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 March 31, 2007.
o
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
(Exact
name of small business issuer as specified in its charter)
|
New
York
|
14-1702188
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
122
Smith Road, Kinderhook, New York 12106
(Address
of principal executive offices)
800-227-1243
(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
o
State
the
number of shares outstanding of each of the issuer's classes of common equity
as
of the latest practicable date:
21,719,768
Common Shares as of May 10, 2007
Transitional
Small Business Disclosure Format: Yes o
No x
PART
I
FINANCIAL
INFORMATION
American
Bio Medica Corporation
| |
|
March
31,
|
|
December
31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
467,000
|
|
$
|
641,000
|
|
|
Accounts
receivable, net of allowance of $105,000 at both March 31, 2007 and
December 31, 2006
|
|
|
1,325,000
|
|
|
1,313,000
|
|
|
Inventory-net
of reserve for slow moving and
|
|
|
|
|
|
|
|
|
obsolete
inventory of $250,000 at both March 31, 2007 and December 31,
2006
|
|
|
5,111,000
|
|
|
4,859,000
|
|
|
Prepaid
and other current assets
|
|
|
228,000
|
|
|
165,000
|
|
| |
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
7,131,000
|
|
|
6,978,000
|
|
| |
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
2,326,000
|
|
|
1,982,000
|
|
|
Other
assets
|
|
|
56,000
|
|
|
57,000
|
|
| |
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
9,513,000
|
|
$
|
9,017,000
|
|
| |
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,170,000
|
|
$
|
1,091,000
|
|
|
Accrued
liabilities
|
|
|
311,000
|
|
|
509,000
|
|
|
Wages
payable
|
|
|
266,000
|
|
|
269,000
|
|
|
Line
of credit
|
|
|
556,000
|
|
|
176,000
|
|
|
Current
portion of mortgages and notes payable
|
|
|
111,000
|
|
|
17,000
|
|
|
Other
current liabilities
|
|
|
60,000
|
|
|
60,000
|
|
| |
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,474,000
|
|
|
2,122,000
|
|
| |
|
|
|
|
|
|
|
|
Long
term portion of mortgages and notes payable
|
|
|
1,183,000
|
|
|
758,000
|
|
| |
|
|
|
|
|
|
|
|
Other
long term liabilities
|
|
|
100,000
|
|
|
100,000
|
|
| |
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
3,757,000
|
|
|
2,980,000
|
|
| |
|
|
|
|
|
|
|
|
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; 21,719,768
and 21,719,768 shares issued and outstanding at March 31, 2007 and
December 31, 2006, respectively
|
|
|
217,000
|
|
|
217,000
|
|
|
Additional
paid-in capital
|
|
|
19,234,000
|
|
|
19,218,000
|
|
|
Accumulated
deficit
|
|
|
(13,695,000
|
)
|
|
(13,398,000
|
)
|
| |
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
5,756,000
|
|
|
6,037,000
|
|
| |
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
9,513,000
|
|
$
|
9,017,000
|
|
The
accompanying notes are an integral part of the financial statements
|
American
Bio Medica Corporation
|
|
Statements
of Operations
|
|
(Unaudited)
|
| |
|
|
|
| |
|
For
The Three Months Ended
|
|
| |
|
March
31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Net
sales
|
|
$
|
3,175,000
|
|
$
|
3,423,000
|
|
|
Cost
of goods sold
|
|
|
1,916,000
|
|
|
1,781,000
|
|
|
Gross
profit
|
|
|
1,259,000
|
|
|
1,642,000
|
|
| |
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
169,000
|
|
|
154,000
|
|
|
Selling
and marketing
|
|
|
692,000
|
|
|
811,000
|
|
|
General
and administrative
|
|
|
672,000
|
|
|
645,000
|
|
| |
|
|
1,533,000
|
|
|
1,610,000
|
|
|
Operating
income
|
|
|
(274,000
|
)
|
|
32,000
|
|
| |
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,000
|
|
|
1,000
|
|
|
Interest
expense
|
|
|
(27,000
|
)
|
|
(17,000
|
)
|
| |
|
|
(23,000
|
)
|
|
(16,000
|
)
|
|
Income/(loss)
before provision for income taxes
|
|
|
(297,000
|
)
|
|
16,000
|
|
|
Income
taxes
|
|
|
|
|
|
(5,000
|
)
|
|
Net
income/(loss)
|
|
$
|
(297,000
|
)
|
$
|
11,000
|
|
| |
|
|
|
|
|
|
|
|
Basic
and diluted income/(loss) per common share
|
|
$
|
(.01
|
)
|
$
|
0.00
|
|
| |
|
|
|
|
|
|
|
|
Weighted
average shares outstanding -
|
|
|
|
|
|
|
|
|
basic
|
|
|
21,719,768
|
|
|
21,359,768
|
|
|
Dilutive
effect of stock options and warrants
|
|
|
|
|
|
150,372
|
|
|
Weighted
average shares outstanding -
|
|
|
|
|
|
|
|
|
diluted
|
|
|
21,719,768
|
|
|
21,510,140
|
|
The
accompanying notes are an integral part of the financial statements
|
American
Bio Medica Corporation
|
|
Statements
of Cash Flows
|
|
(Unaudited)
|
| |
|
|
|
| |
|
For
The Three Months Ended
|
|
| |
|
March
31,
|
|
| |
|
2007
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$
|
(297,000
|
)
|
$
|
11,000
|
|
|
Adjustments
to reconcile net income to cash:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
117,000
|
|
|
95,000
|
|
|
Non
cash compensation expense
|
|
|
16,000
|
|
|
|
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(12,000
|
)
|
|
(45,000
|
)
|
|
Inventory
|
|
|
(253,000
|
)
|
|
522,000
|
|
|
Prepaid
and other current assets
|
|
|
(62,000
|
)
|
|
(172,000
|
)
|
|
Accounts
payable
|
|
|
79,000
|
|
|
(700,000
|
)
|
|
Accrued
liabilities
|
|
|
(199,000
|
)
|
|
25,000
|
|
|
Wages
payable
|
|
|
(2,000
|
)
|
|
6,000
|
|
|
Net
cash used in operating activities
|
|
|
(613,000
|
)
|
|
(258,000
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(460,000
|
)
|
|
(6,000
|
)
|
|
Net
cash used in investing activities
|
|
|
(460,000
|
)
|
|
(6,000
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Debt
payments
|
|
|
(20,000
|
)
|
|
(15,000
|
)
|
|
Proceeds
from debt financing
|
|
|
539,000
|
|
|
|
|
|
Proceeds
from line of credit
|
|
|
380,000
|
|
|
359,000
|
|
|
Net
cash provided by financing activities
|
|
|
899,000
|
|
|
344,000
|
|
| |
|
|
|
|
|
|
|
|
Net
increase / (decrease) in cash and cash
equivalents
|
|
|
(174,000
|
)
|
|
80,000
|
|
|
Cash
and cash equivalents - beginning of period
|
|
|
641,000
|
|
|
446,000
|
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
|
$
|
467,000
|
|
$
|
526,000
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid during period for interest
|
|
$
|
27,000
|
|
$
|
17,000
|
|
The
accompanying notes are an integral part of the financial statements
Notes
to
financial statements (unaudited)
March
31,
2007
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 March 31, 2007, and the results of its operations, and cash flows
for
the three-month periods ended March 31, 2007 and 2006. The results of operations
for the three-month period ended March 31, 2007 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, 2006 included in the Company's
Form
10-KSB.
During
the year ended December 31, 2006, the Company earned a net income of $196,000
from net sales of $13,838,000, and had net cash provided by operating activities
of $342,000. During the three months ended March 31, 2007, the Company sustained
a net loss of $297,000 from net sales of $3,175,000. The Company had net cash
used in operating activities of $613,000 for the first three months of 2007
primarily as a result of a net loss, reductions of accrued liabilities and
increases in inventory. During the first three months of 2007, the Company
continued to take steps to improve its financial prospects including focusing
on
research and development and selling and marketing, while investing in
automation equipment and expanding manufacturing capacity to meet the expected
need for increased production.
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 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.
FAS
No.
123(R) required adoption 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.
ABMC
adopted FAS No. 123(R) on January 1, 2006 using the modified prospective method.
Because we previously accounted for share-based payments to our employees using
the intrinsic value method, our results of operations have not previously
included the recognition of compensation expense for the issuance of stock
option awards. On December 14, 2005 the Company accelerated the vesting of
all
outstanding stock options that were not yet fully vested, to that date. Options
granted to two employees during the second quarter of 2006 were accounted for
in
accordance with FAS No. 123(R).
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
may
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. This statement became 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.
In
June
2006 the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109”. This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, “Accounting for
Income Taxes”.
This
Interpretation prescribes a recognition threshold and measurement attribute
for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. This Interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition.
The
evaluation of a tax position in accordance with this Interpretation is a
two-step process. The first step is recognition: The enterprise determines
whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. In evaluating whether
a tax position has met the more-likely-than-not recognition threshold, the
enterprise should presume that the position will be examined by the appropriate
taxing authority that would have full knowledge of all relevant information.
The
second step is measurement: A tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement.
Differences
between tax positions taken in a tax return and amounts recognized in the
financial statements will generally result in one of the following:
| |
a.
|
An
increase in a liability for income taxes payable or a reduction of
an
income tax refund receivable
|
| |
b. |
A reduction in a deferred tax asset or an increase
in a
deferred tax liability |
An
enterprise that presents a classified statement of financial position should
classify a liability for unrecognized tax benefits as current to the extent
that
the enterprise anticipates making a payment within one year or the operating
cycle, if longer. An income tax liability should not be classified as a deferred
tax liability unless it results from a taxable temporary difference (that is,
a
difference between the tax basis of an asset or a liability as calculated using
this Interpretation and its reported amount in the statement of financial
position). This Interpretation does not change the classification requirements
for deferred taxes.
Tax
positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent financial reporting
period in which that threshold is met. Previously recognized tax positions
that
no longer meet the more-likely-than-not recognition threshold should be
derecognized in the first subsequent financial reporting period in which that
threshold is no longer met. Use of a valuation allowance as described in
Statement 109 is not an appropriate substitute for the derecognition of a tax
position. The requirement to assess the need for a valuation allowance for
deferred tax assets based on the sufficiency of future taxable income is
unchanged by this Interpretation. The Company does not believe that the adoption
of FIN 48 will have a significant effect on its financial
statements.
In
September 2006 the FASB issued FAS No. 157 "Fair Value Measurements". FAS No.
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. The Company does not believe that the
adoption of FAS No. 157 will have a significant effect on its financial
statements.
In
September 2006 the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 108. The interpretation expresses the staff’s views regarding the
process of quantifying financial statement misstatements. The staff is aware
that certain registrants do not consider the effects of prior year errors on
current year financial statements, thereby allowing improper assets or
liabilities to remain unadjusted. While these errors may not be material if
considered only in relation to the balance sheet, correcting the errors could
be
material to the current year income statement. The interpretations in this
Staff
Accounting Bulletin were issued to address diversity in practice in quantifying
financial statement misstatements and the potential under current practice
for
the build up of improper amounts on the balance sheet.
SAB
108
notes that a materiality evaluation must be based on all relevant quantitative
and qualitative factors. This analysis generally begins with quantifying
potential misstatements to be evaluated. The diversity in approaches for
quantifying the amount of misstatements primarily stems from the effects of
misstatements that were not corrected at the end of the prior year (“prior year
misstatements”). These prior year misstatements should be considered in
quantifying misstatements in current year financial statements.
If
the
misstatement that exists after recording the adjustment in the current year
financial statements is material (considering all relevant quantitative and
qualitative factors), the prior year financial statements should be corrected,
even though such revision previously was and continues to be immaterial to
the
prior year financial statements. Correcting prior year financial statements
for
immaterial errors would not require previously filed reports to be
amended. Such correction is permitted to be made the next time the
registrant files the prior year financial statements.
To
provide full disclosure, registrants electing not to restate prior periods
should reflect the effects of initially applying this guidance in their annual
financial statements covering the first fiscal year ending after November 15,
2006. The cumulative effect of the initial application should be reported in
the
carrying amounts of assets and liabilities as of the beginning of that fiscal
year, and the offsetting adjustment should be made to the opening balance of
retained earnings for that year. Registrants should disclose the nature and
amount of each individual error being corrected in the cumulative adjustment.
The disclosure should also include when and how each error being corrected
arose
and the fact that the errors had previously been considered
immaterial.
Prior
to
SAB 108, the Company used the “roll-over” method for accounting for audit
differences. It was determined that under the roll-over method, a vacation
accrual was not material to the financial statements taken as a whole in any
given year. At December 31, 2006 unpaid vacation was estimated to be
approximately $80,000, which is material to the Financial Statements of the
Company under the SAB 108. This liability of $80,000 has accumulated steadily
over a ten-year period. A change in accounting principle was recorded in 2006
financial statements that had not been previously recorded. The adjustment
is
included in the beginning balances (December 31, 2005) of wages payable and
the
accumulated deficit.
Note
B -
Net Income/(Loss) 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 March 31, 2007 and 2006:
| |
|
March
31,
2007
|
|
March
31,
2006
|
|
| |
|
|
|
|
|
|
Warrants
|
|
|
150,000
|
|
|
2,223,420
|
|
|
Options
|
|
|
3,993,080
|
|
|
4,118,080
|
|
For
the
three months ended March 31, 2007 and 2006 the number of securities not included
in the diluted Earnings Per Share, because the effect would have been
anti-dilutive, were 4,143,080 and 4,624,500 respectively.
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.
Note
D -
Reclassifications
Certain
items have been reclassified from prior periods to conform to the current period
presentation.
Note
E -
Lines of Credit
On
October 5, 2006, the Company was notified that the maximum amount available
under its line of credit with First Niagara Financial Group, Inc. (“FNFG”) was
increased from $350,000 to $875,000. The maximum available line of $875,000
is
not to exceed 70% of accounts receivable less than 60 days. The purpose of
the
line of credit is to provide working capital. The interest rate is .25% above
the FNFG prime rate. The Company is required to maintain net worth
(stockholders’ equity) greater than $5 million and working capital greater than
$4 million. Further, the Company is required to maintain a minimum Debt Service
Coverage ratio of not less than 1.2:1.0 measured at each fiscal year end
beginning December 31, 2006. Debt Service Coverage Ratio is defined as Net
Operating Income divided by annual principal and interest payments on all loans
relating to subject property. There is no requirement for repayment of all
principal annually on this line of credit. The amount outstanding on this line
of credit at March 31, 2007 was $506,000.
The
Company obtained an additional line of credit from FNFG for $75,000 during
the
first quarter of 2006. The line of credit is to be used exclusively for payments
on a sublicense agreement entered into during the first quarter of 2006 (see
Note G). The interest rate is .50% above the FNFG prime rate and principal
may
be repaid at any time and borrowed again as needed. There is no requirement
for
repayment of all principal annually on this line of credit. The Company intends
to repay the funds drawn down on this line within one year to allow borrowing
of
additional amounts related to future payments due under the Sublicense
Agreement. The amounts outstanding on this line of credit at March 31, 2007
and
March 31, 2006 were $50,000 and $75,000 respectively.
Note
F -
Term loan
On
January 22, 2007, the Company entered into a Term Note (the “Note”) with First
Niagara Financial Group (“FNFG”) in the amount of $539,000. The term of the Note
is five (5) years with a fixed interest rate of 7.17%. The Registrant's monthly
payment will be $10,714 and payments will commence on February 1, 2007, with
the
final payment being due on January 1, 2012. The Company has the option of
prepaying the Note in full or in part at any time during the term without
penalty. There were no closing costs associated with this Note. The loan is
secured by Company assets now owned or to be acquired.
The
proceeds received were used for the purchase of three (3) pieces of automation
equipment to enhance the Company's manufacturing process in its New Jersey
facility
Note
G
-Sublicense Agreement
On
February 28, 2006, the Company entered into a non-exclusive Sublicense Agreement
(the "Agreement") related to certain patents to allow the Company to expand
its
contract manufacturing operations. Under this Agreement, the Company is
committed to pay a non-refundable fee of $175,000 over the course of 2 years,
of
which $75,000 was paid in the first quarter of 2006. The next payment of $50,000
was paid in February 2007. The Company would also be required to pay royalties
for products the Company manufactures that fall within the scope of these
patents. The Company has not manufactured any products that fall within the
scope of these patents, and therefore, no royalty payments are currently
required.
Note
H -
Integrated Bio Technology Agreement
On
March
29, 2006, the Company entered into a royalty agreement with Integrated Bio
Technology Corporation (“IBC”). IBC is the owner of the RSV test and previously
purchased the tests from the Company, via a contract manufacturing agreement,
for resale to its distributor. At December 31, 2005 IBC had outstanding amounts
due to ABMC totaling approximately $119,000. To address this outstanding
balance, and to streamline the delivery of product to IBC’s distributor, the
Company agreed to work directly with IBC’s distributor to receive orders,
manufacture product and execute all invoicing and collection directly from
the
distributor. Effective January 1, 2006, the Company will pay a royalty equal
to
20% of total sales to IBC and/or its distributor. The Company will pay only
25%
of royalties earned during the first two years, with the remaining 75% applied
to amounts currently owed to ABMC by IBC. If the entire amount receivable from
IBC is not earned through royalties during the first two years of the term
of
the royalty Agreement, all payments to IBC will cease until the full amount
owed
to the Company is satisfied. From the inception of the agreement with IBC
through the first three months of 2007, ABMC manufactured and sold approximately
$681,000 of the RSV tests to IBC’s distributor. The royalties earned on these
sales are approximately $137,000, of which $104,000 has been applied to the
prepaid royalty, leaving a balance of approximately $15,000 as of March 31,
2007. Payments to IBC will cease until approximately $75,000 in sales of the
RSV
test have occurred, in accordance with the agreement.
Note
I -
Stock Option Grants
In
June
2006, the Company’s Board of Directors granted a stock option to purchase 72,000
shares of the Company’s common stock to the Company’s Chief Financial Officer,
and an option to purchase 3,000 shares of the Company’s common stock to an
employee in the Company’s R&D division. Both option grants have exercise
prices of $1.05 (the closing price of the Company’s common shares on the date of
grant) and vest 100% on the one-year anniversary of the date of the grant.
In
accordance with FAS 123(R) (see “New Accounting Standards”), the Company will
recognize $63,347 in non-cash compensation expense related to these grants
over
twelve months. Included in the three months ended March 31, 2007 is $16,000
of
this non-cash compensation expense.
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 MONTHS ENDED MARCH 31, 2007 AND 2006
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
During
the three months ended March 31, 2007, there were no significant changes to
the
Company's critical accounting policies, which are included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2006.
Results
of operations for the three months ended March 31, 2007 as compared to the
three
months ended March 31, 2006
Net
sales
were $3,175,000 for the three months ended March 31, 2007 as compared to
$3,423,000 for the three months ended March 31, 2006, a decrease of $248,000
or
7.2%. Increases in national account sales and international sales were offset
by
declines in direct, in-house and contract manufacturing sales. The largest
decline is in the area of contract manufacturing sales, which was $291,000
less
in the first quarter of 2007 than in the first quarter of 2006. While the
Company saw a decrease in contract manufacturing sales on a comparative quarter
to quarter basis, the Company does not expect to see a decline in contract
manufacturing sales in fiscal year 2007 as compared to fiscal year 2006.
First
quarter sales of the Company’s Rapid Drug Screen® (RDS®) InCup® were up slightly
over 2006 as were sales of the Oralstat® oral fluid test and the Rapid TOX™
cassette product. These increases were offset by declines in RDS and Rapid
TEC®
sales during the first three months of 2007, compared to the same period a
year
ago. Some of the RDS attrition is a result of customers ordering the InCup
(rather than the RDS) due to its “all inclusive” cup format and the Rapid TOX
(rather than the RDS) due to its lower cost. The Company anticipates continued
growth in sales of the Rapid TOX product as it continues to gain market
acceptance and penetrates new markets. The Company also anticipates continued
growth in its Oralstat oral fluid test and contract manufacturing
operations.
During
the three months ended March 31, 2007, the Company continued its extensive
program to market and distribute its urine and oral fluid based point of
collection tests for drugs of abuse. The Company also continued marketing its
Rapid Reader®, the first all inclusive drug screen interpretation and data
management system cleared by the Food and Drug Administration (“FDA”). Sales of
the Rapid Reader totaled $13,000 during the three months ended March 31, 2007
compared to $17,000 during the first quarter of 2006.
The
Company continued its contract manufacturing operations for unaffiliated third
parties during the first three months of 2007. The Company is evaluating several
other requests for contract manufacturing including incorporation of the
Company’s drugs of abuse tests into another test manufactured by an unrelated
third party that is used in hospitals, emergency rooms and clinics, and
development of variations of the Company’s current oral fluid product to meet
specific market demands in Europe. Contract manufacturing sales during the
first
quarter of 2007 totaled $69,000, down from $360,000 a year ago.
The
Company was notified during the third quarter of 2006, by one of the parties
for
whom the development of an HIV product was being done, that they had entered
into a royalty agreement with a developer and a distributor, to share in the
profits of sales of an already FDA cleared HIV test. The Company was
subsequently notified that the party entering into a royalty agreement would
no
longer require our contract manufacturing services. The Company continues to
manufacture an HIV test for another distributor. Further, the Company is
currently evaluating its options related to securing FDA clearance, and
identifying distribution channels through other contract manufacturing customers
or other sources.
Cost
of
goods sold for the three months ended March 31, 2007 was $1,916,000 or 60.3%
of
net sales as compared to $1,781,000 or 52.0% of net sales for the three months
ended March 31, 2006. The increase in cost of goods sold is due to fluctuations
in the average cost of labor and overhead during the first quarter of 2007,
stemming from the greater diversity and complexity of new products along with
preparation for fulfilling anticipated orders during the remainder of 2007.
Also
affecting cost of goods are disposals of some inventory components manufactured
during the introduction of the new Rapid TOX product in the fourth quarter
of
2005. These factors combined, resulted in charges of $185,000, or 5.8% of sales,
to cost of sales in the first quarter of 2007.
While
the
Company has been able to control the cost of labor and overhead, the costs
of
some materials have risen since the first quarter of 2006. The Company continues
its efforts to control the costs to produce its products. Since the summer
of
2006, the Company has invested nearly $1 million in equipment and facilities
to
both increase capacity and automate assembly. The single largest investment
was
approximately $654,000 for equipment at its facility in New Jersey to assemble
and pouch the Rapid TOX product automatically. This automation will increase
output and reduce the number of assemblers necessary to meet expected demand.
Further, the Company acquired additional manufacturing space at its New Jersey
facility during the fourth quarter of 2006, increasing manufacturing space
by
nearly 100%. Increased price pressure in the marketplace has limited the
Company’s ability to recover manufacturing cost increases while maintaining
market share. The Company continues to evaluate all aspects of its manufacturing
and assembly processes to identify any areas of cost savings to improve gross
margins.
Operating
expenses decreased $77,000, or 4.8%, to $1,533,000 in the first three months
of
2007, compared to $1,610,000 in the same period in 2006. Increases of $27,000
in
general and administrative expense and $15,000 in research and development
expense were offset by a decrease of $119,000 in selling and marketing expense.
The increase in general and administrative expense was primarily due to
increases in investor relations expense, salaries and wages, and non-cash
compensation stemming from options granted during the second quarter of 2006.
Operating expenses increased from 47.0% of net sales in the first three months
of 2006, to 48.3% for the same period in 2007.
Research
and development
Research
and development (“R&D”) expenses for the three months ended March 31, 2007
were $169,000, or 5.3%, of net sales compared to $154,000, or 4.5%, of net
sales
for the three months ended March 31, 2006. The increase in expense is primarily
due to increases in salaries and wages, supplies, facilities expenses, and
consulting fees offset by a decrease in FDA compliance costs. Management
continues its overall strategy to: focus on new product development to meet
the
changing needs of the point of collection drug of abuse testing market; respond
to requests from other contract manufacturing inquiries; and develop new uses
of
immunoassay lateral flow technology.
Selling
and marketing expense
Selling
and marketing expense was $692,000, or 21.8%, of net sales in the first three
months of 2007. This represents a decrease of $119,000, from $811,000 or 23.7%
of net sales in the same three months in 2006. This decrease is primarily
attributable to reductions in personnel costs, advertising, royalty and
miscellaneous expenses offset by increases in travel and trade show expense.
Royalty expense relates to the agreement entered into with IBC (see Note H)
and
the sublicense agreement entered into during the first quarter of 2007(see
Note
G). The Company’s sales strategy continues to be a focus on direct sales and
inside direct sales, while identifying new contract manufacturing operations
and
pursuing new national accounts.
General
and administrative expense
General
and administrative (G&A) expense increased $27,000 in the first three months
of 2007 than the same period in 2006. Total G&A expense for the three months
ended March 31, 2007 was $672,000, or 21.2% of net sales, compared to $645,000,
or 18.8%, of net sales in the first three months of 2006. Increases in investor
relations expense, personnel expenses, consulting fees, repairs to facilities,
patents and license expense, and non-cash compensation were primarily
responsible for the increase. The investor relations expense relates to two
contracts signed in 2005 and 2006 with two investor relations firms. The
contracts, one renewed on a month-to-month basis in February of 2007, together
total $11,500 per month. Offsetting these increases were savings in
telecommunications, bad debts and insurance.
LIQUIDITY
AND CAPITAL RESOURCES AS OF MARCH 31, 2007
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 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 $4,657,000 at March 31, 2007 compared to working
capital of $4,856,000 at December 31, 2006. 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. The Company 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 $613,000 for the three months ended March
31,
2007 compared to net cash used in operating activities of $258,000 for the
three
months ended March 31, 2006. The net cash used in operating activities for
the
three months ended March 31, 2007 resulted primarily from a net loss, increases
in inventory, and decreases in accrued liabilities.
Net
cash
used in investing activities was $460,000 for the three months ended March
31,
2007 compared to net cash used in investing activities of $6,000 for the three
months ended March 31, 2006. The net cash used in both years was for investment
in property, plant and equipment. Included in cash used in 2007 is $270,000
representing 50% of the cost of automation equipment purchased for use in the
Company’s New Jersey manufacturing facility. Delivery of the new equipment
occurred in the first quarter of 2007. This investment is for machinery that
will be used to assemble the Rapid TOX cassette product and in preparation
for
significant growth in demand expected for 2007.
Net
cash
provided by financing activities was $899,000 for the three months ended March
31, 2007 consisting of proceeds of $380,000 from the Company’s lines of credit
and $539,000 in proceeds from a five year term note entered into in the first
quarter of 2007. The term note proceeds were used for the purchase of automation
equipment in the New Jersey manufacturing facility. The term note was entered
into with
First
Niagara Financial Group (“FNFG”). The term of the note is five (5) years with a
fixed interest rate of 7.17%. The Company's monthly payment will be $10,714
and
payments commenced on February 1, 2007, with the final payment being due on
January 1, 2012. The Company has the option of prepaying the term note in full
or in part at any time during the term without penalty. There were no closing
costs associated with this term note. The loan is secured by Company assets
now
owned or to be acquired. Net
cash
provided by financing activities in the first three months of 2006 was $344,000,
representing proceeds from the Company’s line of credit offset by debt payments.
The
Company has available two lines of credit with FNFG. The first line has a
maximum available line of $875,000, not to exceed 70% of accounts receivable
less than 60 days for general operating use. The interest rate is .25% above
the
FNFG prime rate. The Company is required to maintain net worth (stockholder’s
equity) greater than $5 million and working capital greater than $4 million.
Further the Company is required to maintain a minimum Debt Service Coverage
ratio of not less than 1.2:1.0 measured at each fiscal year end beginning
December 31, 2006. Debt Service Coverage Ratio is defined as Net Operating
Income divided by Annual principal and interest payments on all loans relating
to subject property. There is no requirement for repayment of all principal
annually on this line of credit. The amount outstanding on this line of credit
was $506,000 at March 31, 2007 and $284,000 at March 31, 2006. The second line
of credit was obtained during the first quarter of 2006 for the limited purpose
of paying amounts associated with a sublicense agreement executed during the
first quarter. This line is for a maximum of $75,000 with an interest rate
of
.50% above the FNFG prime rate and the Company is not required to pay the
principal down to $0 during each twelve-month period. The amount outstanding
on
this line of credit at March 31, 2007 was $50,000 and $75,000 at March 31,
2006.
At
March
31, 2007, the Company had cash and cash equivalents of $467,000.
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, American Bio Medica Corporation
carried out an evaluation, under the supervision and with the participation
of
the Chief Financial Officer and the Chief Executive Officer, to evaluate the
effectiveness of the disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange
Act")). Based on that evaluation, the Chief Financial Officer and the Chief
Executive Officer have concluded that American Bio Medica Corporation's
disclosure controls and procedures as of the date of this report are effective
for recording, processing, summarizing, and reporting information that is
required to be disclosed in their reports under the Exchange Act, as amended,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. 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.
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.
Changes in Securities
None.
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
|
|
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.
|
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:
May 11, 2007