SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended September 30, 2005.
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the transition period from to
Commission File Number: 0-28666
AMERICAN BIO MEDICA CORPORATION
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(Exact name of small business issuer as specified in its charter)
New York 14-1702188
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
122 Smith Road, Kinderhook, New York 12106
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(Address of principal executive offices)
800-227-1243
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(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
21,359,768 Common Shares as of November 8, 2005
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
PART I
FINANCIAL INFORMATION
American Bio Medica Corporation
Balance Sheets
September 30, December 31,
2005 2004
(Unaudited)
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 776,000 $ 995,000
Accounts receivable, net of allowance of $105,000 at both
September 30, 2005 and December 31, 2004 1,602,000 1,108,000
Inventory-net of reserve for slow moving and obsolete
inventory of $100,000 at both September 30, 2005 and
December 31, 2004 4,443,000 4,338,000
Prepaid and other current assets 140,000 121,000
------------ ------------
Total current assets 6,961,000 6,562,000
Property, plant and equipment, net 1,651,000 1,808,000
Other assets 7,000 5,000
------------ ------------
Total assets $ 8,619,000 $ 8,375,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 945,000 $ 1,358,000
Accrued liabilities 218,000 176,000
Wages payable 293,000 243,000
Line of Credit 78,000
Current portion of mortgages and notes payable 43,000 71,000
Current portion of unearned grant 10,000 6,000
------------ ------------
Total current liabilities 1,587,000 1,854,000
Long term portion of mortgages and notes payable 602,000 629,000
Long term portion of unearned grant 70,000 54,000
------------ ------------
Total liabilities 2,259,000 2,537,000
------------ ------------
Stockholders' equity:
Preferred stock; par value $.01 per share; 5,000,000 shares
authorized; none issued and outstanding
Common stock; par value $.01 per share; 50,000,000 shares
authorized; 21,284,768 and 21,282,268 shares issued and
outstanding at September 30, 2005 and December 31, 2004,
respectively
213,000 213,000
Additional paid-in capital 18,765,000 18,763,000
Accumulated deficit (12,618,000) (13,138,000)
------------ ------------
Total stockholders' equity 6,360,000 5,838,000
------------ ------------
Total liabilities and stockholders' equity $ 8,619,000 $ 8,375,000
============ ============
The accompanying notes are an integral part of the financial statements
2
American Bio Medica Corporation
Statements of Operations
(Unaudited)
For The Nine Months Ended
September 30,
-------------------------------
2005 2004
------------ ------------
Net sales $ 10,315,000 $ 9,519,000
Cost of goods sold 4,907,000 4,293,000
------------ ------------
Gross profit 5,408,000 5,226,000
------------ ------------
Operating expenses:
Research and development 520,000 511,000
Selling and marketing 2,540,000 2,115,000
General and administrative 1,788,000 1,955,000
Employee severance costs 240,000
------------ ------------
4,848,000 4,821,000
------------ ------------
Operating income 560,000 405,000
------------ ------------
Other income (expense):
Other income (expense) 5,000 (2,000)
Interest income 3,000 7,000
Interest expense (42,000) (40,000)
------------ ------------
(34,000) (35,000)
------------ ------------
Income before provision for income taxes 526,000 370,000
Income taxes 6,000 35,000
------------ ------------
Net income $ 520,000 $ 335,000
============ ============
Basic income per common share $ 0.02 $ 0.02
============ ============
Diluted income per common share $ 0.02 $ 0.02
============ ============
Weighted average shares outstanding -
basic 21,293,010 21,154,781
Dilutive effect of stock options and warrants 64,514 723,084
------------ ------------
Weighted average shares outstanding -
diluted 21,357,524 21,877,865
============ ============
The accompanying notes are an integral part of the financial statements
3
American Bio Medica Corporation
Statements of Operations
(Unaudited)
For The Three Months Ended
September 30,
-------------------------------
2005 2004
------------ ------------
Net sales $ 3,570,000 $ 3,254,000
Cost of goods sold 1,569,000 1,396,000
------------ ------------
Gross profit 2,001,000 1,858,000
------------ ------------
Operating expenses:
Research and development 188,000 239,000
Selling and marketing 859,000 761,000
General and administrative 642,000 546,000
------------ ------------
1,689,000 1,546,000
------------ ------------
Operating income 312,000 312,000
------------ ------------
Other income (expense):
Interest income 1,000 2,000
Interest expense (15,000) (12,000)
------------ ------------
(14,000) (10,000)
------------ ------------
Income before provision for income taxes 298,000 302,000
Income taxes (24,000)
------------ ------------
Net income $ 298,000 $ 278,000
============ ============
Basic income per common share $ 0.01 $ 0.01
============ ============
Diluted income per common share $ 0.01 $ 0.01
============ ============
Weighted average shares outstanding -
basic 21,309,225 21,282,268
Dilutive effect of stock options and warrants 35,413 165,472
------------ ------------
Weighted average shares outstanding -
diluted 21,344,638 21,447,740
============ ============
The accompanying notes are an integral part of the financial statements
4
American Bio Medica Corporation
Statements of Cash Flows
(Unaudited)
For The Nine Months Ended
September 30,
-----------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net income $ 520,000 $ 335,000
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 281,000 188,000
Non cash compensation expense 228,000
Changes in:
Accounts receivable (494,000) (354,000)
Inventory (105,000) (366,000)
Prepaid and other current assets (20,000) (74,000)
Accounts payable (413,000) 230,000
Accrued liabilities 43,000 (55,000)
Unearned Grant (5,000)
Wages payable 50,000 (80,000)
----------- -----------
Net cash used in operating activities (143,000) (52,000)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (125,000) (392,000)
----------- -----------
Net cash used in investing activities (125,000) (392,000)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants 3,000 528,000
Proceeds from exercise of options 53,000
Debt payments (57,000) (44,000)
Proceeds from line of credit 78,000 132,000
Line of credit payments (99,000)
Proceeds from grant 25,000
----------- -----------
Net cash provided by financing activities 49,000 570,000
----------- -----------
Net increase / (decrease) in cash and cash equivalents (219,000) 230,000
Cash and cash equivalents - beginning of period 995,000 942,000
----------- -----------
Cash and cash equivalents - end of period $ 776,000 $ 1,172,000
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during period for interest $ 42,000 $ 40,000
Issuance of note payable for purchase of equipment $ 85,000
The accompanying notes are an integral part of the financial statements
5
Notes to financial statements (unaudited)
September 30, 2005
Note A - Basis of Reporting
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, such
statements include all adjustments, which are considered necessary for a fair
presentation of the financial position of American Bio Medica Corporation (the
"Company" or "ABMC") at September 30, 2005, and the results of its operations,
and cash flows for the nine-month and three-month periods ended September 30,
2005 and 2004. The results of operations for the nine-month and three-month
periods ended September 30, 2005 are not necessarily indicative of the operating
results for the full year. These financial statements should be read in
conjunction with the Company's audited financial statements and related
disclosures for the year ended December 31, 2004 included in the Company's Form
10-KSB.
During the year ended December 31, 2004, the Company earned net income of
$266,000 from net sales of $12,241,000, and had net cash provided by operating
activities of $134,000. During the nine months ended September 30, 2005, the
Company earned a net income of $520,000 from net sales of $10,315,000. The
Company had net cash outflows from operating activities of $143,000 for the
first nine months of 2005 primarily as a result of increases in accounts
receivables, and reductions in accounts payable from payments made for inventory
purchases made in the fourth quarter of 2004. The Company continued to take
steps to improve its financial prospects including focusing on research and
development and sales and marketing. In 2004, the Company added six new regional
sales or sales support professionals, a production manager, a controller, a
quality control manager and an additional quality control resource. The Company
also hired marketing support professionals in both the first and third quarters
of 2005.
The Company's continued existence is dependent upon several factors,
including its ability to raise revenue levels and reduce costs to generate
positive cash flows, and to sell additional shares of the Company's common stock
to fund operations, if necessary.
NEW ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132R ("FAS 132R"),
"Employers' Disclosures about Pensions and Other Postretirement Benefits". The
statement provides disclosures requirements for defined benefit pension plans
and other post-retirement benefit plans. The statement was effective for annual
financial statements with fiscal years ending after December 15, 2003, and for
interim periods beginning after December 15, 2003. The Company adopted FAS 132R
during the year ended December 31, 2004. The adoption of FAS 132R did not have
any impact on the Company's operating results or financial position.
In December 2003, the FASB published a revision to Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46R"), to clarify some of
the provisions of the original interpretation, and to exempt certain entities
from its requirements. Under the revised guidance, there are new effective dates
for companies that have interests in structures that are commonly referred to as
special-purpose entities. FIN 46R did not impact the Company's operating results
or financial position because the Company does not have any variable interest
entities.
6
In March 2004, the Emerging Issues Task Force reached a consensus on Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairments and Its Application
to Certain Investments" ("EITF 03-1"). EITF 03-1 provides a three-step
impairment model for determining whether an investment is other-than-temporarily
impaired and requires the Company to recognize such impairments as an impairment
loss equal to the difference between the investment's cost and fair value at the
reporting date. The guidance became effective for the Company during the first
quarter of fiscal 2005. The Company adopted the provisions of EITF 03-1 during
the year ended December 31, 2004. EITF 03-1 did not impact the Company's
operating results or financial position.
In May 2004, the FASB issued Staff Position 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" ("FAS 106-2"), providing final guidance on
accounting for the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 ("the Act"). The Company adopted the provisions of FAS 106-2 during the
year ended December 31, 2004. FAS 106-2 did not impact the Company's operating
results or financial position.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs - An
Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and spoilage should be
expensed as incurred and not included in overhead. Further, FAS 151 requires
that allocation of fixed and production facilities overhead to conversion costs
should be based on normal capacity of the production facilities. The provisions
in FAS 151 are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not believe that the adoption of
FAS 151 will have a significant effect on its financial statements.
In November 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets -- An Amendment of APB Opinion No. 29" ("FAS 153"). The provisions of
this statement are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. This statement eliminates the exception
to fair value for exchanges of similar productive assets and replaces it with a
general exception for exchange transactions that do not have commercial
substance -- that is, transactions that are not expected to result in
significant changes in the cash flows of the reporting entity. The Company does
not believe that the adoption of FAS 153 will have a significant effect on its
financial statements.
In November 2004, the FASB's Emerging Issues Task Force reached a
consensus on Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report Discontinued Operations"
("EITF 03-13"). The guidance should be applied to a component of an enterprise
that is either disposed of or classified as held for sale in fiscal periods
beginning after December 15, 2004. The adoption of EITF 03-13 did not have a
significant effect on the Company's financial statements.
In December 2004, the FASB issued Staff Position No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004" ("FAS 109-2"). FAS
109-2 requires the Company to disclose the total effect on income tax expense
(or benefit) for amounts that have been recognized under the repatriation
provision. For annual financial statements, any effect should be shown
separately in the same place (either on the face of the income statement or in
the footnotes) that the amounts of current and deferred taxes are disclosed for
the period. The Company does not believe that the adoption of Staff Position No.
FAS 109-2 will have a significant effect on its financial statements.
In December 2004, the FASB issued FAS No. 123 (revised 2004), "Share-Based
Payment", ("FAS No. 123(R)"), which amends FAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. FAS No. 123(R) requires compensation expense to be
recognized for all share-based payments made to employees based on the fair
value of the award at the date of grant, eliminating the intrinsic value
alternative allowed by FAS No. 123. Generally, the approach to determining fair
value under the original pronouncement has not changed. However, there are
revisions to the accounting guidelines established, such as accounting for
forfeitures, which will change our accounting for stock-based awards in the
future.
7
FAS No. 123(R) must be adopted in the first interim or annual period
beginning after December 15, 2005. The statement allows companies to adopt its
provisions using either of the following transition alternatives:
(i) The modified prospective method, which results in the recognition of
compensation expense using FAS 123(R) for all share-based awards granted
after the effective date and the recognition of compensation expense using
FAS 123 for all previously granted share-based awards that remain unvested
at the effective date; or
(ii) The modified retrospective method, which results in applying the
modified prospective method and restating prior periods by recognizing the
financial statement impact of share-based payments in a manner consistent
with the pro forma disclosure requirements of FAS No. 123. The modified
retrospective method may be applied to all prior periods presented or
previously reported interim periods of the year of adoption.
We currently plan to adopt FAS No. 123(R) on January 1, 2006 using the
modified prospective method. Because we currently account for share-based
payments to our employees using the intrinsic value method, our results of
operations have not included the recognition of compensation expense for the
issuance of stock option awards. Had we applied the fair-value criteria
established by FAS No. 123(R) to previous stock option grants, the impact to our
results of operations would have approximated the impact of applying FAS No.
123, which was a reduction to net income of approximately $995,000 in 2004,
$1,018,000 in 2003 and $881,000 in 2002. The impact of applying SFAS No. 123 to
previous stock option grants for the year ended December 31, 2005 will be a
reduction in net income equal to approximately $705,000, including $505,000 in
the first nine months of 2005. We currently expect the recognition of
compensation expense for stock options issued and outstanding at September 30,
2005 to reduce our 2006 net income by approximately $164,000.
FAS No. 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce our net operating cash inflows and increase our net
financing cash flows in periods after adoption. The impact that this change in
reporting will have on future periods cannot be determined at this time because
the benefit recognized is dependent upon attributes that vary for each option
exercise.
In May 2005, the FASB issued FAS No. 154. "Accounting Changes and Error
Corrections" which replaced APB Opinion No. 20 and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements", and changes the
requirements for the accounting for and reporting of a change in accounting
principle ("FAS No. 154"). This statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. FAS No. 154 requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. This Statement defines retrospective application as the
application of a different accounting principle to prior accounting periods as
if that principle had always been used or as the adjustment of previously issued
financial statements to reflect a change in the reporting entity. FAS No. 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. The Company does not
believe that the adoption of FAS No. 154 will have a significant effect on its
financial statements.
8
Note B - Net Income Per Common Share
Basic net income or loss per share is calculated by dividing the net
income or loss by the weighted average number of outstanding common shares
during the period. Diluted net income or loss per share includes the weighted
average dilutive effect of stock options and warrants.
Potential common shares outstanding as of September 30, 2005 and 2004:
September 30, September 30,
2005 2004
---- ----
Warrants 2,243,420 2,245,920
Options 4,278,080 4,321,080
For the three months and nine months ended September 30, 2005 the number
of securities not included in the diluted EPS, because the effect would have
been anti-dilutive, were 5,783,000 and 4,884,500, respectively. For the three
months and nine months ended September 30, 2004 the number of securities not
included in the diluted EPS, because the effect would have been anti-dilutive,
were 3,686,000 and 1,951,670 respectively.
The following pro forma information gives effect to fair value of the
options on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 0%, volatility of 75% to 77% for
2005 and 79% to 81% for 2004, risk free interest rates ranging from 4.26% to
4.91% for 2005 and 4.62% to 5.34% for 2004, and an expected life of 10 years for
both 2005 and 2004. The pro-forma net income represents nine months amortization
of expense associated with the option grants.
Nine months ended Nine months ended
September 30, 2005 September 30, 2004
------------------ ------------------
Net Income/(loss):
As reported $ 520,000 $ 335,000
Pro forma $ (141,000) $ (419,000)
Basic income/(loss) per share
As reported $ .02 $ .01
Pro forma $ (.01) $ (.02)
Diluted income/(loss) per share
As reported $ .02 $ .01
Pro forma $ (.01) $ (.02)
Note C - Litigation
The Company has been named in legal proceedings in connection with matters
that arose during the normal course of its business, and that in the Company's
opinion are not material. While the ultimate result of any litigation cannot be
determined, it is management's opinion based upon consultation with counsel,
that it has adequately provided for losses that may be incurred related to these
claims. If the Company is unsuccessful in defending any or all of these claims,
resulting financial losses could have an adverse effect on the financial
position, results of operations and cash flows of the Company.
9
Note D - Reclassifications
Certain items have been reclassified to conform to the current
presentation.
Note E - Employee Severance Costs
During the first quarter of 2004 the Company incurred severance costs as a
result of several personnel changes made in conjunction with the changing needs
of the business. Included in these changes were the separation of an executive
vice president and a manager of operations, a sales representative, and two
clerical positions, all at the Company's headquarters in Kinderhook, NY. The
costs related to these separations totaled $240,000, of which $30,000 was
non-cash.
Note F - Line of Credit
The Company has available a line of credit with First Niagara Financial
Group, Inc. ("FNFG") and has a maximum available line of $350,000, not to exceed
70% of accounts receivable less than 60 days. The interest rate is .25% above
the FNFG prime rate and the Company is required to pay the principal down to $0
for a 30 consecutive day period in each 12 month period during which the line is
available.
Item 2. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
The following discussion of the Company's financial condition and the
results of operations should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this document.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that in addition to the description of historical
facts contained herein, this report contains certain forward-looking statements
that involve risks and uncertainties as detailed herein and from time to time in
the Company's other filings with the Securities and Exchange Commission and
elsewhere. Such statements are based on management's current expectations and
are subject to a number of factors and uncertainties, which could cause actual
results to differ materially from those described in the forward-looking
statements. These factors include, among others: (a) the Company's fluctuations
in sales and operating results; (b) risks associated with international
business; (c) regulatory, competitive and contractual risks; (d) product
development risks; and (e) the ability to achieve strategic initiatives,
including but not limited to the ability to achieve sales growth across the
business segments through a combination of enhanced sales force, new products,
and customer service.
Critical accounting policies
There have been no significant changes to the Company's critical
accounting policies, which are included in the Company's form 10-KSB filing for
the year ended December 31, 2004, during the nine months ended September 30,
2005.
10
Results of operations for the nine months ended September 30, 2005 as compared
to the nine months ended September 30, 2004
Net sales were $10,315,000 for the nine months ended September 30, 2005 as
compared to $9,519,000 for the nine months ended September 30, 2004, an increase
of $796,000 or 8.4%. The Company's efforts to grow its direct sales continued in
the first nine months of 2005 with the addition of six new sales professionals.
Further, two marketing support professionals were added during 2005 to support
the sales efforts of the direct sales and inside sales groups. Direct sales
accounted for 73.9% or $7,619,000 of sales for the first nine months compared to
$6,741,000 or 70.8% a year ago. Telemarketing, international and other sales
contributed $2,696,000 or 26.1% of the net sales for the first nine months of
2005, compared to $2,778,000 or 29.2% of the net sales for the same period in
2004.
During the nine months ended September 30, 2005, the Company continued its
program to market and distribute its urine based drug screens, the Rapid Drug
Screen(R), Rapid TEC(R) and Rapid One(R) product lines. The Company also
continued to market and distribute its newly developed Oralstat(R), a saliva
based drug screen, and the RDS(R) InCup(TM), an all-inclusive urine drug screen,
both introduced in the third quarter of 2004. The Company continued sales of its
Rapid Reader(TM), a portable computer peripheral device that captures a picture
of test results on an ABMC drug screen using a high-resolution camera. The Rapid
Reader then interprets and records the results. The result information is then
sent to a data management system, which enables the user to store, transmit,
report and print the drug test results.
The Company continued its contract manufacturing operations for
unaffiliated third parties during the first nine months of 2005. Development
continued on the production of a point of collection test for HIV, which is
currently being evaluated by the FDA. In addition, the Company continued the
manufacture of a test for the detection of Respiratory Syncytial Virus ("RSV"),
a juvenile respiratory disease, a test developed in the third quarter of 2004.
Cost of goods sold for the nine months ended September 30, 2005 was
$4,907,000 or 47.6% of net sales as compared to $4,293,000 or 45.1% of net sales
for the nine months ended September 30, 2004. The increase in cost of goods sold
is due to the increase in net sales and increases in the cost of labor for
manufacturing, stemming from the greater diversity and complexity of new
products. Gross profit margin fell 2.5% year over year. While the cost of labor
and overhead rose in 2005 compared to a year ago, cost of materials has remained
relatively consistent and the company continued its efforts to control the costs
to produce its products.
Operating expenses remained relatively flat; to $4,848,000, or 47.0% of
net sales, in the first nine months of 2005, compared to $4,821,000, or 50.6% of
net sales, in the same period in 2004. Research and development ("R&D") expense
was $520,000, up from $511,000 in the first nine months of 2004. This is
attributable to increased costs for FDA compliance and consulting fees. Selling
and marketing expense was $2,540,000 for the first nine months of 2005 compared
to $2,115,000 in the same period a year ago. The increase is attributed to
hiring six additional sales professionals to further increase penetration in the
market. General and administrative expenses decreased to $1,788,000 in the first
nine months of 2005, compared to $1,955,000 in the same period a year ago.
Included in operating expenses in the first nine months of 2004 are
charges of $664,000 of which $240,000 related to employee severance costs,
incurred in response to the changing needs of the business in January 2004 and
$199,000 of expense related to a financial advisory services contract executed
in December of 2003 and subsequently cancelled during the second quarter of
2004. These charges of $664,000 also included general and administrative expense
for the first nine months of 2004 of $225,000 in professional fees related to
the Company's investigation into allegations identified in an anonymous letter
received by its independent accountants in February 2004. As part of this
response, an independent counsel performed an internal investigation.
11
Though the investigation expenses did not recur in the first nine months
of 2005, other expenses were incurred related to the company's continued efforts
to grow sales, increase market penetration, and address increased regulatory
reporting requirements. In 2004, the Company added six new regional sales or
sales support professionals, a production manager, a controller, a quality
control manager and an additional quality control resource. The Company also
hired marketing support professionals in both the first and third quarters of
2005.
Research and development
R&D expenses for the nine months ended September 30, 2005 were $520,000 or
5.0% of net sales compared to $511,000 or 5.4% of net sales for the nine months
ended September 30, 2004. The increase in expense is primarily due to an
increase in consulting costs in addition to an increase in FDA compliance costs.
Management continues its strategy to: focus on new product development to meet
the changing needs of the point of collection drugs of abuse testing market;
develop test components for an HIV test currently under development for a third
party and being evaluated by the FDA; and develop new uses of immunoassay
lateral flow technology.
Selling and marketing expense
Selling and marketing expense was $2,540,000 or 24.6% of net sales in the
first nine months of 2005. This represents an increase of $425,000, from
$2,115,000 or 22.2% of net sales in the same six months in 2004. This increase
is primarily attributable to the addition of six sales professionals and a
marketing support professional to further penetrate the Company's core markets;
corporate/workplace and government/corrections. Further, in the first three
quarters of 2005 expenses for advertising and promotion and travel were higher
than the same period a year ago.
General and administrative expense
General and administrative (G&A) expense was $167,000 lower in the first
nine months of 2005 than the same period in 2004. Total G&A expense for the nine
months ended September 30, 2005 was $1,788,000 or 17.3% of net sales compared to
$1,955,000 or 20.5% of net sales in the first nine months of 2004. Included in
G&A expense in the first nine months of 2004 was $225,000 of expense related to
the independent investigation described above plus $199,000 of non-cash
compensation for a financial advisory agreement entered into in the fourth
quarter of 2003 and subsequently cancelled during the second quarter of 2004.
Though these expenses did not recur in the first nine months of 2005, other
expenses increased including expenses attributable to additional personnel hired
to address increased regulatory reporting requirements such as: operations
management, additional quality control management and additional finance
resources to comply with the Sarbanes Oxley Act of 2002 and associated
regulations. Further, director's fees and expenses, and state and local taxes
increased in the first nine months of 2005 compared to 2004. These increases
were partially offset by savings in consulting fees, accounting fees and outside
service fees.
Results of operations for the three months ended September 30, 2005 as compared
to the three months ended September 30, 2004
Net sales were $3,570,000 for the three months ended September 30, 2005 as
compared to $3,254,000 for the three months ended September 30, 2004,
representing an increase of $316,000 or 9.7%. Direct sales accounted for 75.6%,
or $2,698,000, of sales for the third quarter compared to $2,423,000, or 74.5%,
a year ago. Telemarketing, international and other sales contributed $873,000 or
24.4% of the net sales for the third quarter of 2005, compared to $832,000 or
25.6% of the net sales for the same period in 2004.
12
During the three months ended September 30, 2005, the Company continued
its extensive program to market and distribute its urine based drug screens, the
Rapid Drug Screen(R), Rapid TEC(R) and Rapid One(R) product lines. The Company
also continued to market and distribute its newly developed Oralstat(R), a
saliva based drug screen, and the RDS(R) InCup(TM), an all-inclusive urine drug
screen, both introduced in the third quarter of 2004. The Company continued
sales of its Rapid Reader(TM), a portable computer peripheral device that
captures a picture of test results on an ABMC drug screen using a
high-resolution camera. The Rapid Reader then interprets and records the
results. The results and interpretation are then sent to a data management
system, which enables the user to store, transmit, report and print the drug
test results.
The Company continued its contract manufacturing operations for
unaffiliated third parties during the third quarter of 2005. Development
continued on the production of a point of collection test for HIV, which is
currently being evaluated by the FDA. In addition, the Company continued the
manufacture of a test for the detection of Respiratory Syncytial Virus ("RSV"),
a juvenile respiratory disease, a test developed in the third quarter of 2004.
Cost of goods sold for the three months ended September 30, 2005 was
$1,569,000 or 43.9% of net sales as compared to $1,396,000 or 42.9% of net sales
for the three months ended September 30, 2004. The increase in cost of goods
sold is due to an increase in sales along with an increase in the cost of labor
in manufacturing, stemming from the greater diversity and complexity of new
products. Gross profit margin fell 1.0% in the third quarter of 2005 compared to
the same period in 2004. While the cost of labor and overhead rose in 2005
compared to a year ago, the cost of materials has remained relatively consistent
and the Company continued its efforts to control the costs to produce its
products.
Operating expenses increased to $1,689,000, or 47.3% of net sales, in the
third quarter of 2005, compared to $1,546,000, or 47.6% of net sales, in the
same period in 2004. This is attributable to increases in selling and marketing
expenditures of $98,000, G&A expenditures of $96,000, offset by a decrease in
R&D expense of $51,000.
Research and development
R&D expenses for the three months ended September 30, 2005 were $188,000,
or 5.3% of net sales, compared to $239,000, or 7.3% of net sales, for the three
months ended September 30, 2004. The decrease in R&D expense is primarily due to
the decrease in cost of labor, supplies and materials and consulting fees.
Management continues its strategy to: focus on new product development to meet
the changing needs of the point of collection drug of abuse testing market;
develop test components for an HIV test currently under development for a third
party and being evaluated by the FDA; and develop new uses of immunoassay
lateral flow technology.
Selling and marketing expense
Selling and marketing expense was $859,000, or 24.1% of net sales, in the
third quarter of 2005, an increase of $98,000, from $761,000, or 23.4% of net
sales, in the same three months of 2004. This increase is primarily attributable
to the addition of six sales professionals and two marketing support
professionals to further penetrate the Company's core markets;
corporate/workplace and government/corrections. Further, in the third quarter of
2005 expenses for advertising and promotion and travel were higher than the same
period a year ago.
General and administrative expense
General and administrative expense increased by $96,000 in the third
quarter of 2005 compared to the same period in 2004. Total G&A expense in the
third quarter of 2005 was $642,000, or 18.0% of net sales, compared to $546,000,
or 16.8% of net sales, in the three months ended September 30, 2004. This
increase is attributable to additional personnel hired to address increased
regulatory reporting requirements such as: operations management, additional
quality control management and additional finance resources to comply with the
Sarbanes Oxley Act of 2002 and associated regulations. Further, investor
relations and quality assurance expense as well as director's fees increased in
the third quarter of the current year compared to last year. These increases
were partially offset by savings in consulting fees, accounting fees and outside
service fees.
13
LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 30, 2005
The Company's cash requirements depend on numerous factors, including
product development activities, ability to penetrate the direct sales market,
market acceptance of its new products, and effective management of inventory
levels in response to sales forecasts. The Company expects to devote substantial
capital resources to continue its product development, expand manufacturing
capacity, and support its direct sales efforts. The Company will examine other
growth opportunities including strategic alliances and expects such activities
will be funded from existing cash and cash equivalents, issuance of additional
equity or debt securities or additional borrowings subject to market and other
conditions. The Company believes that its current cash balances, and cash
generated from future operations will be sufficient to fund operations for the
next twelve months. If cash generated from operations is insufficient to satisfy
the Company's working capital and capital expenditure requirements, the Company
may be required to sell additional equity or obtain additional credit
facilities. There is no assurance that such financing will be available or that
the Company will be able to complete financing on satisfactory terms, if at all.
Management believes that the amount of research and development, selling
and marketing and general and administrative costs may increase as the Company
continues its investment in long term growth and creates the necessary
infrastructure to: achieve its worldwide drug test marketing and sales goals,
continue its penetration of the direct sales market, support research and
development projects and leverage new product initiatives. However, management
has implemented programs to control the rate of increase of these costs to be
consistent with the expected sales growth rate of the Company.
The Company has working capital of $5,374,000 at September 30, 2005
compared to working capital of $4,708,000 at December 31, 2004. The Company has
historically satisfied its net working capital requirements, if needed, through
cash generated by proceeds from private placements of equity securities with
institutional investors. The Company has never paid any dividends on its common
shares and anticipates that all future earnings, if any, will be retained for
use in the Company's business and it does not anticipate paying any cash
dividends.
Net cash used in operating activities was $143,000 for the nine months
ended September 30, 2005 compared to net cash used in operating activities of
$52,000 for the nine months ended September 30, 2004. The net cash used in
operating activities for the nine months ended September 30, 2005 resulted
primarily from increases in accounts receivable and inventory and reductions in
accounts payable offset by decreases in accrued expenses and wages payable.
Reductions in accounts payable pertain to purchases of inventory materials in
the fourth quarter of 2004, paid for in the first quarter of 2005.
Net cash used in investing activities was $125,000 for the nine months
ended September 30, 2005 compared to net cash used in investing activities of
$392,000 for the nine months ended September 30, 2004. The net cash used in
investing activities in the first nine months of 2005 was exclusively for
investment in property, plant & equipment, specifically costs associated with
the completion of the Company's HIV room and equipment purchases in the
Company's New Jersey facility and additional equipment purchases for new hires.
In the first nine months of 2004 cash used in investing activities was comprised
of the purchase of Rapid Reader devices and software, and the purchase and
installation of enhanced sales tracking and forecasting software.
Net cash provided by financing activities was $49,000 for the nine months
ended September 30, 2005 consisting of proceeds from borrowings on a line of
credit totaling $78,000, the exercise of warrants totaling $3,000 and proceeds
of $25,000 from a Columbia County Economic Development Grant offset by $57,000
in payments on mortgage and notes payable. Net cash provided by financing
activities in the first nine months of 2004 was $570,000 and consisted of
proceeds from the exercise of warrants totaling $528,000, proceeds from the
exercise of options totaling $53,000, and borrowings on a line of credit
totaling $132,000, offset by $44,000 in payments on mortgage and notes payable.
The Company also issued a note payable in the amount of $85,000, which was a
non-cash financing activity, bearing an interest rate of 5% and a term of two
years from the manufacturer of a new mold purchased by the Company.
14
The Company has available a line of credit with First Niagara Financial
Group, Inc. ("FNFG") and has a maximum available line of $350,000, not to exceed
70% of accounts receivable less than 60 days. The interest rate is .25% above
the FNFG prime rate and the Company is required to pay the principal down to $0
for a 30 consecutive day period in each 12 month period during which the line is
available. Amounts outstanding under the line at September 30, 2005 totaled
$78,000 compared to $132,000 outstanding at September 30, 2004.
At September 30, 2005, the Company had cash and cash equivalents of
$776,000.
The Company's primary short-term capital and working capital needs relate
to continued support of its research and development programs, opening new
distribution opportunities, focusing sales efforts on segments of the drugs of
abuse testing market that will yield high volume sales, increasing its
manufacturing and production capabilities, establishing adequate inventory
levels to support expected sales and instituting controls necessary to comply
with financial disclosure controls as necessitated by new regulatory
requirements.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's CEO and
CFO reviewed the Company's disclosure controls and procedures. Based on this
evaluation, the Company, including the CEO and CFO, have concluded that the
Company's disclosure controls and procedures are adequate to ensure the clarity
and material completeness of the Company's disclosure in its periodic reports
required to be filed with the SEC. Additionally, based upon this most recent
evaluation, we have concluded that there were no significant changes in internal
controls or other factors that have materially affected or are likely to
materially affect the Company's internal control over financial reporting during
the period covered by this report.
15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings:
See "Note C - Litigation" in the Notes to Financial Statements included in
this report for a description of pending legal proceedings in which the Company
is a party.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 7, 2005, the Company entered into a Services Agreement and
Stock Grant Agreement (copies of both of these Agreements are attached to this
report as Exhibit 4.7 and 4.8) with Barretto Pacific Corporation ("BPC") in
which BPC would assist the Company in the dissemination and publication of
information regarding the Company, its business and its affairs to members of
the public in the United States of America with a view to encouraging investment
in the Company's securities. Both the Services Agreement and Stock Grant
Agreement were effective September 7, 2005.
As compensation for BPC rendering these services under the Services
Agreement, the Company agreed to pay BPC a fee of $115,000 in cash (the "Cash
Fee"), payable in monthly installments over the one year term of the Services
Agreement, restricted stock (the "Restricted Stock") and expense reimbursements.
On September 19, 2005, the Company issued a stock certificate representing
75,000 unregistered common shares in the name of BPC as provided in the Stock
Grant Agreement.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security-Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
4.7 Services Agreement dated September 7, 2005 by and between the
Company and Barretto Pacific Corporation.
4.8 Stock Grant Agreement dated September 7, 2005 by and between
the Company and Barretto Pacific Corporation.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
AMERICAN BIO MEDICA CORPORATION
(Registrant)
By: /s/ Keith E. Palmer
--------------------------------------
EVP of Finance, Chief Financial Officer
and Treasurer (Principal Accounting
Officer and duly authorized Officer)
Dated: November 8, 2005
17