertain economic conditions and high unemployment rates. This uncertainty greatly impacts our core markets of Workplace and Government. We continue to 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). In August 2013, we implemented a number of additional expense and personnel cuts, and we implemented a salary and commission deferral program. The salary deferral program consists of a 20% salary deferral for our 2 (then) executive officers (Stan Cipkowski and Melissa Waterhouse) as well as a 20% salary deferral for our non-executive VP Operations, Douglas Casterlin. The commission deferral program consists of a 50% commission deferral of employee and consultant commissions. As of September 30, 2013, we have deferred salary compensation owed of $18,000 and deferred commision owed of $36,000. We expect the salary and commission deferral programs to continue for up to 12 months.

We are also examining other growth opportunities from both a product and market perspective. During the nine months ended September 30, 2013, we sustained a net loss of $933,000 from net sales of $6,762,000. We had cash used in operating activities of $505,000 for the nine months ended September 30, 2013.

During the nine months ended September 30, 2013, 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) in the growing pain management market.

AMERICAN BIO MEDICA CORPORATION

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, securing additional credit facilities, as necessary, and/or refinancing current credit facilities.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2012

Net Sales: Net sales in the nine months ended September 30, 2013 decreased 4.0% when compared to net sales in the nine months ended September 30, 2012. Workplace sales (some of which are national account oral fluid customers) decreased when comparing the nine months ended September 30, 2013 to the nine months ended September 30, 2012. This was primarily as a result of decreased purchasing by our customers given the uncertainty and unstable nature of the economy, and the oral fluid workplace jurisdictional issue with the U.S. Food and Drug Administration ("FDA"), which has been negatively impacting sales as well as our ability to garner new national accounts (see Part I, Item 1, Note D
- Litigation for more information).

Both the number of unemployed persons, at 11.3 million, and the unemployment rate, at 7.3% changed little in October. This continues to indicate that people are either leaving the workforce or not actively looking for employment. This statistic directly impacts one of our core markets, Workplace. Also affecting the Workplace market in the nine months ended September 30, 2013 is the uncertainty of our ability to continue to sell our oral fluid products in the Workplace market; this has made it more difficult to obtain new national accounts that would use our oral fluid tests.

Government sales also declined in the nine months ended September 30, 2013 when compared to the nine months ended September 30, 2012, although we were able to secure some government contracts/orders that offset the declines. 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 also declined in the nine months ended September 30, 2013 when compared to the nine months ended September 30, 2012. Sales in Latin America were unchanged, and this was offset by decreased sales in other parts of the world.

Contract manufacturing sales also declined in the nine months ended September 30, 2013 when compared to the nine months ended September 30, 2012. This was primarily the result of an unexpected delay that resulted in decreased shipments to one of our customers in the nine months ended September 30, 2013. The issue has been addressed and sales are expected to return to normal levels going forward.

COST OF GOODS SOLD/GROSS PROFIT: Cost of goods sold increased to 60.1% of net sales in the nine months ended September 30, 2013, compared to 58.9% of net sales in the nine months ended September 30, 2012. Gross profit for the nine months ended September 30, 2013 decreased to 39.9% of net sales from 41.1% of net sales in the nine months ended September 30, 2012. The increase in cost of goods/decrease in gross profit stems primarily from a diminished capacity to purchase raw materials in greater quantities and on better terms due to limited cash flow, as well as 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.

AMERICAN BIO MEDICA CORPORATION

Inventory levels and the amount of product being manufactured is monitored closely, however, certain direct labor and overhead costs are fixed and when these fixed costs are being allocated to a reduced number of manufactured strips, this increases 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 by 5.9% in the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012. We continue to assess our operating expenses to ensure they are adequate to elicit growth, support current sales levels and address market trends and customer needs. In the nine months ended September 30, 2013, we made a number of personnel and expense cuts in efforts to improve our financial condition and cash flow. The full benefit of these expense reductions will not be recognized until November 2013, however some benefit was realized in the latter part of the nine months ended September 30, 2013. In the nine months ended September 30, 2013, research and development increased, general and administrative remained relatively unchanged, and selling and marketing expense decreased; more specifically:

Research and Development ("R&D") expense

R&D expense increased 203.7% when comparing the nine months ended September 30, 2013 with the nine months ended September 30, 2012. This increase stems from increases in FDA compliance costs (associated with actions taken to submit our oral fluid 510k clearance application in September 2013) offset by a decrease in R&D salaries. While we do not expect to incur costs of this magnitude going forward related to our oral fluid 510k clearance application, additional costs may be incurred as a result of further actions that may need to be taken by the Company to obtain 510k clearance. 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 nine months ended September 30, 2013 decreased 8.3% when compared to the nine months ended September 30, 2012. This decrease is primarily a result of decreased sales salaries, employment taxes, sales commissions and postage; offset by increases in consulting fees in both sales and marketing. 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 (this product line was not in place in the nine months ended September 30, 2012). We continued to promote our products through selected advertising, participation at high profile trade shows and other marketing activities. Our direct sales force focuses 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 nine months ended September 30, 2013 remained relatively unchanged (decreased by less than 1%) when compared to the nine months ended September 30, 2012. Increases in salaries (due to the return of a member of senior management in operations), brokers fees (in connection with debt financings), insurance costs, government contract fees and bank service fees were offset by decreases in quality assurance salaries and benefits, legal fees (due to timing of activities in our current litigation-See Part I, Item 1, Note D - Litigation), patents and licenses, and share based payment expense. Share based payment expense totaled $79,000 in the nine months ended September 30, 2013, and $93,000 in the nine months ended September 30, 2012.

AMERICAN BIO MEDICA CORPORATION

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 ("THIRD
QUARTER 2013") COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2012 ("THIRD
QUARTER 2012")

Net Sales: Net sales in the Third Quarter 2013 declined 1.1% when compared to net sales in the Third Quarter 2012. Workplace sales (some of which are national account oral fluid customers) actually increased when comparing the Third Quarter 2013 with Third Quarter 2012, primarily due to seasonal temporary employment hiring. We continue to see decreased purchasing by our customers given the uncertainty and unstable nature of the economy, and the oral fluid workplace jurisdictional issue with the U.S. Food and Drug Administration ("FDA"), which has been negatively impacting sales as well as our ability to garner new national accounts (see Part I, Item 1, Note D - Litigation for more information).

Both the number of unemployed persons, at 11.3 million, and the unemployment rate, at 7.3% changed little in October. This continues to indicate that people are either leaving the workforce or not actively looking for employment. This statistic directly impacts one of our core markets, Workplace.

Government sales also declined in the Third Quarter 2013 when compared to the Third Quarter 2012, although we were able to secure some government contracts/orders that offset the declines. 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 declined in the Third Quarter 2013 when compared to the Third Quarter 2012. Sales in Latin America were relatively unchanged, but were offset by decreased sales in other parts of the world.

Contract manufacturing sales also declined in the Third Quarter, 2013 when compared to the Third Quarter 2012. This was primarily the result of an unexpected delay that resulted in decreased shipments to one of our customers in the Third Quarter 2013. The issue has been addressed and sales are expected to return to normal levels going forward.

COST OF GOODS SOLD/GROSS PROFIT: Cost of goods sold decreased to 59.9% of net sales in the Third Quarter 2013, compared to 61.0% of net sales in the Third Quarter 2012. Gross profit for the Third Quarter 2013 increase to 40.1% of net sales from 39.0% of net sales in the Third Quarter 2012. The decrease in cost of goods/increase in gross profit stems primarily from a shift in sales mix (from sales of a higher margin in the Third Quarter 2013 to sales of a lower margin in the Third Quarter 2012). Although gross profit increased, downward pressure on selling prices continue from foreign manufacturers.

Inventory levels and the amount of product being manufactured is monitored closely and 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 by 6.4% in the Third Quarter 2013, compared to the Third Quarter 2012. We continue to assess our operating expenses to ensure they are adequate to elicit growth, support current sales levels and address market trends and customer needs. In the Third Quarter 2013, we made a number of personnel and expense cuts in efforts to improve our financial condition and cash flow. The full benefit of these expense reductions will not be recognized until November 2013, however some benefit was realized in the Third Quarter 2013. In the Third Quarter 2013, research and development increased, while general and administrative and selling and marketing expense decreased; more specifically:

Research and Development ("R&D") expense

R&D expense increased 483.3% when comparing the Third Quarter 2013 with the Third Quarter 2012. This increase stems from increases in FDA compliance costs (associated with actions taken to submit our oral fluid 510k clearance application in September 2013) offset by a decrease in R&D salaries. While we do not expect to incur costs of this magnitude going forward related to our oral fluid 510k clearance application, additional costs may be incurred as a result of further actions that may need to be taken by the Company to obtain 510k clearance. 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.

AMERICAN BIO MEDICA CORPORATION

Selling and Marketing expense

Selling and marketing expense for the Third Quarter 2013 decreased 9.1% when compared to the Third Quarter 2012. This decrease is primarily a result of decreased sales salaries, employment taxes, travel expense and postage; offset by increases in consulting fees in both sales and marketing. 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 (this product line was not in place in the Third Quarter 2012). We continued to promote our products through selected advertising, participation at high profile trade shows and other marketing activities. Our direct sales force focuses 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 Third Quarter 2013 decreased 24.1% when compared to the Third Quarter 2012. Decreases in salaries and benefits (due to personnel cuts made in administration in the Third Quarter 2013), quality assurance salaries and benefits, legal fees (due to the settlement of litigation in the Third Quarter 2013), patents and licenses and share based payment expense, were offset by increases in SEC report fees (due to costs related to XBRL), brokers fees (in connection with debt financings), government contract fees and bank service fees. Share based payment expense totaled $18,000 in the Third Quarter 2013, and $70,000 in the Third Quarter 2012.

Liquidity and Capital Resources as of September 30, 2013

Our cash requirements depend on numerous factors, including product development activities, penetration of our core markets, regulatory requirements to sell our products, 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 expire in less than 12 months. Our First Niagara Mortgage Consolidation Loan expires on March 1, 2014 and our Series A Debentures expire on either February 1, 2014 or August 1, 2014 (see Part I, Item I, Note G- Subsequent Events for information on the Series A Debenture extension completed in October 2013). We are exploring 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 September 30, 2013, we had a Mortgage Consolidation Loan with First Niagara and a Line of Credit with Imperium. The balance on the Imperium Line of Credit was $880,000 and the balance on the supplemental advance was $200,000, for a total loan balance of $1,080,000 at September 30, 2013. There was $120,000 in loan availability under the Imperium Line of Credit and $0 in availability under the Supplemental Advance, for a total Loan Availability of $120,000 as of September 30, 2013. The balance on our Mortgage Consolidation Loan was $493,000 at September 30, 2013.

AMERICAN BIO MEDICA CORPORATION

Working Capital Deficiency / Working Capital

Our working capital decreased $578,000 at September 30, 2013 when compared to working capital at December 31, 2012 primarily as a result of a decrease in cash, decreases in inventory, increases in our line of credit balance and accrued expenses/other liabilities, offset by an increase in accounts receivables and prepaid expenses/other current assets and a decrease in accounts payable.

We have historically satisfied 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 receivables and decreases in payables offset partially by the decrease in inventory resulted in cash used in operating activities of $505,000 for the nine months ended September 30, 2013 verses the cash used from operating activities of $125,000 for the nine months ended September 30, 2012.

Net cash used in investing activities consisting primarily of equipment, molds and patent costs remains low at $33,000 and $35,000 for the nine months ended September 30, 2013 and 2012, respectively.

Net cash provided by financing activities for the nine months ended September 30, 2013 consisted solely from the proceeds from the line of credit of $759,000, offset by payment of one time fees associated with the new line of credit and payment on the mortgage balance. Net cash provided by financing activities for the nine months ended September 30, 2012 consisted of the proceeds from the line of credit of $168,000, a bridge loan of $150,000, offset by payment of one time fees associated with the this line of credit and payment on the mortgage balance.

At September 30, 2013, we had cash and cash equivalents of $63,000.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 (including but not limited to a prolonged cessation of marketing and selling our oral fluid drug tests in the workplace market), 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 and out ability continue operations.

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 either June 30, 2013 or September 30, 2013 under our Imperium Line of Credit (compliance with the September 30, 2013 requirement is 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.

AMERICAN BIO MEDICA CORPORATION

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