UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q

xQuarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2009September 30, 2008

¨Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to

Commission File Number: 0-286660-28666

AMERICAN BIO MEDICA CORPORATION
(ExactAMERICAN BIO MEDICA CORPORATION
 (Exact name of registrant 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) (Zip Code)

518-758-8158
(Registrant's telephone number, including area code)

(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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     x     Yes     o¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)        x Yes     o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨Accelerated filer ¨
Large accelerated filer       o
Accelerated filer                           o
Non-accelerated filer         o
Non-accelerated filer ¨Smaller reporting company          x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
o  ¨Yes     x  No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

21,744,768 Common Shares as of November 12 2008May 14, 2009



American Bio Medica Corporation

Index to Quarterly Report on Form 10-Q
For the quarter ended September 30, 2008March 31, 2009

 
PAGE
PART I – FINANCIAL INFORMATION
 
 
Item 1.Financial Statements 
 Balance Sheets as of September 30, 2008March 31, 2009 (unaudited) and December 31, 200720083
 Statements of Operations for the nine months ended September 30, 2008 and September 30, 20074
Unaudited Statements of Operations for the three months ended September 30,March 31, 2009 and March 31, 2008 and September 30, 200754
 Unaudited Statements of Cash Flows for the ninethree months ended September 30,March 31, 2009 and March 31, 2008 and September 30, 200765
 Notes to Financial Statements76
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1110
Item 3.Quantitative and Qualitative Disclosures About Market Risk1614
Item 4.Controls and Procedures1614
   
PART II – OTHER INFORMATION
   
Item 1.Legal Proceedings1614
Item 1A.Risk Factors1614
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds1614
Item 3.Defaults Upon Senior Securities1714
Item 4Submission of Matters to a Vote of Security Holders1714
Item 5.Other Information1714
Item 6.Exhibits1715
   
Signatures
 18

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
American Bio Medica Corporation
Balance Sheets

American Bio Medica Corporation
     
Balance Sheets
     
  
September 30,
 
December 31,
 
  
2008
 
2007
 
  
(Unaudited)
   
ASSETS
     
Current assets     
Cash and cash equivalents $391,000 $336,000 
Accounts receivable - net of allowance for doubtful accounts of $105,000 at both September 30, 2008 and December 31, 2007  1,765,000  
1,365,000
 
Inventory – net of reserve for slow moving and obsolete inventory of $250,000 at both September 30, 2008 and December 31, 2007  5,433,000  4,994,000 
Prepaid and other current assets  114,000  181,000 
Total current assets  7,703,000  6,876,000 
        
Property, plant and equipment, net  2,043,000  2,267,000 
Debt issuance costs  120,000    
Other assets  7,000  7,000 
Total assets $9,873,000 $9,150,000 
        
LIABILITIES AND STOCKHOLDERS' EQUITY
       
Current liabilities       
Accounts payable $1,432,000 $1,403,000 
Accrued expenses  657,000  220,000 
Wages payable  399,000  332,000 
Patent sublicense current     50,000 
Line of credit  419,000  723,000 
Current portion of long term debt  128,000  121,000 
Current portion of unearned grant  10,000  10,000 
Total current liabilities  3,045,000  2,859,000 
        
Other liabilities  102,000  48,000 
Long-term debt  1,761,000  1,107,000 
Unearned grant  40,000  40,000 
Total liabilities  4,948,000  4,054,000 
        
COMMITMENTS AND CONTINGENCIES       
        
Stockholders' equity:       
Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at September 30, 2008 and December 31, 2007       
Common stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768 issued and outstanding at both September 30, 2008 and December 31, 2007  217,000  
217,000
 
Additional paid-in capital  19,273,000  19,267,000 
Accumulated deficit  (14,565,000) (14,388,000)
        
Total stockholders’ equity  4,925,000  5,096,000 
        
Total liabilities and stockholders’ equity $9,873,000 $9,150,000 

  March 31,  December 31, 
  2009  2008 
  (Unaudited)    
ASSETS      
Current assets      
Cash and cash equivalents $592,000  $201,000 
Accounts receivable - net of allowance for doubtful accounts of $105,000 at both March 31, 2009 and December 31, 2008  1,391,000   1,161,000 
Inventory – net of reserve for slow moving and obsolete inventory of $308,000 at both March 31, 2009 and December 31, 2008  5,021,000   5,552,000 
Prepaid expenses and other current assets  107,000   97,000 
Total current assets  7,111,000   7,011,000 
         
Property, plant and equipment, net  1,897,000   1,961,000 
Debt issuance costs  109,000   117,000 
Other assets  44,000   47,000 
Total assets $9,161,000  $9,136,000 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities        
Accounts payable $1,540,000  $1,568,000 
Accrued expenses and other current liabilities  661,000   544,000 
Wages payable  263,000   230,000 
Line of credit  621,000   431,000 
Current portion of long-term debt  1,067,000   1,098,000 
Current portion of unearned grant  10,000   10,000 
Total current liabilities  4,162,000   3,881,000 
         
Other long-term liabilities  204,000   207,000 
Long-term debt  759,000   760,000 
Unearned grant  30,000   30,000 
Total liabilities  5,155,000   4,878,000 
         
COMMITMENTS AND CONTINGENCIES        
         
Stockholders' equity:        
Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at March 31, 2009 and December 31, 2008        
Common stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768 issued and outstanding at both March 31, 2009 and December 31, 2008  217,000   217,000 
Additional paid-in capital  19,279,000   19,279,000 
Accumulated deficit  (15,490,000)  (15,238,000)
         
Total stockholders’ equity  4,006,000   4,258,000 
         
Total liabilities and stockholders’ equity $9,161,000  $9,136,000 
The accompanying notes are an integral part of the financial statements

3

American Bio Medica Corporation
 
Statements of Operations
 
(Unaudited)
 
    
For The Nine Months Ended
 
    
September 30
 
    
2008
 
2007
 
        
Net sales    $10,368,000 $10,523,000 
           
Cost of goods sold     5,822,000  6,383,000 
           
Gross profit     4,546,000  4,140,000 
           
Operating expenses:          
Research and development     445,000  520,000 
Selling and marketing     2,197,000  2,334,000 
General and administrative     1,973,000  2,149,000 
      4,615,000  5,003,000 
           
Operating loss     (69,000) (863,000)
           
Other income (expense):          
Interest income     3,000  7,000 
Interest expense     (107,000) (106,000)
Other expense     (4,000)   
      (108,000) (99,000)
           
Loss before tax
     (177,000) (962,000)
           
Income tax          
           
Loss after tax
    $(177,000)$(962,000)
           
Basic and diluted loss per common share
    $(0.01)$(0.04)
           
Weighted average number of shares outstanding – basic and diluted     21,744,768  21,733,779 
American Bio Medica Corporation
Statements of Operations
(Unaudited)

  For The Three Months Ended 
  March 31 
  2009  2008 
       
Net sales $2,255,000  $3,299,000 
         
Cost of goods sold  1,336,000   1,872,000 
         
Gross profit  919,000   1,427,000 
         
Operating expenses:        
Research and development  101,000   138,000 
Selling and marketing  498,000   768,000 
General and administrative  524,000   683,000 
   1,123,000   1,589,000 
         
Operating loss  (204,000)  (162,000)
         
Other income (expense):        
Interest income  1,000   1,000 
Interest expense  (47,000)  (34,000)
Other expense  (2,000)  (4,000)
   (48,000)  (37,000)
         
Loss before tax  (252,000)  (199,000)
         
Income tax        
         
Net loss after tax $(252,000) $(199,000)
         
Basic and diluted loss per common share $(0.01) $(0.01)
         
Weighted average number of shares outstanding – basic & diluted  21,744,768   21,744,768 

The accompanying notes are an integral part of the financial statements

4

American Bio Medica Corporation
 
Statements of Operations
 
(Unaudited)
 
    
For The Three Months Ended
 
    
September 30
 
    
2008
 
2007
 
        
Net sales    $3,604,000 $3,912,000 
           
Cost of goods sold     2,104,000  2,493,000 
           
Gross profit     1,500,000  1,419,000 
           
Operating expenses:          
Research and development     128,000  173,000 
Selling and marketing     713,000  818,000 
General and administrative     532,000  641,000 
      1,373,000  1,632,000 
           
Operating income/(loss)     127,000  (213,000)
           
Other income (expense):          
Interest income        2,000 
Interest expense     (41,000) (41,000)
      (41,000) (39,000)
           
Income/(Loss) before tax
     86,000  (252,000)
           
Income tax          
           
Income/(Loss) after tax
    $86,000 $(252,000)
           
Basic and diluted income/(loss) per common share
    $0.00  (0.01)
           
Weighted average number of shares outstanding – basic     21,744,768  21,744,768 
Dilutive effect of stock options and warrants     16,934    
Weighted average number of shares outstanding – fully diluted     21,761,702  21,744,768 
American Bio Medica Corporation
 Statements of Cash Flows
(Unaudited)

  For The Three Months Ended 
  March 31, 
  2009  2008 
Cash flows from operating activities:      
Net loss $(252,000) $(199,000)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation  86,000   92,000 
Loss on disposal of fixed assets  2,000   4,000 
Amortization of debt issuance costs  8,000     
Changes in:        
Accounts receivable  (230,000)  (143,000)
Inventory  531,000   (79,000)
Prepaid expenses and other current assets  (10,000)  (46,000)
Other non-current assets  3,000   50,000 
Accounts payable  (28,000)  236,000 
Accrued expenses and other current liabilities  117,000   205,000 
Patent sublicense      (50,000)
Wages payable  33,000   8,000 
Other long-term liabilities  (3,000)    
  Net cash provided by operating activities  257,000   78,000 
         
Cash flows from investing activities:        
Purchase of property, plant and equipment  (24,000)  (7,000)
Net cash used in investing activities  (24,000)  (7,000)
         
Cash flows from financing activities:        
Payments on debt financing  (32,000)  (30,000)
Net proceeds from line of credit  190,000     
Net cash provided by / (used in) financing activities  158,000   (30,000)
         
Net increase in cash and cash equivalents  391,000   41,000 
Cash and cash equivalents - beginning of period  201,000   336,000 
         
Cash and cash equivalents - end of period $592,000  $377,000 
         
Supplemental disclosures of cash flow information        
Cash paid during period for interest $65,000  $34,000 

The accompanying notes are an integral part of the financial statements

5

American Bio Medica Corporation
 
Statements of Cash Flows
 
(Unaudited)
 
  
For The Nine Months Ended
 
  
September
 
  
2008
 
2007
 
Cash flows from operating activities:
     
Net loss $(177,000)$(962,000)
  Adjustments to reconcile net loss to net cash used in operating activities:       
Depreciation  268,000  338,000 
Loss on disposal of fixed assets  4,000    
Amortization of debt issuance costs  5,000    
Non-cash compensation expense     26,000 
Changes in:       
Accounts receivable  (399,000) (753,000)
Inventory  (439,000) 643,000 
Prepaid and other current assets  67,000  (24,000)
Accounts payable  29,000  12,000 
Accrued expenses  437,000  (165,000)
Other liabilities  4,000    
Wages payable  67,000  137,000 
Net cash used in operating activities  (134,000) (748,000)
        
Cash flows from investing activities:
       
  Purchase of property, plant and equipment  (48,000) (632,000)
Net cash used in investing activities  (48,000) (632,000)
        
Cash flows from financing activities:
       
 Proceeds from exercise of options
     23,000 
  Long term debt payments  (89,000) (74,000)
  Proceeds from debt financing     539,000 
  Proceeds from line of credit  2,129,000  900,000 
  Proceeds from long-term debt financing  750,000    
  Debt issuance costs  (120,000)   
  Line of credit payments  (2,433,000) (273,000)
Net cash provided by financing activities  237,000  1,115,000 
        
Net increase / (decrease) in cash and cash equivalents
  55,000  (265,000)
Cash and cash equivalents - beginning of period  336,000  641,000 
        
Cash and cash equivalents - end of period
 $391,000 $376,000 
        
Supplemental disclosures of cash flow information
       
Cash paid during period for interest $107,000 $106,000 
Purchase of property, plant and equipment, financing through capital lease $  $17,000 
Warrants issued in connection with long term debt financing $6,000 $ 

The accompanying notes are an integral part of the financial statements

6

Notes to financial statements (unaudited)

September 30, 2008March 31, 2009

Note A - Basis of Reporting

The accompanying unaudited interim financial statements of American Bio Medica Corporation (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statement presentation. In the opinion of management, the interim financial statements include all normal, recurring adjustments, which are considered necessary for a fair presentation of the financial position of the Company at September 30, 2008,March 31, 2009, and the results of its operations for the three and nine month periods ended September 30, 2008 and September 30, 2007, and cash flows for the ninethree month periods ended September 30, 2008March 31, 2009 and 2007.March 31, 2008.

Operating results for the three and nine months ended September 30, 2008March 31, 2009 are not necessarily indicative of results that may be expected for the year ending December 31, 2008.2009. Amounts at December 31, 20072008 are derived from the Company’s audited financial statements. For further information, refer to the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB10-K for the fiscal year ended December 31, 2007.2008.

During the ninethree months ended September 30, 2008,March 31, 2009, there were no significant changes to the Company's critical accounting policies, which are included in the Company's Annual Report on Form 10-KSB10-K for the year ended December 31, 2007.2008.
 
The preparation of these interim financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances;circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

These unaudited interim financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. The Company's independent registered public accounting firm's report of the financial statements included in the Company's Annual Report on Form 10-KSB10-K for the year ended December 31, 2007,2008, contained an explanatory paragraph regarding the Company's ability to continue as a going concern.

Recently Adopted Accounting Standards

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 established a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, established a framework for measuring fair value, and expanded disclosure about such fair value measurements. SFAS No. 157 became effective for our financial assets and liabilities on January 1, 2008.  The FASB has deferred the implementation of theCertain provisions of SFAS No. 157 relating to certainthe Company’s nonfinancial assets and liabilities untilbecame effective January 1, 2009. The implementation of SFAS No. 157 diddoes not materially affect how wethe Company’s interim financial statements.
SFAS No. 157 establishes a hierarchy for ranking the quality and reliability of the information used to determine fair value.

In February 2007, the FASB issuedvalues.  SFAS No. 159, “The Fair Value Option for Financial Assets157 requires that assets and Financial Liabilities Including an Amendment of SFAS No. 115” (“SFAS No. 159”). This new standard permits entities to choose to measure many financial instruments and certain warranty and insurance contractsliabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1:  Unadjusted quoted market prices in active markets for identical assets or liabilities.
Level 2:  Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices are observable for the asset or liability.

6

Level 3:  Unobservable inputs for the asset or liability.
The Company endeavors to utilize the best available information in measuring fair value.  Financial assets and liabilities are classified based on a contract-by-contract basis. SFAS No. 159 became effective on January 1, 2008. We have not electedthe lowest level of input that is significant to the fair value optionmeasurement.  The following methods and assumptions were used by the Company in estimating its fair value disclosures for any of our existing financial instruments on the effective date and have not determined whether or not we will elect this option for any eligible financial instruments we acquireinstruments:
Cash Equivalents – The carrying amount reported in the future.balance sheet for cash equivalents approximates its fair value due to the short-term maturity of these instruments.

Line of Credit and Long-Term Debt – The carrying amounts of the Company’s borrowings under its line of credit agreement and other long-term debt approximates fair value, based upon current interest rates.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”Combinations,” (“SFAS No. 141(R)”) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). Effective for the Company as of January 1, 2009, SFAS No. 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Effective January 1, 2009, SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. Management is evaluating the impact of adoptingThe Company adopted SFAS No. 141(R) and SFAS No. 160 if any,as of January 1, 2009 and this adoption had no impact on the Company’sour interim financial statements.

7

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 expands the disclosure requirements in SFAS No. 133, regarding an entity’s derivative instruments and hedging activities. SFAS No. 161 is effective on January 1, 2009.  Management is evaluating the impact of adoptingThe Company adopted SFAS No. 161 if any,as of January 1, 2009 and this adoption had no impact on the Company’sour interim financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 shall be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. Management is evaluating the impact of adopting SFAS No. 162, if any, on the Company’s financial statements.

In May 2008, the FASB issued FASB Statement No. 163, “Accounting for Financial Guarantee Insurance Contracts” (“SFAS No. 163”), which clarifies how FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”, applies to financial guarantee insurance contracts issued by insurance enterprises. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, including interim periods in that year. Management is evaluating the impact of adopting SFAS No. 163, if any, on the Company’s financial statements.

Note B – Net Income / (Loss)Loss Per Common Share

Basic net income or loss per common share is calculated by dividing the net income or loss by the weighted average number of outstanding common shares during the period. Diluted net incomeloss per common share includes the weighted average dilutive effect of stock options and warrants.

Potential common shares outstanding as of September 30, 2008March 31, 2009 and 2007:2008:

  
September 30, 
2008
 
September 30, 
2007
 
      
Warrants
  224,900  150,000 
Options
  3,762,080  3,968,080 

  
March 31,
2009
  
March 31,
2008
 
Warrants  75,000   150,000 
Options           3,762,080            3,768,080 
For the three months ended September 30,March 31, 2009 and March 31, 2008, the number of securities included in the diluted EPS was 3,895,146. For the three months ended September 30, 2007, the number of securities not included in the diluted EPS because the effect would have been anti-dilutive was 4,118,080.

For the nine months ended September 30, 2008were 3,837,080 and 2007, the number of securities not included in the diluted EPS because the effect would have been anti-dilutive was 3,986,080 and 4,118,0803,918,080, 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.


7

Note D – LinesReclassifications
Certain items have been reclassified to conform to the current presentation.
Note E – Line of Credit and Long TermLong-Term Debt
Real Estate Mortgage

On November 6, 2006, the Company obtained a real estate mortgage (“Real Estate Mortgage”) related to its facility in Kinderhook, New York. The loan through First Niagara Financial Group (“FNFG”) is in the amount of $775,000 and has a term of 10ten (10) years with a 20twenty (20) year amortization. The interest rate is fixed at 7.50% for the first 5five (5) years. Beginning with year 6six (6) and through the end of the loan term, the rate changes to 2% above the Federal Home Loan Bank of New York 5five (5) year term, 15fifteen (15) year Amortization Advances Rate. The Company’s monthly payment is $6,293 and payments commenced on January 1, 2007, with the final payment being due on December 1, 2016. The loan is collateralized by the Company's facility in Kinderhook, New York and its personal property.  The amount outstanding on this mortgage was $744,000$734,000 and $758,000$739,000 at September 30, 2008March 31, 2009 and December 31, 2007,2008, respectively.

8
Line of Credit
 
The Company has a Line of Credit with FNFG. As disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on August 8, 2008, effective August 1, 2008, the Company and FNFG entered into an amendment to the original Loan Documents (the “Amendment”). The Amendment combined two lines of credit already in place with FNFG into one line of credit (the “Line of Credit”) along with amendingand amended certain terms related to the combined Line of Credit. Pursuant to the Amendment, the maximum amount available under the Line of Credit iswas lowered to $750,000, and the maturity date of the Line of Credit iswas April 1, 2009. The interest rate on the Line of Credit iswas prime plus 1%.  Pursuant to the Amendment, the Company iswas required to maintain certain financial covenants; the Company’s monthly net loss mustwas not to exceed $75,000 during any month and, while any loans or commitments are outstanding and due FNFG, the Company mustwas to maintain a minimum debt service coverage ratio of 1.10x, to be measured at December 31, 2008. The minimum debt service coverage ratio is defined as net income plus interest expense plus depreciation plus expense related to the amortization of derivative securities divided by required principal payments over the preceding twelve months plus interest expense. There is no requirement for annual repayment of all principal on this Line of Credit;Credit and it is payable on demand. The purpose of this Line of Credit is to provide working capital. The amount outstanding on the Line of Credit was $419,000$621,000 at September 30, 2008. AtMarch 31, 2009 and $431,000 at December 31, 2007, the Line of Credit was two separate lines of credit and the amount outstanding was $690,000 under one line and $33,000 under the other line, totaling $723,000.2008.

Term Note
On January 22, 2007, the Company entered into a Term Note with FNFG in the amount of $539,000 (the “Note”). The term of the Note is 5 years with a fixed interest rate of 7.17%. The Company’s monthly payment is $10,714 and payments commenced on February 1, 2007, with the final payment being due on January 23, 2012. The Company has the option of prepaying the Note in full or in part at any time during the term without penalty. The loan is secured by Company assets now owned or hereafter acquired. The proceeds received were used for the purchase of automation equipment to enhance the Company's manufacturing process in its New Jersey facility. The amount outstanding on this Note was $381,000$330,000 and $455,000$356,000 at September 30, 2008March 31, 2009 and December 31, 2007,2008, respectively.

Any default or breach byForbearance Agreement
On February 4, 2009, although the Company was current with the payment schedules for its Real Estate Mortgage, Term Note and Line of anyCredit, the Company received a letter from FNFG notifying the Company that an event of default had occurred under the terms, covenants and conditions set forth in any Loan DocumentDocuments related to the Note, the Line of Credit, Real Estate Mortgage and Term Note (the “Credit Facilities”); the event of default occurred as a result of, among other things, the Company’s failure to comply with the maximum monthly net loss covenant set forth in the Amendment.  Pursuant to the terms of the Loan Documents, all obligations of the Company to FNFG under the Loan Documents could be declared by FNFG to be immediately due and payable. The principal amount totaled $1,636,635.97, plus interest and other charges through February 4, 2009 (collectively, the “Debt”).
The February 4, 2009 notice also stated that, as an accommodation to the Company, FNFG decided not to immediately accelerate the Debt, and that they expected the Company to enter into a Forbearance Agreement with FNFG memorializing measures and conditions required by FNFG. FNFG also notified the Company that they were reducing the commitment on the Line of Credit from $750,000 to $650,000 and placing a hold on one of our accounts held at FNFG.

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On March 12, 2009, the Company entered into a Forbearance Agreement (the “Agreement”) with FNFG. The Agreement addresses the Company’s non-compliance with the maximum monthly net loss and the minimum debt service coverage ratio covenants (“Existing Defaults”) under the Loan Documents related to the Debt. Under the terms of the Agreement, FNFG will forbear from exercising its rights and remedies arising under the Loan Documents from the Existing Defaults. The Agreement is in effect until (i) June 1, 2009; or (ii) the date on which FNFG elects to terminate the Agreement upon the occurrence of an event of default under the Agreement or under the Loan Documents (other than an Existing Default); or (iii) the date on which any subsequent amendment to the Agreement becomes effective (the “Forbearance Period”).
During the Forbearance Period, FNFG will continue to place a hold on one of the Company’s accounts but agreed to release up to $5,000 per month from the account to be used for the purpose of paying a financial advisory firm engaged by the Company to find and evaluate alternative funding sources; the financial advisory firm was referred to the Company by FNFG. The Company began making payments to this financial advisory firm on March 1, 2009. As of the date of this report there is a balance of $86,000 in this account.
The maximum available under the Line of Credit during the Forbearance Period will be the lesser of $650,000, or the Net Borrowing Capacity. Net Borrowing Capacity is defined as Gross Borrowing Capacity less the Inventory Value Cap. Gross Borrowing Capacity is defined as the sum of (i) 80% of eligible accounts receivable, (ii) 20% of raw material inventory and (iii) 40% of finished goods inventory. Inventory Value Cap is defined as the lesser of $400,000, or the combined value of items (ii) and (iii) of Gross Borrowing Capacity. Since September 2008, the Company’s Net Borrowing Capacity has declined from $1,195,000 to $910,000 as of the date of this report.
During the Forbearance Period, interest will accrue on the Line of Credit at the rate of prime plus 4%, an increase from prime plus 1%. Interest accruing on the Real Estate Mortgage (togetherduring the “Credit Facilities”) shall constitute a defaultForbearance Period remains unchanged at the fixed rate of 7.5% and FNFG may declare all sums outstanding underinterest on the Credit Facilities due and payable without notice or demand.Note remains unchanged at the fixed rate of 7.17%. In the event of default under the Agreement, interest under the Line of Credit will increase to the greater of prime plus 6% or 10%. The Line of Credit terminates on June 1, 2009.
Under the Agreement, during the Forbearance Period: FNFG waives any further default relating to the maximum monthly net loss covenant and minimum debt service coverage ratio provided the Company will beshows a net loss no greater than $300,000 for the quarter ending March 31, 2009, and on or before May 1, 2009, the Company is required to provide to FNFG a legally binding and executed commitment letter from a bona-fide third party lender setting forth the terms of a full refinancing of the Debt to close on or before June 1, 2009.
The Company is in compliance with the net loss requirement for the quarter ended March 31, 2009 and remains in compliance with its payment schedules related to the Credit Facilities. On April 1, 2009, the Company entered into a non-binding proposal with a third party related to a revolving secured line of credit of up to $1,500,000. The financing is subject to completion of the third party’s due diligence. In connection with this proposal, the Company has paid the third party a non-refundable deposit of $12,500, for their time and costs involved in their due diligence review and evaluation.  FNFG authorized the release of these funds from the Company’s account currently frozen by FNFG.
On May 6, 2009, the Company entered into Letter Agreement related to the Forbearance Agreement of March 12, 2009. The Letter Agreement requires the Company to produce to FNFG, on or before May 15, 2009, a legally binding and executed commitment letter from a bona-fide third party lender setting forth the terms of a full refinancing of the Line of Credit to close on or before June 1, 2009. Furthermore, on or before June 1, 2009, the Company must produce to FNFG a legally binding and executed commitment letters from a bona-fide third party lender setting forth the terms of a full refinancing of the Term Note and the Real Estate Mortgage to close on or before July 1, 2009. As of the date of this report, the Company continues to work with the third party lender referenced above towards finalizing a loan commitment by May 15, 2009.
Copier Lease
On May 8, 2007, the Company purchased a copier through an equipment lease with RICOH in the amount of $17,000.  The term of the lease is five (5) years with an interest rate of prime plus 6% under its Line of Credit.14.11%.  The amount outstanding on this lease was $12,000 and $13,000 at March 31, 2009 and December 31, 2008, respectively.


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Under the Loan Documents, as amended by the Amendment, the Company was required to sell at least $500,000 in subordinated debentures by September 1, 2008, on terms consistent with a term sheet agreed to between the Company and Cantone Research, Inc. of Tinton Falls, New Jersey (“Cantone”) for the private placement of an issue of 10% Subordinated Convertible Debentures,

Series A (the “Series A Debentures”).Debenture Financing

On August 15, 2008, the Company completed its offering of the Series A Debentures and received gross proceeds of $750,000 in principal amount of Series A Debentures (see Current Report on Form 8-K and amendment on Form 8-K/A-1 filed with the Commission on August 8, 2008 and August 18, 2008 respectively). The net proceeds of the offering of Series A Debentures were $630,000.$631,000 after $54,000 of placement agent fees and expenses, legal and accounting fees of $63,000 and $2,000 of state filing fees. The securities issued in this transaction were sold pursuant to the exemption from registration afforded by Rule 506 under Regulation D ("Regulation D") as promulgated by the Commission under the Securities Act of 1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933 Act.

The Series A Debentures accrue interest at a rate of 10% per annum (payable by the Company semi-annually) and mature on August 1, 2012. The payment of principal and interest on the Series A Debentures is subordinate and junior in right of payment to all Senior Obligations, as defined under the Series A Debentures. Holders of the Series A Debentures will have a right of conversion of the principal amount of the Series A Debentures into shares (the “Conversion Shares”) of the common stock of the Company (“Common Stock”), at a conversion rate of 666.67 shares per $500 in principal amount of the Series A Debentures (representing a conversion price of approximately $0.75 per share). This conversion right can be exercised at any time, commencing the earlier of (a) one hundred twenty (120) days after the date of the Series A Debentures, or (b) the effective date of a Registration Statement to be filed by the Company with respect to the Conversion Shares. The Company has the right to redeem any Series A Debentures that have not been surrendered for conversion at a price equal to the Series A Debentures’ face value plus $0.05 per underlying common share, or $525 per $500 in principal amount of the Series A Debentures, representing an aggregate conversion price of $787,500. This redemption right can be exercised by the Company at any time within ninety (90) days after any date when the closing price of the Common Stock has equaled or exceeded $2.00 per share for a period of twenty (20) consecutive trading days.

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As the Offering’s placement agent Cantone Research, Inc. (“CRI”) received a Placement Agent fee of $52,500, or 7% of the gross principal amount of Series A Debentures sold. In addition, the Company issued CantoneCRI a four (4) year warrant to purchase 30,450 shares of the Company’s common stock at an exercise price of $0.37 per share (the closing price of the Company’s common shares on the Closing Date) and a four (4) year warrant to purchase 44,550 shares of the Company’s common stock at an exercise price of $0.40 per share (the closing price of the Company’s common stock on the Series A Completion Date), (together the “Placement Agent Warrants”). All warrants issued to Cantone areCRI were immediately exercisable upon issuance.

The Company has incurred $125,000 in costs related to the offering. Included in these costs was $6,000 of non-cash compensation expense related to the issuance of the Placement Agent Warrants to Cantone. These costs will be amortized over the term of the Series A Debentures. For the three months ended September 30, 2008, the Company amortized $5,000 of expense related to these debt issuance costs. The Company has also accrued $13,000 in interest expense at September 30, 2008.

Pursuant to a Registration Rights Agreement, the Company willwas to use reasonable efforts to register the Conversion Shares and the shares of Common Stock issuable upon exercise of the Placement Agent Warrants.

On May 8, 2007,Warrants, and the Company purchasedfiled a copier through an equipment lease with RICOH inRegistration Statement on Form S-3 on April 15, 2009, and further amended the amount of $17,000. The term of the lease isRegistration Statement on May 5, years with an interest rate of 14.11%. The amount outstanding on this lease was $13,000 and $15,000 at September 30, 2008 and December 31, 2007, respectively.

Note E –Sublicense Agreement2009.
 
On February 28, 2006, theThe Company entered into a non-exclusive Sublicense Agreement (the “Agreement”) with an unaffiliated third partyhas incurred $131,000 in costs related to certain patents allowing us to expand our contract manufacturing operations. Under this Sublicense Agreement, the Company must pay a non-refundable feeoffering. Included in these costs was $12,000 of $175,000 over the course of 2 years, of which $75,000 was paid in the first quarter of 2006 and $50,000 was paid in the first quarter of 2007. The remaining $50,000 was paid in the first quarter of 2008. The Company is also required to pay royalties for products it manufactures that fall within the scope of these patents. The Company was not obligated to pay any royalties in 2006 or 2007. Beginning with the year ended December 31, 2007, the Company is obligated to pay a $20,000 minimum annual royalty (“MAR”) that can be applied against royalties on sales of products that fall within the scope of the sublicensed patents in the fiscal year ending December 31, 2008. The first MAR payment was made in January 2008 and there were not any sales of products made in the nine months ended September 30, 2008 that would be applied against the MAR.

Note F – Integrated Biotechnology Agreement

In March 2006, the Company entered into a royalty agreement with Integrated Biotechnology Corporation (“IBC”). IBC is the owner of the RSV (Respiratory Syncytial Virus) test that the Company manufactures for one of IBC’s distributors. The agreement was entered into to address amounts that IBC owed to the Company at the end of fiscal year 2005, and to streamline the order and fulfillment process of IBC’s RSV product. All outstanding amounts due to the Company were satisfied by the end of the third quarter of 2007. The Company continues to work directly with IBC’s distributor under the terms of the agreement, which states the Company is to pay a 20% royalty of total sales to IBC. During the nine months ended September 30, 2008, IBC earned royalties in the amount of $65,000.

Note G – 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 then 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 vested 100% on the one-year anniversary of the date of the grant (although the options granted to the former Chief Financial Officer expired in January 2008). In accordance with FAS 123(R), the Company recognized $63,347 in non-cash compensation expense related to these grants from June 2006 through May 2007. Included in general and administrative expense for the nineissuance of the Placement Agent Warrants to CRI. These costs will be amortized over the term of the Series A Debentures.  For the three months ended September 30, 2007 is $26,000March 31, 2009, the Company amortized $8,000 of this non-cash compensation expense.

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Note H – Employment Agreements
expense related to these debt issuance costs. The Company has entered into employment agreements with its Chief Executive Officer Stan Cipkowski, Chief Science Officer Martin R. Gould, Chief Financial Officer Stefan Parker and Executive Vice President of Operations Douglas Casterlin, providing for aggregate annual salaries of $624,000. The agreement with Chief Executive Officer Cipkowski provides for a $206,000 annual salary, is for a term of one year and automatically renews unless either party gives advance notice of 60 days. The agreement with the Chief Science Officer Gould provides for a $149,000 annual salary, is for a term of one year and automatically renews unless either party gives advance notice of 60 days. The agreement with Chief Financial Officer Parker provides for a $120,000 annual salary, is for a term of one year and automatically renews unless either party gave advance notice of 60 days. The agreement with the Executive Vice President of Operations Casterlin provides for a $149,000 annual salary, is for a term of one year and automatically renews unless either party gives advance notice of 60 days. Copies of Cipkowski and Gould’s employment agreements were filed as exhibits to its Quarterly Report on Form 10-QSB filed with the Commission on August 13, 2007. A copy of Parker’s employment agreement was filed as an exhibitalso accrued $12,000 in interest expense at March 31, 2009 related to the Company’s Current Report on Form 8K filed with the Commission on August 24, 2007.Series A copy of Casterlin’s employment agreement was filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Commission on May 1, 2008.Debentures.
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
General
 
The following discussion of the Company's financial condition and the results of operations should be read in conjunction with the interim Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains, in addition to historical statements, forward-looking statements that involve risks and uncertainties. Our actual future results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed in the section titled "Risk Factors" in our Annual Report on Form 10-KSB10-K for the year ended December 31, 2007.2008. Any forward-looking statement speaks only as of the date on which such statement is made and we do not assume any responsibility to update any such forward-looking statement, nor we do intend to update any such forward-looking statements.


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Overview

During the yearthree months ended DecemberMarch 31, 2007,2009, the Company sustained a net loss of $990,000$252,000 from net sales of $13,872,000, and had net cash used in operating activities of $605,000. During the nine months ended September 30, 2008, the Company sustained a net loss of $177,000 from net sales of $10,368,000.$2,255,000. The Company had net cash used inprovided by operating activities of $134,000$257,000 for the ninefirst three months ended September 30, 2008.of 2009.

During the ninefirst three months ended September 30, 2008,of 2009, the Company continued to take steps to improve its financial position. Beginning in April 2008, the Company implemented a number of cost cutting initiatives including but not limited to, reducing the number of employees in its selling and marketing, research and development and general and administrative departments. The Company also continuescontinued to take steps to reduce manufacturing costs related to its products to increase the Company’s gross margin. Simultaneously with these efforts, the Company continues to focus on the development of new products to address market trends and needs.

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 and/or obtain additional credit facilities, if and when necessary.

In July 2008,March 2009, the Company shipped their first order ofwas notified by the United States Patent & Trademark office that it will be granted two patents; one for its OralStat® oral fluid drug tests to Save Mart Supermarkets of Modesto, California, a privately held food store chain.

In August 2008,testing product line and the Company completedother for its private placement of Series A Debentures.

In August 2008, the Company was granted CLIA waived status from the US Food and Drug Administration (“FDA”) of its Rapid TOX®all inclusive urine point of collection drug test cup product line. The waiver applies to all 14 drugs that the Company’s products currently test, and to two different cut-off levelsWith these grants, ABMC's intellectual property portfolio for its opiatedrug of abuse testing line will increase to 12 United States patents and cocaine tests. CLIA waived tests are recognized by FDA14 foreign patents, in addition to be so simple to usea number of pending patent applications both within the US and so accurate that there is little risk of error. CLIA waived tests are the most widely used tests in the clinical market (hospitals and physicians), and are in-demand for occupational health and criminal justice applications.

internationally.
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Plan of Operations

The Company’s sales strategy continues to be a focus on direct sales, while identifying new contract manufacturing operationsopportunities and pursuing new national accounts. During the ninethree months ended September 30, 2008,March 31, 2009, the Company continued its program to market and distribute its urine and oral fluid based point of collection tests for drugs of abuse and its Rapid Reader® drug screen results and data management system. Contract manufacturing operations also continued in the ninethree months ended September 30, 2008.March 31, 2009.

Results of operations for the ninethree months ended September 30, 2008March 31, 2009 compared to the ninethree months ended September 30, 2007March 31, 2008

NET SALES: SALES: Net sales for the nine monthsquarter ended September 30, 2008 were $10,368,000,March 31, 2009 decreased $1,044,000 or 31.6% when compared to $10,523,000net sales for the nine monthsquarter ended September 30, 2007. This represents a decrease of 155,000, or 1.5%. When comparing the nine months ended September 30, 2008 with the nine months ended September 30, 2007, international and contract manufacturing sales increased. These increases were offset by decreasesMarch 31, 2008. Sales in national accounts, outside sales, and in-house sales. Our outside and in-house sales divisions continueall markets continued to be affected by the global economic crisis and price pressures in the criminal justicefirst quarter of 2009. Sales in our Corporate/Workplace market caused by general economic conditions and foreign competition. Historically, sales in(which includes our national account division have increased, but general economic conditions have depresseddivision) continue to be negatively impacted as new and existing employment levels of our customers either remain lower or in some cases experienced further declines. Price pressure from foreign competitors in our Government/Corrections/Law Enforcement market also continues to negatively impact that market. Sales in our International markets also declined slightly in the first quarter of 2009. We expect to continue to see declines in the Corporate/Workplace market as a result of declines in the employment levels of these customers. Decreasesour customers, and increased price pressure in national accountthe Government/Corrections/Law Enforcement market, until the economy begins to recover. We are optimistic that sales in our International markets will either recover or decline at a lower rate.  To combat the thirdsales decline we are experiencing with our current customers in the Corporate/Workplace market, we hope to close new accounts (including but not limited to new national accounts). To combat the decline in the Government/Corrections/Law Enforcement market, we have started offering our customers a modified version of our Rapid TOX Cup® product, the Rapid TOX Cup II. Certain raw material costs associated with the Rapid TOX Cup II are lower, which means we can offer the Rapid TOX Cup II at a reduced cost to our customers, which we hope will allow us to be successful in combating the price pressures in the Government/Corrections/Law Enforcement market. We will continue to focus our sales efforts on national accounts, direct sales and contract manufacturing, while striving to reduce manufacturing costs, which could enable us to be more cost competitive.

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When comparing the first quarter of 2009 to the first quarter of 2008, have thus negatively impacted the sales results for the nine months ended September 30, 2008. International sales were positively impacted by increased sales to Latin America, which were offset by the loss of one of our international distributors as well as decreased sales to other areas of the world as a result of the slowing economy.

Our Rapid Reader® (drug screen interpretation and data management system)TOX®, Rapid TOX (urine based testing cassette), and Rapid TOX Cup® (urine based all inclusive testing cup) product line sales increased along with an increase in our Rapid STAT™ (oral fluid based test device) product line sales. The Rapid TOX Cup and Rapid STAT product lines were launched late in the third quarter of 2007, so there were no sales of these product lines included in the nine months ended September 30, 2007.STAT™ increased. Increases in these product lines were offset by decreasesdeclines in our OralStat® (oral fluid based test device)sales of InCup®, Rapid TEC® (urine based multi-line dipstick)Drug Screen®, RDS InCup® (urine based all inclusive testing cup),OralStat® and Rapid Drug Screen product lines. The Company believes thatReader®. While most of these declines are simply the result of our lower sales levels, some of the attrition in these product lines is a result of customers switching from one product line to another due to either increased ease of use (in the case of the OralStat and Rapid STAT) or lower cost (in the case of RDS InCup and Rapid TOX Cup and Rapid TEC and Rapid TOX)Cup).

In the second quarter of 2008, the Company began marketing and selling a new version of its Rapid ONE® dipstick product, the Rapid ONE cassette. The Rapid ONE cassette utilizes the same drug-testing strip as the Rapid ONE, which is inserted into the cassette platform used for the Company’s Rapid TOX product line. It is the Company’s intention to transition the Rapid ONE dipstick product to the Rapid ONE cassette platform. This product transition will enable the Company to assemble and package the device on the Company’s automated production equipment in its New Jersey facility, thereby making the manufacturing process more efficient in time and cost, while still providing its customers with the same single testing options.

The Company’s contract manufacturing operations currently include the manufacture of a HIV test, a test for fetal amniotic membrane rupture, and a test for RSV and other infectious diseases, and agricultural testing products. The Company was notified during the third quarter of 2008 that its agreement with an unaffiliated third party to provide drug testing strips for incorporation into the party’s tests used in hospitals, emergency rooms and clinics will terminate, effective December 24, 2008. This termination is a result of the party’s merger with another entity, but the Company is currently negotiating to continue this contract relationship with the merger successor. The outcome of these negotiations will not have a material impact on the Company’s current contract manufacturing operations.RSV. Contract manufacturing sales forduring the nine months ended September 30, 2008first quarter of 2009 totaled $414,000, up$94,000, down from $218,000 for$131,000 in the nine months ended September 30, 2007.same period a year ago.

COST OF GOODS: GOODS SOLD: Cost of goods sold for the ninethree months ended September 30, 2008 was $5,822,000, or 56.2%ending March 31, 2009 increased to 59.2% of net sales, compared to $6,383,000, or 60.7%56.7% of net sales for the ninethree months ending March 31, 2008. Beginning in the fourth quarter of fiscal year ended September 30, 2007. WhileDecember 31, 2008, the Company has seen increased costsunanticipated sharp decline in raw materials relatedsales due to the manufacturedownturn of its products, the Company has been ableeconomy negatively impacted our gross profit margin; more specifically, our labor and overhead costs and raw material expenditures were not in line with the level of sales achieved. In the first quarter of 2009, we began reducing manufacturing labor and overhead costs and raw material expenditures in efforts to improve its cost of goods sold because of increased manufacturing efficiencies resulting from automation of its Rapid TOX product line and a shift in product sales to non-government markets at higherour gross profit margins. This improvement in cost of goods sold is alsomargin going forward, anticipating that sales will either continue to stay at lower levels or further decline until the economy recovers. As a result of inventory disposals that occurred duringthese efforts, we did see some positive impact on our gross profit margin in the nine months ended September 30, 2007 that didfirst quarter of 2009, however, due to the timing of the efforts, the impact was not occur during the nine months ended September 30, 2008. The inventory disposals in 2007 consisted of expired products and components enhanced as a result of product development.fully realized.

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OPERATING EXPENSES:Operating expenses declined 29.3%, when comparing the first quarter of 2009 to the first quarter of 2008. As a percentage of sales, operating expenses were $4,615,000, or 44.5%49.8% of net sales in the nine months ended September 30, 2008,first quarter of 2009, compared to $5,003,000, or 47.5%48.2% of net sales in the nine months ended September 30, 2007. Decreases in costs associated with our CLIA waiver application as well asfirst quarter of 2008. To improve its results of operations during the implementationglobal economic crisis, the Company implemented a number of cost cutting initiatives in research and development, selling and marketing and general and administrativethese initiatives have resulted in expense reductionsdecreases in expenses in all three divisions.divisions as described in the following detail:

Research and development (R&D)(“R&D”) expense

R&D expenses for the ninefirst three months ended September 30, 2008 were $445,000, or 4.3% of net sales2009 decreased 26.8% when compared to $520,000, or 4.9%the first quarter of net sales for the nine months ended September 30, 2007. Savings2008. The greatest savings was in consulting fees, supplies and materials, travel, depreciation and telephone costs were offset by increases in salaries and employee related benefits, FDA compliance costs, facility utility costs, and repairs and maintenance. Effectivesalary expense.  In June 30, 2008, the Company’s Vice President of Product Development retired. The former vice president received a payment of $35,000, equal to half his annual salary of $70,000, paid in 3 equal monthly installments of approximately $11,666 each beginning July 31, 2008, withretired and the last payment being made on September 30, 2008. The Company doeshas not filled this position, nor do we expect to fill this position in the future. Although there were increases in salariesThe R&D department continues to focus their efforts on the enhancement of current products and employee related benefits inexploration of contract manufacturing opportunities.
Selling and marketing expense
Selling and marketing expenses for the ninefirst three months ended September 30, 2008of 2009 decreased 35.2% when compared to the nine months ended September 30, 2007, the Company expects to see the full savings from this personnel reduction beginning in the fourthfirst quarter of 2008.  In the nine months ended September 30, 2008, the Company’s R&D department continued to focus its efforts on development of new products, exploration of contract manufacturing opportunities and enhancement of its current products.

Selling and marketing expense

Selling and marketing expenses in the nine months ended September 30, 2008 were $2,197,000, or 21.2% of net sales, compared to $2,334,000, or 22.2% of net sales, in the nine months ended September 30, 2007. This decrease in expense results from reductionsReductions in sales salaries and commissions, sales employee related benefits, travel and customer relations,expense, trade show related expenses,expense, postage, royalty expense, consulting fees, and advertising and marketing consulting fees. These decreasesexpense were partially offset by increases in postage, marketing salaries and royalty expensemarketing employee related benefits. A number of these reductions stem from our cost cutting initiatives that began in 2008.
In the first quarter of 2009, we continued to promote our products through selected advertising, participation at high profile trade shows and other marketing activities. Our direct sales force continued to focus their selling efforts in our targets markets, which include but are not limited to, Corporate/Workplace, and Government/Corrections/Law Enforcement. In addition, beginning in the fourth quarter of 2008, our direct sales force began to focus more efforts on the Clinical/Physician/Hospital market, as a result of increased salesour receipt of RSV.a CLIA (Clinical Laboratory Improvement Amendments) waiver related to our Rapid TOX product line. The reduction in sales salaries, commissionsClinical Laboratory Improvement Amendments (CLIA) of 1988 established quality standards for laboratory testing to ensure the accuracy, reliability and other employee related benefits resulted fromtimeliness of patient test results regardless of where the test was performed. As a reduction in sales personnel as partresult, those using CLIA waived tests are not subject to the more stringent and expensive requirements of the Company’s implementation of cost cutting initiatives.

moderate or high complexity laboratories.
 
General and administrative (G&A)(“G&A”) expense

G&A expenses were $1,973,000, or 19.0%for the first three months of net sales in the nine months ended September 30, 20082009 decreased 23.3% when compared to $2,149,000, or 20.4%the first quarter of net sales in the nine months ended September 30, 2007. Expenses in the nine months ended September 30, 2007 included $204,000 of costs associated with the Company’s CLIA waiver application and $26,000 in non-cash compensation expense. Costs associated with the CLIA waiver application significantly decreased to $13,000, and there was no non-cash compensation expense in the nine months ended September 30, 2008. Also contributing to the decrease in G&A expense were decreasesReductions in investor relations consultingexpense, quality assurance salaries and supplies, CLIA waiver expense, legal fees, insurance, travel related expenses, outsidepatents, licenses and permits, training, computer supplies, General Service Administration fees, bad debts and bank service fees and repairs and maintenance. These decreases were partially offset by increases in quality assurance related expenses, accountingG&A salaries, consulting fees, auto allowance, postage, repairs and legalmaintenance, payroll service fees patents and licenses, bad debts and bank service fees.

Results of operations for the three months ended September 30, 2008 compared to the three months ended September 30, 2007

NET SALES: Net sales for the quarter ended September 30, 2008 were $3,604,000, compared to $3,912,000 for the quarter ended September 30 2007. This represents a decrease of $308,000, or 7.9%. Decreases in national accounts and outside sales were offset by increases in contract manufacturing and international sales. The Company’s outside and in-house sales divisions continue to be affected by price pressures in the criminal justice market caused by general economic conditions and foreign competition. Historically, sales in our national account division have increased, but general economic conditions have depressed the employment levels of these customers, causing the decrease in sales in the third quarter of 2008. International sales were positively impacted by increased sales to our master distributors and customers in Latin America, as well as by increases in sales to our European master distributor.

In the third quarter of 2008, sales of the Rapid Reader, Rapid TOX, Rapid TOX Cup and Rapid STAT product lines increased while sales of the RDS InCup, Rapid Drug Screen, OralStat and Rapid TEC product lines decreased. The Rapid TOX Cup and Rapid STAT product lines were launched late in the third quarter of 2007, so there were no sales of these product lines included in the third quarter of 2007. Increases in these product lines were offset by decreases in the OralStat and RDS InCup product lines. The Company believes that the attrition in these product lines is a result of customers switching from one product line to another due to either increased ease of use (in the case of the OralStat and Rapid STAT) or lower cost (in the case of RDS InCup and Rapid TOX Cup and Rapid TEC and Rapid TOX).depreciation.

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In the second quarter of 2008, the Company began marketing and selling a new version of its Rapid ONE® dipstick product, the Rapid ONE cassette. The Rapid ONE cassette utilizes the same drug-testing strip as the Rapid ONE, which is inserted into the cassette platform used for the Company’s Rapid TOX product line. It is the Company’s intention to transition the Rapid ONE dipstick product to the Rapid ONE cassette platform. This product transition will enable the Company to assemble and package the device on the Company’s automated production equipment in its New Jersey facility, thereby making the manufacturing process more efficient in time and cost, while still providing its customer with the same single testing options.

The Company’s contract manufacturing operations currently include the manufacture of a HIV test, a test for fetal amniotic membrane rupture, a test for RSV and other infectious diseases, and agricultural testing products. The Company was notified during the third quarter of 2008 that its agreement with an unaffiliated third party to provide drug testing strips for incorporation into the party’s tests used in hospitals, emergency rooms and clinics will terminate, effective December 24, 2008. This termination is a result of the party’s merger with another entity, and the Company is currently negotiating to continue this contract relationship with the merger successor. The outcome of these negotiations will not have a material impact on the Company’s current contract manufacturing operations. Contract manufacturing sales for the third quarter of 2008 totaled $181,000, up from $136,000 for the third quarter of 2008.

COST OF GOODS: Cost of goods sold for the three months ended September 30, 2008 was $2,104,000, or 58.4% of net sales, compared to $2,493,000, or 63.7% of net sales for the three months ended September 30, 2007. While the Company has seen increased costs in raw materials related to the manufacture of its products, the Company has been able to improve its cost of goods because of increased manufacturing efficiencies resulting from automation of its Rapid TOX product line and a shift in product sales to non-government markets at higher gross profit margins.
OPERATING EXPENSES: Operating expenses were $1,373,000, or 38.1% of net sales, in the third quarter of 2008, compared to $1,632,000, or 41.7% of net sales, in the third quarter of 2007. Decreases in costs associated with our CLIA waiver application as well as the implementation of cost cutting initiatives in research and development, selling and marketing and general and administrative resulted in expense reductions in all three divisions.

Research and development (R&D) expense

R&D expenses for the three months ended September 30, 2008 and 2007 were $128,000, or 3.6% of net sales and $173,000, or 4.4% of net sales, respectively. Savings in salaries and employee related benefits, consulting fees, supplies and materials, telephone and depreciation were partially offset by increases in utility costs, FDA compliance costs, and repairs and maintenance. Effective June 30, 2008, the Company’s Vice President of Product Development, retired. The former vice president received a payment of $35,000, equal to half his annual salary of $70,000, paid in 3 equal monthly installments of approximately $11,666 each beginning July 31, 2008, with the last payment being made on September 30, 2008. The Company does not expect to fill this position in the future; therefore, the Company expects to see the full savings from this personnel reduction beginning in the fourth quarter of 2008. In the third quarter of 2008, the Company’s R&D department continued to focus its efforts on development of new products, exploration of contract manufacturing opportunities and enhancement of its current products.

Selling and marketing expense

Selling and marketing expenses were $713,000, or 19.8% of net sales, in the third quarter of 2008, compared to $818,000, or 20.9% of net sales, in the same period a year ago. This decrease in selling and marketing expense is a result of savings in sales salaries and employer related payroll taxes, travel costs, trade-show related expenses, depreciation, marketing salaries (as a result in the reduction in marketing personnel in the third quarter of 2008), and marketing consulting fees. These savings were partially offset by increases in postage, sales employee related benefits and insurance, dues and subscriptions and royalty expense as a result of increased sales of RSV.

General and administrative (G&A) expense

G&A expense were $532,000 or 14.8% of net sales in the three months ended September 30, 2008 compared to $641,000, or 16.4% of net sales in the three months ended September 30, 2007. The third quarter of 2007 included $15,000 of costs associated with our CLIA waiver application; there were no CLIA related costs in the third quarter of 2008. Decreases in investor relations, salaries, legal fees, travel costs, insurances, bank service fees and bad debts, due to a recovery of previously written off account, were partially offset by increases in patents and licenses, auto expense, ISO related expenses, outside service fees, utilities and contributions.

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Liquidity and Capital Resources as of September 30, 2008March 31, 2009

The Company has working capital of $4,658,000 at September 30, 2008 compared to working capital of $4,017,000 at December 31, 2007. The Company has historically satisfied its net working capital requirements through operations, cash generated by proceeds from private placements of equity securities and debt financing. 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.

The Company's cash requirements depend on numerous factors, including product development activities, sales and marketing efforts, 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, refine manufacturing efficiencies, 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’s financial statements for the fiscal year ended December 31, 2008 were prepared assuming it will continue as a going concern. As of the date of this report, the Company believesdoes not believe that its current cash balances, together with cash generated from future operations maybeand amounts available under our credit facilities will be sufficient to fund operations for the next twelve months, but there can be no assurance of the Company’s continued liquidity. The Companymonths. If cash generated from operations is requirednot sufficient to comply with certain financial covenants under its Credit Facilities with FNFG (see Note D),satisfy our working capital and while the Company is in compliance with these financial covenants at September 30, 2008, there can be no assurance that such compliancecapital expenditure requirements, we will continue in the future. Non-compliance would constitute a default and FNFG may declare all sums outstanding under the Credit Facilities due and payable without notice or demand. 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.

Despite implementationThe Company has a Line of cost cutting initiatives beginning inCredit, a Real Estate Mortgage and a Term Note with FNFG (See Item I, Note E).
Working capital
The Company’s working capital decreased $181,000 at March 31, 2009, when compared to working capital at December 31, 2008. In the secondfourth quarter of 2008, management believesthe Company reclassified its long-term bank debt with FNFG to short-term as a result of the Company’s default under the Loan Documents related to our credit facilities with FNFG and the subsequent forbearance (See Item I, Note E).
The Company has historically satisfied its net working capital requirements through cash from operations, bank debt, occasional proceeds from the exercise of stock options and warrants (approximately $623,000 since 2002) and through the private placement of equity securities ($3,299,000 in gross proceeds since August 2001, with net proceeds of $2,963,000 after placement, legal, transfer agent, accounting and filing fees).
Dividends
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.
Cash Flows
Decreases in inventory and increases in researchaccrued expenses and development, selling and marketing and general and administrative expense may be required in the future 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 taken measures to control the rate of increase of these costs to be consistent with the expected sales growth rate of the Company.

Net cash used in operating activities was $134,000 for the nine months ended September 30, 2008, compared to $748,000 for the nine months ended September 30, 2007. The net cash used in operating activities for the nine months ended September 30, 2008 resulted primarily fromwages payable offset by increases in accounts receivable inventory balances and liabilities, includingdecreases in accounts payable, accrued expenses and wages payable.resulted in cash provided by operations of $257,000 in the first three months of 2009.  The primary use of cash in the first quarter of 2009 was funding of operations.

Net cash used in investing activities was $48,000 for the nine months ended September 30, 2008, compared to $632,000 for the nine months ended September 30, 2007. Net cash used in both yearsthe first quarter of both 2009 and 2008 was for investment in property, plant and equipment. Included in the nine months ended September 30, 2007 was $270,000 representing the cost of equipment for use in the Company’s New Jersey facility for the automation of the Company’s Rapid TOX product line.
 
Net cash provided by financing activities was $237,000 forin the ninefirst three months ended September 30, 2008, whichof 2009 consisted of net proceeds from debenture financing and the Company’s lineour Line of creditCredit offset by debt issuance costs and payments on the Company’s outstanding debt and line of credit facilities.debt. Net cash provided byused in financing activities forin the ninefirst three months ended September 30, 2007 was $1,115,000 andof 2008 consisted of proceeds from a 5-year term note, the Company’s lines of credit and exercise of stock options offset by debt and line of credit payments.payments on outstanding debt.

At September 30, 2008,March 31, 2009, the Company had cash and cash equivalents of $391,000.$592,000.

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Outlook
The Company's primary short-term capital and working capital needs relate to continued support of its research and development programs, exploring new distribution opportunities, focusing sales efforts on segments of the drugs of abuse testing market that will yield high volume sales, refining its manufacturing and production capabilities, and establishing adequate inventory levels to support expected sales.

While the Company believes that its current infrastructure is sufficient to support its business, if at some point in the future, the Company experiences renewed growth in sales, it may be required to increase its current infrastructure to support sales. It is also possible that additional investments in research and development, selling and marketing and general and administrative may be necessary in the future to: develop new products in the future, enhance current products to meet the changing needs of the point of collection testing market, grow contract manufacturing operations, promote the Company’s products in its markets and institute changes that may be necessary to comply with various new public company reporting requirements including but not limited to requirements related to internal controls over financial reporting. However, the Company has taken measures to control the rate of increase of these costs to be consistent with any sales growth rate of the Company.
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The Company believes that it will need to raise additional capital in fiscal 2009 to be able to continue operations. If events and circumstances occur such that the Company does not meet its current operating plans, or it is unable to raise sufficient additional equity or debt financing, or credit facilities are insufficient or not available, the Company may be required to further reduce expenses or take other steps which could have a material adverse effect on its future performance.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.applicable

Item 4. Controls and Procedures

(a)
Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), together with other members of management, have reviewed and evaluated the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this review and evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported in a timely manner.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in the Company's internal control over financial reporting during the last quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings

See “Note C – Litigation” in the Notes to interim Financial Statements included in this report for a description of pending legal proceedings in which the Company is a party.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On August 15, 2008, the Company completed its offering of Series A Debentures and received gross proceeds of $750,000. The Series A Debentures accrue interest at a rate of 10% per annum (payable by the Company semi-annually) and mature on August 1, 2012. The payment of principal and interest on the Series A Debentures is subordinate and junior in right of payment to all Senior Obligations, as defined under the Series A Debentures. Holders of the Series A Debentures will have a right to receive Conversion Shares of Common Stock at a conversion rate of 666.67 shares per $500 in principal amount of the Series A Debentures (representing a conversion price of approximately $0.75 per share). This conversion right can be exercised at any time, commencing the earlier of (a) one hundred twenty (120) days after the date of the Series A Debentures, or (b) the effective date of a Registration Statement to be filed by the Company with respect to the Conversion Shares. The Company has the right to redeem any Series A Debentures, which have not been surrendered for conversion at a price equal to the Series A Debentures’ face value plus $0.05 per underlying common share, or $525 per $500 in principal amount of the Series A Debentures. This redemption right can be exercised by the Company at any time within ninety (90) days after any date when the closing price of the Common Stock has equaled or exceeded $2.00 per share for a period of twenty (20) consecutive trading days.None.

On August 15, 2008, the Company completed the Offering and received gross proceeds of $750,000 in principal amount of Series A Debentures. The securities issued in this transaction were sold pursuant to the exemption from registration afforded by Rule 506 under Regulation D as promulgated by the Commission under the 1933 Act, and/or Section 4(2) of the 1933 Act. The Series A Debentures were placed with accredited investors, as that term is defined in Rule 501(a) of Regulation D promulgated by the Commission under the Securities Act of 1933, as amended (the “ 1933 Act”).

As the Offering’s placement agent Cantone received a Placement Agent fee of $52,500, or 7% of the gross principal amount of Series A Debentures sold. In addition, the Company issued Cantone a four (4) year warrant to purchase 30,450 shares of the Company’s common stock at an exercise price of $0.37 per share (the closing price of the Company’s common shares on the Closing Date) and a four (4) year warrant to purchase 44,550 shares of the Company’s common stock at an exercise price of $0.40 per share (the closing price of the Company’s common stock on the Series A Completion Date), (together the “Placement Agent Warrants”).

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Pursuant to a Registration Rights Agreement, the Company will use reasonable efforts to register the Conversion Shares and the shares of Common Stock issuable upon exercise of the Placement Agent Warrants.

Item 3. Defaults uponUpon Senior Securities

 None.

None.
Item 4. Submission of Matters to a Vote of Security Holders
 
None.

Item 5.  Other Information

None.


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Item 6.  Exhibits

31.131.1Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 
31.2Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 
32.1Certification 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
 
32.2Certification 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

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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/Stefan Parker
Stefan Parker
Chief Financial Officer
Executive Vice President, Finance
Principal AccountingFinancial Officer and duly authorized Officer

Dated: NovemberMay 14, 20082009

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