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ABMC > SEC Filings for ABMC > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for AMERICAN BIO MEDICA CORP

Form 10-K for AMERICAN BIO MEDICA CORP


31-Mar-2014

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, 2013, we sustained a net loss of $788,000 from net sales of $8,894,000, and had net cash provided by operating activities of $9,000. 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, 2013, 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. 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.

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 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 and a sales consultant. The commission deferral program consists of a 50% commission deferral of employee commissions. As of December 31, 2013, we have deferred salary compensation owed of $19,000 and deferred commision owed of $52,000. In January 2014, we did repay a small portion of the deferrals (approximately $31,000), however the deferral program is continuing and we expect it will continue for up to 12 months.

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. In addition, in November 2013, we were informed that the FDA determined that our OralStat was not substantially equivalent to the predicate market device (see Part I, Item 3; Legal Proceedings). In accordance with the Consent Decree, we ceased marketing and selling OralStat to the workplace (non-forensic) market but we continue to market and sell OralStat to the forensic market and for export outside the United States. Given Workplace oral fluid sales typically accounted for 15% of our sales, this loss of workplace sales negatively impacted sales in the three months and year ended December 31, 2013.

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.

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, 2013, compared to the year ended December 31, 2012

Net Sales: Net sales decreased 4.8% to $8,894,000 in the year ended December 31, 2013 ("Fiscal 2013") from 9,343,000 in the year ended December 31, 2012 ("Fiscal 2012").

Workplace sales (some of which are national account oral fluid customers) decreased when comparing Fiscal 2013 to Fiscal 2012. This was primarily as a result of decreased purchasing by our customers given the uncertainty and unstable nature of the economy, and the cessation of the marketing and sale of OralStat in the Workplace market (see Part I, Item 3; Legal Matters for more information).

The number of unemployed persons declined by 490,000 to 10.4 million in December 2013 (from November 2013), and the unemployment rate declined by 0.3 percentage point to 6.7%. Over the year, the number of employed persons and the unemployment rate were down by 1.9 million and 1.2% points, respectively. Although unemployment rates increased, only 74,000 jobs were added in December 2013 (from November 2013). 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 Fiscal 2013 is the cessation of the marketing and sales of OralStat in the Workplace market.

Government sales increased in Fiscal 2013 when compared to Fiscal 2012. In the latter part of 2013, we were able to secure some government contracts/orders that offset declines earlier in the year. Sales to government accounts continue to be 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 is 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 Fiscal 2013 when compared to Fiscal 2012. Sales in Latin America declined in the latter part of 2013 although they were unchanged for most of 2013, and sales in other parts of the world decreased as well. In mid-late 2013, we contracted with a two new international distributors and we are hopeful they will positively impact international sales going forward. Contract manufacturing sales also declined in Fiscal 2013 when compared to Fiscal 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 decreased to 59.8% of net sales in Fiscal 2013 from 64.2% of net sales in Fiscal 2012. This improvement from Fiscal 2012 stems primarily from inventory disposals and a limited cash flow which diminished our capacity to purchase raw materials in greater quantities (and on better terms) in Fiscal 2012. Although we continued to have limited cash flow in Fiscal 2013, cash flow in Fiscal 2012 was severely impacted by a restrictive line of credit (that has since been repaid and replaced).

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, at times, being allocated to a reduced number of manufactured strips (due to decreased sales), and this can increase 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 Fiscal 2013 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 2013 increased $429,000, or 10% when compared to operating expenses in Fiscal 2012. In the latter part of Fiscal 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 were not recognized until November 2013. In Fiscal 2013, research and development expense increased dramatically, selling and marketing decreased and general and administrative increased as noted below:

Research and development ("R&D")

R&D expenses for Fiscal 2013 increased $438,000, or 211.6%, when compared to R&D expenses incurred in Fiscal 2012. This 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 510(k) marketing 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

Selling and marketing expense for Fiscal 2013 decreased 5.9% when compared to Fiscal 2012. This decrease is primarily a result of decreased sales salaries, employment taxes, auto and travel expense and postage; offset by an increase 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 targeted cost-conscious customers, including low volume customers and government entities (this product line was not in place in Fiscal 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")

G&A expenses for Fiscal 2013 increased 4.4% from Fiscal 2012. Increases in salaries and benefits (due to the return of a member of senior management in operations in early 2013), broker/bank service fees in connection with debt financings ($295,000 in Fiscal 2013 compared to $128,000 in Fiscal 2012), insurance costs, government contract fees and share based payment expense were offset by reductions in investor relations, quality assurance, consulting fees, legal fees (due to the settlement of litigation, brought by the Company, in August 2013), patents and outside service fees. Share based payment expense was $257,000 in Fiscal 2013 compared to $105,000 in Fiscal 2012.

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 2013 consisted primarily of proceeds from a key man insurance policy (received in the latter part of Fiscal 2013) maintained on our former CEO/CFO Stan Cipkowski. 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 level in the Kinderhook facility was 47 in Fiscal 2012; the last milestone year.

During Fiscal 2013 and Fiscal 2012 we incurred interest expense of $304,000 and $194,000, respectively, related to our loans with First Niagara Bank, our line of credit with Imperium Commercial Finance LLC and our Series A Debentures and loans with Cantone Asset Management.

LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 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 Fiscal 2013 have been prepared assuming we will continue as a going concern. As of the date of this report, our current cash balances, together with cash generated from future operations and amounts available under our credit facilities may not 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 2013, we had a real estate mortgage with First Niagara, a line of credit with Imperium Commercial Finance LLC (which refinanced a line of credit with Medallion Business Credit), unsecured, subordinated Series A Debentures and a loan with Cantone Asset Management.

Real Estate Mortgage with First Niagara

On February 23, 2011, we amended and extended our Mortgage Consolidation Loan (the "Mortgage Consolidation Loan") with First Niagara Bank ("First Niagara"). 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 remained unchanged, including compliance with a covenant (measured monthly) to maintain a certain level of liquidity (defined as any combination of cash, marketable securities or borrowing availability under one or more credit facilities other than the Mortgage Consolidation Loan).

The amended Mortgage Consolidation Loan had a maturity date of March 1, 2013, and had a 6-year (72 month) amortization. The principal amount of the amended Mortgage Consolidation Loan was $815,000 with a fixed interest rate of 8.25%. The monthly payment of principal and interest was $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. We amortized less than $1,000 of this expense in Fiscal 2013 and in Fiscal 2012.

On March 8, 2013, we entered into a Second Amendment to Loan Agreement (the "Second Mortgage Consolidation Loan Amendment") with First Niagara. 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 (See Note L - Subsequent Events). The interest rate was increased from 8.25% to 9.25% and the monthly payment was reduced to $14,115 from $14,437. We were 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.

The balance on the Mortgage Consolidation Loan was $452,000 at the end of Fiscal 2013 and $608,000 at the end of Fiscal 2012. We recognized $48,000 and $56,000 in interest expense in Fiscal 2013 and Fiscal 2012, respectively.

Line of Credit with Imperium Commercial Finance, LLC ("Imperium")

On January 16, 2013 (the "Imperium Closing Date"), we entered into a 3-year Loan and Security Agreement ("LSA") with Imperium, a new Senior Lender, to refinance our Line of Credit with Medallion Financial Corp ("Medallion"), see below for information on the Medallion Line of Credit.

Under the LSA, Imperium 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 our receivables, inventory, and intellectual property rights along with a second security interest in our 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 included a discretionary Supplemental Advance of up to $500,000 (the "Imperium Supplemental Advance"). Supplemental advances, once repaid, could not be re-borrowed, and advances were secured with the same Collateral as the Imperium Line of Credit.

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

On the Imperium Closing Date, we 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"). We also paid an early termination fee of $25,000 to Medallion on the Imperium Closing Date, a finder's fee of 3% of the gross proceeds from the Imperium financing, or $60,000, and a 5-year warrant (the "Monarch Warrant") to purchase 60,000 common shares of the Company at an exercise price of $0.18 to Monarch Capital Group, LLC.

We also pay Imperium an Unused Line Fee in an amount equal to 2% (a) from and after the Imperium Closing Date through and including March 31, 2013, the Maximum Revolving Amount 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 Imperium Closing Date; the final monthly installment of the Unused Line Fee is payable on the termination date. We 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 we terminate and pre-pay 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, we 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, we must have EBITDA of not less than (a) $25,000 for the Fiscal Quarter ended on or about March 31, 2013, (b) $100,000 for the Fiscal Quarter ended 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.

We incurred $435,000 in costs related to the Imperium Line of Credit, which included the costs noted previously as well as $39,000 to Imperium for their legal fees, $2,000 for the Company's legal fees and $9,000 in capitalized deferred financing costs and $290,000 as debt discount associated with the warrants issues to Imperium and Monarch. With the exception of the early termination fee of $25,000 paid to Medallion (which was fully recognized in the three months ended March 31, 2013), these costs are being amortized over the term of the facility (3 years). We recognized $257,000 of these costs in Fiscal 2013, of which $193,000 was debt discount recorded against the line of credit, and $0 in costs in Fiscal 2012 (as we didn't enter into the LSA with Imperium until January 2013). We incurred $122,000 in interest expense in Fiscal 2013, and $0 in interest expense in Fiscal 2012 (as we did not enter into the LSA with Imperium until January 2013).

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 can 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. We did not comply with the minimum EBITDA requirement for the quarter ending March 31, 2013, however, upon conferences with Imperium, on May 20, 2013, Imperium waived the EBITDA requirement for the quarter ended March 31, 2013. Imperium was paid $10,0000 for costs related to account review. We also did not comply with the EBITDA requirement for the quarter ended June 30, 2013 or September 30, 2013, and as of the date of this report, we are also not in compliance with the EDBITDA requirement for the quarter ended December 31, 2013 (to be measured upon the filing of this Form 10-K). EBITDA non-compliance constitutes an event of default under our Imperium Line of Credit. 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, . . .

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