UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
 
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended JuneSeptember 30, 2010
 
¨ Transition report pursuant to 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 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(Address of principal executive offices)  (Zip(Zip Code)

518-758-8158
 (Registrant's(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     ¨ 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)    xYes   ¨ 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¨
Non-accelerated filer¨
¨
Smaller reporting companyx
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  ¨ 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 August 12,November 15, 2010

 
 

American Bio Medica Corporation

Index to Quarterly Report on Form 10-Q
For the quarter ended JuneSeptember 30, 2010

 PAGE
PART I – FINANCIAL INFORMATION
 
 
Item 1.Financial Statements3
 Balance Sheets as of JuneSeptember 30, 2010 (unaudited) and December 31, 20093
 Unaudited Statements of Operations for the sixnine months ended JuneSeptember 30, 2010 and JuneSeptember 30, 20094
 Unaudited Statements of Operations for the three months ended JuneSeptember 30, 2010 and JuneSeptember 30, 20095
 Unaudited Statements of Cash Flows for the sixnine months ended JuneSeptember 30, 2010 and JuneSeptember 30, 20096
 Notes to Financial Statements7
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations11
Item 3.Quantitative and Qualitative Disclosures About Market Risk1816
Item 4.Controls and Procedures1816
   
PART II – OTHER INFORMATION
   
Item 1.Legal Proceedings1816
Item 1A.Risk Factors1816
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2017
Item 3.Defaults Upon Senior Securities2017
Item 4.(Removed and Reserved)2017
Item 5.Other Information2017
Item 6.Exhibits2017
   
Signatures 2219 

 
2
 

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
American Bio Medica Corporation
Balance Sheets

 June 30,  December 31,  September 30,  December 31, 
 2010  2009  2010  2009 
 (Unaudited)     (Unaudited)     
ASSETS            
Current assets            
Cash and cash equivalents $79,000  $35,000  $66,000  $35,000 
Accounts receivable, net of allowance for doubtful accounts of $69,000 at June 30, 2010 and $67,000 at December 31, 2009  1,418,000   816,000 
Inventory, net of allowance for slow moving and obsolete inventory of $235,000 at June 30, 2010 and $271,000 at December 31, 2009  4,001,000   4,315,000 
Accounts receivable, net of allowance for doubtful accounts of $76,000 at September 30, 2010 and $67,000 at December 31, 2009  1,254,000   816,000 
Inventory, net of allowance for slow moving and obsolete inventory of $223,000 at September 30, 2010 and $271,000 at December 31, 2009  3,751,000   4,315,000 
Prepaid expenses and other current assets  127,000   101,000   186,000   101,000 
Total current assets  5,625,000   5,267,000   5,257,000   5,267,000 
                
Property, plant and equipment, net  1,486,000   1,624,000   1,462,000   1,624,000 
Debt issuance costs, net  95,000   118,000   83,000   118,000 
Other assets  30,000   31,000   30,000   31,000 
Total assets $7,236,000  $7,040,000  $6,832,000  $7,040,000 
                
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities                
Accounts payable $778,000  $678,000  $589,000  $678,000 
Accrued expenses and other current liabilities  443,000   506,000   321,000   506,000 
Wages payable  291,000   215,000   252,000   215,000 
Line of credit  483,000   260,000   749,000   260,000 
Current portion of long-term debt  911,000   107,000   883,000   107,000 
Current portion of unearned grant  10,000   10,000   10,000   10,000 
Total current liabilities  2,916,000   1,776,000   2,804,000   1,776,000 
                
Other liabilities  138,000   136,000   138,000   136,000 
Long-term debt  754,000   1,606,000   753,000   1,606,000 
Related party note  124,000   124,000   124,000   124,000 
Unearned grant  20,000   20,000   20,000   20,000 
Total liabilities  3,952,000   3,662,000   3,839,000   3,662,000 
                
COMMITMENTS AND CONTINGENCIES                
                
Stockholders' equity:                
Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at June 30, 2010 and December 31, 2009        
Common stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768 issued and outstanding at June 30, 2010 and December 31, 2009  217,000   217,000 
Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at September 30, 2010 and December 31, 2009        
Common stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768 issued and outstanding at September 30, 2010 and December 31, 2009  217,000   217,000 
Additional paid-in capital  19,313,000   19,299,000   19,323,000   19,299,000 
Accumulated deficit  (16,246,000)  (16,138,000)  (16,547,000)  (16,138,000)
                
Total stockholders’ equity  3,284,000   3,378,000   2,993,000   3,378,000 
                
Total liabilities and stockholders’ equity $7,236,000  $7,040,000  $6,832,000  $7,040,000 

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 
 
For The Six Months Ended
June 30,
  September 30, 
 2010  2009  2010  2009 
            
Net sales $5,552,000  $5,063,000  $8,082,000  $7,563,000 
                
Cost of goods sold  3,140,000   2,988,000   4,793,000   4,463,000 
                
Gross profit  2,412,000   2,075,000   3,289,000   3,100,000 
                
Operating expenses:                
Research and development  216,000   208,000   244,000   316,000 
Selling and marketing  1,021,000   1,070,000   1,532,000   1,587,000 
General and administrative  1,172,000   1,171,000   1,757,000   1,755,000 
  2,409,000   2,449,000   3,533,000   3,658,000 
                
Operating income / (loss)  3,000   (374,000)
Operating loss  (244,000)  (558,000)
                
Other income / (expense):                
Interest income      1,000       1,000 
Interest expense  (108,000)  (96,000)  (160,000)  (152,000)
Other expense      (2,000)      (3,000)
  (108,000)  (97,000)  (160,000)  (154,000)
                
Net loss before tax  (105,000)  (471,000)  (404,000)  (712,000)
                
Income tax expense  (3,000)      (4,000)    
                
Net loss $(108,000) $(471,000) $(408,000) $(712,000)
                
Basic and diluted loss per common share $0.00  $(0.02) $(0.02) $(0.03)
                
Weighted average number of shares outstanding – basic & diluted  21,744,768   21,744,768   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 
 
For The Three Months
Ended
June 30,
  September 30, 
 2010  2009  2010  2009 
            
Net sales $3,126,000  $2,808,000  $2,530,000  $2,501,000 
                
Cost of goods sold  1,665,000   1,652,000   1,653,000   1,476,000 
                
Gross profit  1,461,000   1,156,000   877,000   1,025,000 
                
Operating expenses:                
Research and development  114,000   106,000   28,000   108,000 
Selling and marketing  534,000   572,000   511,000   517,000 
General and administrative  591,000   648,000   585,000   584,000 
  1,239,000   1,326,000   1,124,000   1,209,000 
                
Operating income / (loss)  222,000   (170,000)
Operating loss  (247,000)  (184,000)
                
Other expense:                
Interest expense  (55,000)  (49,000)  (52,000)  (56,000)
Loss on disposal of fixed assets      (1,000)
  (55,000)  (49,000)  (52,000)  (57,000)
                
Net income / (loss) before tax  167,000   (219,000)
Net loss before tax  (299,000)  (241,000)
                
Income tax expense          (1,000)    
                
Net income / (loss) $167,000  $(219,000)
Net loss $(300,000) $(241,000)
                
Basic and diluted income / (loss) per common share $0.01  $(0.01)
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   21,744,768   21,744,768 

The accompanying notes are an integral part of the financial statements

 
5
 

American Bio Medica Corporation
Statements of Cash Flows
(Unaudited)

 
For The Six Months
Ended
  For The Nine Months Ended 
 June 30,  September 30, 
 2010  2009  2010  2009 
Cash flows from operating activities:            
Net loss $(108,000) $(471,000) $(408,000) $(712,000)
Adjustments to reconcile net loss to net cash provided by / (used in) operating activities:        
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation  148,000   171,000   220,000   255,000 
Loss on disposal of property, plant and equipment      2,000       3,000 
Amortization of debt issuance costs  36,000   17,000   53,000   28,000 
Provision for bad debts  12,000       19,000     
Provision for slow moving and obsolete inventory  (36,000)      (48,000)    
Share-based payment expense  13,000       23,000   8,000 
Changes in:                
Accounts receivable  (614,000)  (292,000)  (457,000)  165,000 
Inventory  350,000   1,091,000   612,000   1,148,000 
Prepaid expenses and other current assets  (38,000)  (25,000)  (103,000)  (48,000)
Other assets  1,000   (4,000)  1,000   16,000 
Accounts payable  100,000   (180,000)  (89,000)  (631,000)
Accrued expenses and other current liabilities  (63,000)  (60,000)  (185,000)  (251,000)
Wages payable  76,000   89,000   37,000   39,000 
Other liabilities  2,000   (7,000)  2,000   (23,000)
Net cash provided by / (used in) operating activities  (121,000)  331,000 
Net cash used in operating activities  (323,000)  (3,000)
                
Cash flows from investing activities:                
Purchase of property, plant and equipment  (10,000)  (25,000)  (57,000)  (28,000)
Net cash used in investing activities  (10,000)  (25,000)  (57,000)  (28,000)
                
Cash flows from financing activities:                
Payments on debt financing  (48,000)  (63,000)  (77,000)  (96,000)
Debt issuance costs      (41,000)
Net proceeds from line of credit  223,000   143,000   488,000   148,000 
Net cash provided by financing activities  175,000   80,000   411,000   11,000 
                
Net increase in cash and cash equivalents  44,000   386,000 
Net increase / (decrease) in cash and cash equivalents  31,000   (20,000)
Cash and cash equivalents - beginning of period  35,000   201,000   35,000   201,000 
                
Cash and cash equivalents - end of period $79,000  $587,000  $66,000  $181,000 
                
Supplemental disclosures of cash flow information                
Cash paid during period for interest $108,000  $96,000  $179,000  $171,000 
Related party note issued in lieu of accounts payable $   $124,000 

The accompanying notes are an integral part of the financial statements

 
6
 

Notes to financial statements (unaudited)
 
JuneSeptember 30, 2010
 
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 (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, theythese unaudited interim financial statements do not include all information and footnotes required by U.S. GAAP for complete financial statement presentation. These unaudited interim financial statements should be read in conjunction with our audited financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2009. 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 JuneSeptember 30, 2010, and the results of its operations for the three and sixnine month periods ended JuneSeptember 30, 2010 and JuneSeptember 30, 2009, and cash flows for the sixnine month periods ended JuneSeptember 30, 2010 and JuneSeptember 30, 2009.
 
Operating results for the three and sixnine months ended JuneSeptember 30, 2010 are not necessarily indicative of results that may be expected for the year ending December 31, 2010. Amounts at December 31, 2009 are derived from our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.
 
During the sixnine months ended JuneSeptember 30, 2010, there were no significant changes to our critical accounting policies, which are included in our Annual Report on Form 10-K for the year ended December 31, 2009.
 
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, we evaluate estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations, and contingencies and litigation. We base estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
These unaudited interim financial statements have been prepared assuming that wethe Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. Our independent registered public accounting firm's report on the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009, contained an explanatory paragraph regarding our ability to continue as a going concern. As of the date of this report, our current cash balances, together with cash generated from future operations and amounts available under current credit facilities may not be sufficient to fund operations for the next 12 months if sales levels do not continue to improve or if sales levels start to decline.improve. If cash generated from operations is not sufficient to satisfy our working capital and capital expenditure requirements, we will be required to sell additional equity or obtain additional credit facilities. There is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms, if at all.

 
7

Recently Adopted Accounting Standards
 
In April 2010, the FASB issued Update No. 2010-17, “Revenue Recognition—Milestone Method (Topic 605), Milestone Method of Revenue Recognition”, (“ASU No. 2010-17”). ASU No. 2010-17 provides guidanceThere were no new standards adopted that are expected to have a material impact on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. Determining whether a milestone is substantive is a matter of judgment made at the inception of the arrangement and ASU No. 2010-17 provides guidance on criteria that must be met for a milestone to be considered substantive.
Under ASU No. 2010-17, a milestone should be considered substantive in its entirety. An individual milestone may not be bifurcated. An arrangement may include more than one milestone, and each milestone should be evaluated separately to determine whether the milestone is substantive. Accordingly, an arrangement may contain both substantive and nonsubstantive milestones. A vendor’s decision to use the milestone method of revenue recognition for transactions relating to research and development deliverables is a policy election. Other proportional revenue recognition methods also may be applied as long as the application of those other methods does not result in the recognition of consideration in its entirety in the period the milestone is achieved. The amendments in ASU No. 2010-17 are effective on a prospective basis for milestones achieved in fiscal years, andour interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the impact, if any; the adoption of this guidance would have on our financial statements.
 
Note B – Net Income / (Loss)Loss Per Common Share
 
Basic net income / (loss)loss per common share is calculated by dividing the net income / (loss)loss by the weighted average number of outstanding common shares during the period. Diluted net income / (loss)loss per common share includes the weighted average dilutive effect of stock options and warrants. Potential common shares outstanding as of JuneSeptember 30, 2010 and 2009:
 
 June 30, 2010  June 30, 2009  
September 30,
2010
  September 30, 2009 
Warrants  75,000   75,000   75,000   75,000 
Options  3,401,580   3,762,080   2,826,580   3,802,080 

7
 
The number of securities not included in the diluted net loss per common share for the three and sixnine months ended JuneSeptember 30, 2010 and JuneSeptember 30, 2009 (because the effect would have been anti-dilutive) were 3,476,5802,901,580 and 3,837,080,3,877,080, respectively.
 
Note C – Litigation
 
From time to time, we are named in legal proceedings in connection with matters that arose during the normal course of business. While the ultimate result of any such litigation cannot be predicted, if we are unsuccessful in defending any such litigation, the resulting financial losses could have an adverse effect on the financial position, results orof operations and cash flows of the Company. We are aware of no significant litigation loss contingencies for which management believes it is both probable that a liability has been incurred and that the amount of the loss can be reasonably estimated. We are unaware of any proceedings being contemplated by governmental authorities as of the date of this report.

 
8

Note D – Line of Credit and Debt
 
Rosenthal and Rosenthal, Inc. (“Rosenthal”) Line of Credit
 
On July 1, 2009, we entered into a Financing Agreement (the “Refinancing“Financing Agreement”) with Rosenthal to refinance a line of credit held by First Niagara Bank (“First Niagara”). Under the RefinancingFinancing Agreement, Rosenthal agreed to provide the Company with up to $1,500,000 under a revolving secured line of credit (“Rosenthal Line of Credit”) that. The Rosenthal Line of Credit is collateralized by a first security interest in all of the Company’s receivables, inventory, and intellectual property, and a second security interest in our machinery and equipment, leases, leasehold improvements, furniture and fixtures. The maximum availability of $1,500,000 is subject to an availability formula based on certain percentages of accounts receivable and inventory, and elements of the availability formula are subject to periodic review and revision by Rosenthal. Under the RefinancingFinancing Agreement, we pay certain administrative fees and interest is payable monthly andmonthly. Interest is charged at variable rates, with minimum monthly interest of $4,000. We must maintain certain financial covenants soSo long as any obligations are due under the Rosenthal Line of Credit.Credit, we must maintain working capital of not less than $2,000,000 and tangible net worth, as defined by the Financing Agreement, of not less than $4,000,000 at the end of each fiscal quarter. Under the Financing Agreement, tangible net worth is defined as (a) the aggregate amount of all Company assets (in accordance with U.S. GAAP), excluding such other assets as are properly classified as intangible assets under U.S. GAAP, less (b) the aggregate amount of liabilities (excluding liabilities that are subordinate to Rosenthal). As of September 30, 2010, we were not in compliance with the tangible net worth requirement, but Rosenthal has waived the tangible net worth requirement for the quarter ended September 30, 2010. Failure to comply with these working capital and tangible net worth requirements in the future could constitute an event of default and all amounts outstanding, at Rosenthal’s option, could be immediately due and payable without notice or demand. Upon the occurrence of any such default, in addition to other remedies provided under the Financing Agreement, we could be required to pay to Rosenthal a charge at the rate of the Over-Advance Rate plus 3% per annum on the outstanding balance from the date of this report, we aredefault until the date of full payment of all amounts to Rosenthal. However, in compliance with these covenants.no event could the default rate exceed the maximum rate permitted by law. The Rosenthal Line of Credit is payable on demand and Rosenthal may terminate the RefinancingFinancing Agreement at any time by giving the Company 45 days advance written notice.
 
The amount outstanding on the Rosenthal Line of Credit was $483,000$749,000 at JuneSeptember 30, 2010 and $260,000 at December 31, 2009. Additional loan availability as of JuneSeptember 30, 2010 was $439,000,$336,000, for a total loan availability of $922,000$1,085,000 as of JuneSeptember 30, 2010. We incurred $41,000 in costs related to this refinancing, and these costs are being amortized over the term of the Rosenthal Line of Credit. For the sixnine months ended JuneSeptember 30, 2010, we have amortized $7,000$11,000 in costs. We have amortized $4,000 in costs for the three months ended September 30, 2010 and September 30, 2009, and for the nine months ended September 30, 2009. We use the Rosenthal Line of Credit for working capital.

8
 
Mortgage Consolidation Loan
 
On December 17, 2009, we closed on a refinancing and consolidation of an existing real estate mortgage and term note with First Niagara. The new credit facility through First Niagara is a fully secured term loan that matures on January 1, 2011, with a 6.5-year (78 month) amortization (the “Mortgage Consolidation Loan”). The Mortgage Consolidation Loan continues to be secured by our facility in Kinderhook, New York as well as various pieces of machinery and equipment. We must comply with a covenant to maintain a certain level of Liquidity (defined as any combination of cash, marketable securities or borrowing availability under one or more credit facilities other than the Mortgage Consolidation Loan). As of the date of this report, we are in compliance with this covenant.
 
The annual interest rate of the Mortgage Consolidation Loan is fixed at 8.75%. The monthly payment of principal and interest is $16,125. We have incurred approximately $28,000 in costs associated with this refinancing, which are included in prepaid expenses and other current assets, and will be amortized over the term of the Mortgage Consolidation Loan. For the sixthree and nine months ended JuneSeptember 30, 2010, we have amortized $12,000$6,000 and $18,000 of expense.expense, respectively. The balance of the Mortgage Consolidation Loan was $907,000$879,000 at JuneSeptember 30, 2010 and $953,000 at December 31, 2009.
 
Copier LeaseLeases
 
On May 8, 2007, we 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 14.11%. The amount outstanding on this lease was $8,000$7,000 at JuneSeptember 30, 2010 and $10,000 at December 31, 2009.
 
Debenture Financing
 
In August 2008, we completed an offering of Series A Debentures and received gross proceeds of $750,000. The net proceeds of the offering of Series A Debentures were $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 Series A Debentures accrue interest at a rate of 10% per annum (payable by the Company semi-annually) and mature on August 1, 2012. As placement agent, Cantone Research, Inc. (“Cantone”) received a Placement Agent fee of $52,500, or 7% of the gross principal amount of Series A Debentures sold. In addition, we issued Cantone a four-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 date of closing) and a four-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 Debentures Completion Date). All warrants issued to Cantone were immediately exercisable upon issuance. We incurred $131,000 in expenses related to the offering, including $12,000 in expense related to warrants issued to Cantone. We amortized $16,000$24,000 of expense related to these debt issuance costs forin both the sixnine months ended JuneSeptember 30, 2010 and $17,000 forin the sixnine months ended JuneSeptember 30, 2009. We amortized $8,000 of expense related to these debt issuance costs in both the three months ended September 30, 2010 and September 30, 2009. We have also accrued interest expense related to the Series A Debentures of $31,000$13,000 at JuneSeptember 30, 2010 and $31,000 at December 31, 2009.

9
 
Note E – Stock Option Grants
 
As a condition to the RefinancingFinancing Agreement with Rosenthal, our Chief Executive Officer, Stan Cipkowski  (“Cipkowski”) was required to execute a Validity Guarantee (the “Validity Guarantee”) that includes representations and warranties with respect to the validity of our receivables and guarantees the accuracy of our reporting to Rosenthal related to our receivables and inventory.inventory to Rosenthal. The Validity Guarantee places Cipkowski’s personal assets at risk in the event of a breach of such representations, warranties and guarantees. As part of the compensation for his execution of the Validity Guarantee, on July 1, 2009, Cipkowski was awarded an option grant representing 500,000 common shares of the Company under our Fiscal 2001 Stock Option Plan (the “2001 Plan”), at an exercise price of $0.20, the closing price of the Company’s common shares on the date of the grant. The option grant vests over 3 years in equal installments.installments, and the first 33% of the grant vested on July 1, 2010. In accordance with the provisions of ASC Topic 718, “Accounting for Stock Options and Other Stock Based Compensation”, previously referred to as SFAS 123(R), we will recognize $78,000 in share-based payment expense amortized over the required service period of 3 years. We recognized $13,000$20,000 in share-based payment expense for this grant in the sixnine months ended JuneSeptember 30, 2010. We recognized $7,000 in share-based payment expense for this grant in the nine months ended September 30, 2009 and in both the three months ended September 30, 2010 and asSeptember 30, 2009. As of JuneSeptember 30, 2010;2010 there was $52,000$46,000 in unrecognized expense with 2421 months remaining.

 
9

As another condition to the RefinancingFinancing Agreement with Rosenthal, our President and Chairman of the Board, Edmund M. Jaskiewicz (“Jaskiewicz”) was required to execute an Agreement of Subordination and Assignment (“Subordination Agreement”) related to $124,000 owed to Jaskiewicz by the Company as of June 29, 2009 (the “Jaskiewicz Debt”). Under the Subordination Agreement, the Jaskiewicz Debt is not payable, is junior in right to the Rosenthal Line of Credit and no payment may be accepted or retained by Jaskiewicz unless and until we have paid and satisfied in full any obligations to Rosenthal. Furthermore, the Jaskiewicz Debt was assigned and transferred to Rosenthal as collateral for the Rosenthal Line of Credit.
 
As compensation for his execution of the Subordination Agreement, on July 1, 2009 Jaskiewicz was awarded an option grant representing 50,000 common shares of the Company under our Fiscal 2001 Stock Option Plan (the “Fiscal 2001 Plan”), at an exercise price of $0.20, the closing price of the Company’s common shares on the date of the grant. The option grant was immediately exercisable. In accordance with ASC Topic 718, “Accounting for Stock Options and Other Stock Based Compensation”, previously referred to as SFAS 123(R), (“ASC Topic 718”), we recognized $8,000 during the year ended December 31, 2009 in share-based payment expense related to the grant of Jaskiewicz’s options upon issuance of the grant.
 
Furthermore, upon the 2nd and 3rd anniversary of the original stock option grant, Jaskiewicz willis to be awarded additional option grants of 50,000 each (“Additional Grants”). The exercise prices of the Additional Grants will be the closing price of the Company’s common shares on the date of each grant, and the Additional Grants will be immediately exercisable. The Additional Grants shall only be awarded if the Jaskiewicz Debt, or any remaining portion thereof, has not been repaid. If the Jaskiewicz Debt has been repaid in full, no Additional Grants will be issued. On July 1, 2010, Jaskiewicz was awarded an option grant representing 50,000 common shares of the Company under our Fiscal 2001 Plan, at an exercise price of $0.07, the closing price of the Company’s common shares on the date of the grant. The option grant is immediately exercisable. In accordance with ASC Topic 718, upon issuance of the grant in the three and nine months ended September 30, 2010, we recognized $3,000 in share-based payment expense related to this second option grant to Jaskiewicz.
 
Note F – Subsequent Event
On October 16, 2010, we voluntarily and temporarily suspended selling and marketing of our point of collection oral fluid drugs of abuse products in the Workplace market. This decision was made in response to communications and interactions with the FDA over the course of the last several months related to the warning letter we received from the FDA in July 2009 which alleges we are marketing our point of collection oral fluid drug test, OralStat, in workplace settings without marketing clearance or approval (see Current Report on Form 8-K filed with the United States Securities and Exchange Commission (“SEC”) on August 5, 2009). It has been our belief (based on advice from legal counsel) that marketing clearance from the FDA is not required to sell our drug tests in non-clinical (i.e. non-medical) markets (such as Workplace and criminal justice/law enforcement), but is required to sell our products in the clinical and over-the-counter (consumer) markets. We do not sell our oral fluid drug tests in clinical or over-the-counter (consumer) markets. In addition, there are many other oral fluid point of collection drug tests currently being sold in the Workplace market by our competitors, none of which have received FDA marketing clearance. Our point of collection oral fluid drug tests currently account for approximately 20% of our sales, and a material portion of these sales are to the Workplace market; if we continue to be unable to market and sell our point of collection oral fluid drug tests in the Workplace market, this will negatively impact our revenues. We continue to take the necessary actions that will enable the Company to submit a marketing clearance application to the FDA, and/or any additional actions that may be required to address the jurisdictional question raised by ABMC counsel.

 
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
General
 
The following discussion of our 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-K for the year ended December 31, 2009 and in this Quarterly Report on Form 10-Q. Any forward-looking statement speaks only as of the date on which such statement is made and we do not intend to update any such forward-looking statements.
 
Overview
 
During the sixnine months ended JuneSeptember 30, 2010, salesour business continued to be impacted by global economic conditions. However, sales began to improve in the first quarter of 2010, and this improvement continued into the second quarter and third quarter of 2010. Although we2010; although improvement in the third quarter of 2010 was minimal. We are encouraged by this improvement, but given the limited improvement in sales in the third quarter of 2010, we continue to believe it will be some time before significant economic growth occurs allowing employment rates and government budgets to return to pre-recession levels.levels, allowing the Company to sustain consistent sales improvement. In addition, it is possible that we will see a negative impact on our sales as a result of our temporary and voluntarily cessation of marketing and selling our oral fluid drug tests in the Workplace market (see Risk Factor related to regulatory framework). The degree of impact is not yet known, as the degree of impact is dependent on a number of factors, one of which is the length of time in which we do not market or sell our oral fluid products in the Workplace market.
 
During the sixnine months ended JuneSeptember 30, 2010, we sustained a net loss of $108,000$408,000 from net sales of $5,552,000.$8,082,000. We had net cash used in operating activities of $121,000$323,000 for the sixnine months ended JuneSeptember 30, 2010. In response to the state of the global economy, we previously initiatedimplemented cost-cutting measures to reduce operating expenses; these efforts, coupled with the improvement in sales, enabled us to reach profitability in the second quarter of 2010 and reduce our operating loss in the third quarter of 2010. We expect to continue our efforts to reduce or sustain current operating expenses, which would allow us to maintain profitability or minimize losses going forward. However, given the uncertainty of the global economy, there can be no assurance that our sales levels will continue to improve or that we will be able to maintain profitability or minimize losses going forward.
 
During the sixnine months ended JuneSeptember 30, 2010, we continued to market and distribute our urine and oral fluid-based point of collection tests for drugs of abuse (“DOA”) and our Rapid Reader® drug screen result and data management system, and we also performed bulk test strip contract manufacturing services for unaffiliated third parties.
 
Plan of Operations
 
Our sales strategy continues to be a focus on direct sales, including but not limited to the pursuit of new national accounts, while identifying new contract manufacturing opportunities. Simultaneously with these efforts, we will continue to focus on the reduction of manufacturing costs and operating expenses, enhancement of our current products and development of new product platforms and configurations to address market trends.
 
Our continued existence is dependent upon several factors, including our ability to raise revenue levels and reduce costs to generate positive cash flows, and to obtain working capital by selling additional shares of Company common stock and/or securing additional credit facilities, as necessary.
 
Results of operations for the sixnine months ended JuneSeptember 30, 2010 compared to the sixnine months ended JuneSeptember 30, 2009
 
NET SALES: Net sales for the sixnine months ended JuneSeptember 30, 2010 increased 9.7%6.9% when compared to net sales for the sixnine months ended JuneSeptember 30, 2009. National accounts and other non-government direct sales increased in the first half ofnine months ended September 30, 2010 when compared to the first half ofnine months ended September 30, 2009 (although sales are still depressed from pre-recession levels of 2008). We believe thisThis improvement is a result ofwhen comparing the nine-month net sales primarily results from positive movement in ourthe Workplace market asdue to unemployment rates improveimproving in many areas throughout the country although accordingin the second quarter of 2010; however, this same positive movement did not occur throughout the third quarter of 2010. Unemployment rates in the Unites States continue to published reports, muchfluctuate and this, along with the uncertainty of general economic conditions in the country has yetUnited States continues to improve. According toaffect our sales levels in the United States. The Bureau of Labor Statistics (the “Bureau”) report dated JuneSeptember 2010, regional and state unemployment rates were generally lower,shows less improvement than previous reports published by the Bureau with 3923 states and the District of Columbia recording unemployment rate decreases, 511 states reportingrecording increases and 616 states reportinghaving no rate change. This September report also indicated that the national jobless rate was 9.6% in September 2010; relatively the same as a year earlier (9.8%).

 
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Sales
We continue to see improvement in sales to the Clinical market, which includes pain management and drug rehabilitation, increased in the first half of 2010.rehabilitation. The Clinical Laboratory Improvement Amendments (CLIA) of 1988 established quality standards for laboratory testing to ensure the accuracy, reliability and timeliness of patient test results regardless of where the test was performed. As a result, those using CLIA waived tests are not subject to the more stringent and expensive requirements of moderate or high complexity laboratories. Our Rapid TOX® product line is CLIA waived and currently is the only product that includes a CLIA waived assay for Burprenorphine. Burprenorphine is used to treat certain types of drug dependency, including opioid addiction, as well as being used in pain management. Rehabilitation centers and physicians specializing in pain management need a quality DOA testing kit to assist them in monitoring patient usage to ensure the narcotics are being used as prescribed and to identify possible medication usage from other sources that can complicate a patient’s plan of treatment.
 
International sales also improved in the sixnine months ended JuneSeptember 30, 2010 when compared to the sixnine months ended JuneSeptember 30, 2009. The improvement in international sales primarily results from increased sales to Latin America.
 
Contract manufacturing sales improved in the sixnine months ended JuneSeptember 30, 2010 when compared to the sixnine months ended June 30, 2009. Contract manufacturing sales for the six months ended June 30, 2010 totaled $189,000, compared to $132,000 in the six months ended JuneSeptember 30, 2009. This improvement is a result of increased contract manufacturing of a testing product for RSV (Respiratory Syncytial Virus; the most common cause of lower respiratory tract infections in children worldwide), and a product for fetal amniotic membrane rupture.
 
The improvements in sales discussed above were partially offset by decreased sales in our Government market in the first half of 2010.nine months ended September 30, 2010 when compared to nine months ended September 30, 2009. Sales in our Government market continue to be negatively impacted as government entities decrease purchasing levels in attempts to close deficits in their budgets,budget deficits, resulting in decreased buying under the contracts we currently hold. At the same time, we continue to face price pressures from foreign manufacturers, which make it more difficult to secure new government contracts.
 
We will continue to focus our sales efforts on national accounts, non-government direct sales and contract manufacturing, while striving to reduce manufacturing costs. Reduction in manufacturing costs could enable us to be more cost competitive in the Government market, which is extremely price sensitive. To that end, we now offer 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. We remain hopeful that we may be able to mitigate the negative impact of foreign price pressures and decreased budgets with the Rapid TOX Cup II. We have obtained a number of new accounts in the Government market as a result of offering the Rapid TOX Cup II, however, we continue to experience declines in this market as current contracts are reduced by budget cuts, and in some cases, we have been unable to retain contracts due to price competition with competitors who manufacture their products in foreign countries.
 
COST OF GOODS SOLD/GROSS PROFIT: Cost of goods sold for the six months ended June 30, 2010 was 56.6%relatively unchanged at 59.3% of net sales for the nine months ended September 30, 2010, compared to 59.0% of net sales for the nine months ended September 30, 2009. Although we saw improvement in cost of goods sold in the three and six months ended June 30, 2009. This improvement results from2010 as a result of increased product manufacturing efficiencies and a shift in sales mix from lower margin products to sales of higher margin products. We continue to evaluate our production personnel levels as well as our product manufacturing levels to ensure they are adequate to meet current and anticipated sales demands.products, a one-time inventory disposal of $150,000 in the third quarter of 2010 affected cost of goods sold in the nine months ended September 30, 2010.  Gross profit for the first half ofnine months ended September 30, 2010 was also improved when compared torelatively unchanged from gross profit in the first half of 2009, as a result of improved cost of goods, and as sales to our Government market (typically lower margin sales) decline, and sales to national accounts and other non-government accounts (typically higher margin sales) increase.nine months ended September 30, 2009.
 
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OPERATING EXPENSES: Operating expenses decreased 1.6%3.4% for the sixnine months ended JuneSeptember 30, 2010, compared to the sixnine months ended JuneSeptember 30, 2009. Since weCost-cutting measures implemented cost-cutting initiatives in the year ended December 31, 2009 (in response to the unprecedented downturn of the economy),remain in effect. In conjunction with these measures, we continuously assess our operating expenses to ensure they are adequate to: elicit growth, support sales levels and address market trends and customer needs. In the first half ofnine months ended September 30, 2010, research and development expense increased slightly, and selling and marketing expenseexpenses decreased, while general and administrative expenses remainedwere relatively unchanged; more specifically:

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Research and Development (“R&D”) expense
 
R&D expense for the sixnine months ended JuneSeptember 30, 2010 increased 3.8%decreased 22.8%, compared to the sixnine months ended JuneSeptember 30, 2009. This increasedecrease is primarily a result of increases in FDA (U.S. Food and Drug Administration) compliance costs, offset by reductions in salary andsalaries, employee related benefits, consulting costs and consulting fees. Thesupplies, partially offset by an increase in FDA compliance costs stems from the Company’s efforts to respond to and address a warning letter received from the FDA in July 2009 (see Item 1A; Risk Factors).utility costs. Our R&D department continues to focus their efforts on the enhancement of current products, development of new product platforms and exploration of contract manufacturing opportunities.
 
Selling and Marketing expense
 
Selling and marketing expense for the sixnine months ended JuneSeptember 30, 2010 decreased 4.6%3.5%, compared to the sixnine months ended JuneSeptember 30, 2009. This decrease primarily results from reductionsReductions in sales salaries due to decreased personnel and adjustmentsadjustment in base salaries, postage, and marketing salaries,expenses were partially offset by increases in sales employment taxescommissions and sales commissions (as a result of increased sales).related travel expense. In the sixnine months ended JuneSeptember 30, 2010, 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 target markets, which include, but are not limited to, Workplace and Government. Our direct sales team continues to focus more efforts on the Clinical market, as a result of the receipt of our CLIA waiver for our Rapid TOX product line. As discussed above, we have seen some positive impact on our sales in the Clinical market, primarily through physicians and pain management clinics, as a result of these efforts.
 
General and Administrative (“G&A”) expense
 
G&A expense for the sixnine months ended JuneSeptember 30, 2010 remained relatively unchanged compared to the sixnine months ended JuneSeptember 30, 2009. Reductions in investor relations expense, consultingG&A salaries, directors fees and expenses, insurance, accounting fees, and legal feespatents and license costs were partially offset by increases in shipping supplies, generalconsulting fees (stemming from our efforts to respond to and administrative salaries and benefits, patent and license costs,address a warning letter received from the FDA in July 2009; see Item 11: Risk Factors), repairs and maintenance costs, andmiscellaneous cost stemming from a vendor related expense, bad debt expense, bank service fees. Included in G&A expense in the six months ended June 30, 2010 is $13,000 infees and share-based payment related to the issuance of two stock optionexpense (stemming from options grants issued in the third quarter of 2009 and the third quarter of 2010 (see Part I, Item 1, Note E); this. Share based payment expense did not occurtotaled $23,000 in the sixnine months ended JuneSeptember 30, 2010 and $8,000 in the nine months ended September 30, 2009.
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Results of operations for the three months ended JuneSeptember 30, 2010 compared to the three months ended JuneSeptember 30, 2009
 
NET SALES: Net sales for the three months ended JuneSeptember 30, 2010 increased 11.3%1.2%, compared to net sales for the three months ended JuneSeptember 30, 2009. National accounts and other non-government direct sales increased in the second quarter ofthree months ended September 30, 2010 when compared to the second quarter ofthree months ended September 30, 2009 (although sales are still depressed from pre-recession levels of 2008). We believe this improvement is a result of positive movementGeneral economic conditions and uncertainty in ourthe Workplace market asdue to fluctuating unemployment rates improveaffected sales in many areas throughout the country, although according to published reports, muchthird quarter of the country has yet to improve. According to the2010. The Bureau of Labor Statistics (the “Bureau”) report dated JuneSeptember 2010, regional and state unemployment rates were generally lower,shows less improvement than previous reports published by the Bureau with 3923 states and the District of Columbia recording unemployment rate decreases, 511 states reportingrecording increases and 616 states reportinghaving no rate change. This September report also indicated that the national jobless rate was 9.6% in September 2010; relatively the same as a year earlier (9.8%).
 
SalesWhen comparing the third quarter of 2010 to the third quarter of 2009, sales to the Clinical market, which includes pain management and drug rehabilitation, increased in the secondthird quarter of 2010. Our Rapid TOX product line is CLIA waived and presently is the only product that includes a CLIA waived assay for Burprenorphine. Rehabilitation centers and physicians specializing in pain management need a quality DOA testing kit to assist them in monitoring patient usage to ensure thethat narcotics are being used as prescribed and to identify possible medication usage from other sources that can complicate a patient’s plan of treatment.
 
International sales also improved in the secondthird quarter of 2010, compared to the secondthird quarter of 2009. The improvement in international sales primarily results from increased sales to Latin America.
 
Contract manufacturing sales improved in the secondthird quarter of 2010, compared to the secondthird quarter of 2009. Contract manufacturing sales for the three months ended June 30, 2010 totaled $70,000, compared to $38,000 in the three months ended June 30, 2009. This improvement is a result of increased contract manufacturing of testing products for RSV and fetal amniotic membrane rupture.

 
The improvements in sales discussed above were partially offset by decreased sales in our Government market in the second quarter of 2010.
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Sales in our Government market continue to be negatively impacted as government entities decrease purchasing levels in attempts to close deficits in their budgets,budget deficits, resulting in decreased buying under the contracts we currently hold. At the same time, we continue to face price pressures from foreign manufacturers, which make it more difficult to secure new government contracts.
 
COST OF GOODS/GOODS SOLD/GROSS PROFIT:
 
Cost of goods sold for the three months ended JuneSeptember 30, 2010 was 53.3%65.3% of net sales, compared to 58.8%59.0% for the three months ended JuneSeptember 30, 2009. This improvement resultsThe increase in cost of goods sold stems primarily from increased product manufacturing efficiencies and a shiftone-time inventory disposal of $150,000 in sales mix from lower margin products to salesthe third quarter of higher margin products. We continue to evaluate our production personnel levels as well as our product manufacturing levels to ensure they are adequate to meet current and anticipated sales demands.2010 that did not occur in the third quarter of 2009. Gross profit for the secondthird quarter of 2010 also improved,declined when compared to the secondthird quarter of 2009 as a result of improved cost of goods,the one-time inventory disposal and asminimal sales to our Government market (typically lower margin sales) decline, and sales to national account and other non-government accounts (typically higher margin sales) increase.improvement.
 
OPERATING EXPENSES:
 
Operating expenses decreased 6.6%7.0% for the three months ended JuneSeptember 30, 2010, compared to the three months ended JuneSeptember 30, 2009. Since weCost-cutting measures implemented cost-cutting initiatives in the year ended December 31, 2009 (in response to the unprecedented downturn of the economy),remain in effect. In conjunction with these measures, we continuously assess our operating expenses to ensure they are adequate to: elicit growth, support sales levels and address market trends and customer needs. In the second quarter ofthree months ended September 30, 2010, research and development expense increased slightly, whileand selling and marketing expense andexpenses decreased, while general and administrative expense decreased;expenses were relatively unchanged; more specifically:
 
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Research and Development (“R&D”) expense
 
R&D expense for the three months ended JuneSeptember 30, 2010 increased 7.5%decreased 74.1%, compared to the three months ended JuneSeptember 30, 2009. This increasedecrease is primarily a result of increases ina reclassification of FDA compliance costs in the third quarter of 2010 from R&D expense to G&A expense, reduced expenses for salaries and related employee benefits, and supply costs, offset by reductionsslight increases in salaryutilities and employee related benefits and consulting fees. The increase in FDA compliance costs stems from the Company’s efforts to respond to and address a warning letter received from the FDA in July 2009 (see Item 1A; Risk Factors).travel costs. Our R&D department continues to focus their efforts on the enhancement of current products, development of new product platforms and exploration of contract manufacturing opportunities.
 
Selling and Marketing expense
 
Selling and marketing expense for the three months ended JuneSeptember 30, 2010 decreased 6.6%1.2%, compared to the three months ended JuneSeptember 30, 2009. This decrease was primarily results froma result of reductions in sales salaries (due to reduced personnel and adjustments to base salary), postage and marketing salaries and advertising expense, partiallyexpenses, offset by increasesan increase in sales employee taxes and trade show related expenses.commission costs. In the three months ended JuneSeptember 30, 2010, 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 target markets, which include, but are not limited to, Workplace and Government. Our direct sales team continues to focus more efforts on the Clinical market, as a result of the receipt of our CLIA waiver for our Rapid TOX product line. As discussed above, we have seen some positive impact on our sales in the Clinical market, primarily through physicians and pain management clinics, as a result of these efforts.
 
General and Administrative (“G&A”) expense
 
G&A expense for the three months ended JuneSeptember 30, 2010 decreased 8.8%,remained relatively unchanged compared to the three months ended JuneSeptember 30, 2009. Reductions in investor relations expense, consulting fees, legaldirectors fees and outside serviceexpenses, accounting fees and patent and license costs were partially offset by increasesan increase in shipping supplies, generalconsulting fees (stemming from our efforts to respond to and administrative salariesaddress a warning letter received from the FDA in July 2009; see Item 11: Risk Factors) resulting from a reclassification of FDA compliance costs in the third quarter of 2010 from R&D expense to G&A expense, and benefits and repairs and maintenance costs.bank service fees. Included in G&A expense is $9,000 and $8,000 in share-based payment expense in the three months ended JuneSeptember 30, 2010 is $7,000 in share-based payment related to the issuance of two stock option grants in the third quarter ofand September 30, 2009, respectively (see Part I, Item 1, Note E); this expense did not occur in the three months ended June 30, 2009..

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Liquidity and Capital Resources as of JuneSeptember 30, 2010
 
Our cash requirements depend on numerous factors, including product development activities, regulatory and compliance requirements, sales and marketing efforts, market acceptance of new products, and effective management of inventory and production personnel and output levels in response to sales forecasts. We expect to devote substantial capital resources to continue product development and/or enhancement, refine manufacturing efficiencies, and support direct sales efforts.efforts and take the necessary steps to comply with regulatory requirements. We will continue to examine other growth opportunities including strategic alliances, and expect that 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. Our financial statements for the year ended December 31, 2009 were prepared assuming we will continue as a going concern. As of the date of this report, our current cash balances, together with cash generated from future operations and amounts available under current credit facilities may not be sufficient to fund operations for the next 12 months if sales levels do not continue to improve or if sales levels start to decline.improve. If cash generated from operations is not sufficient to satisfy our working capital and capital expenditure requirements, we will be required to sell additional equity or obtain additional credit facilities. There is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms, if at all.
 
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As of JuneSeptember 30, 2010, we had a Mortgage Consolidation Loan with First Niagara and a Line of Credit with Rosenthal. As of September 30, 2010, we were not in compliance with the tangible net worth requirement under the Rosenthal Line of Credit, but Rosenthal has waived the tangible net worth requirements for the quarter ended September 30, 2010. (See Part 1, Item 1, Note D).
 
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Working capital
 
Our working capital decreased $783,000$1,038,000 at JuneSeptember 30, 2010, when compared to working capital at December 31, 2009. At December 31, 2009, our Mortgage Consolidation Loan with First Niagara was classified as a long-term liability. In the first quarter of 2010, we reclassified our Mortgage Consolidation Loan with First Niagara from long-term to short-term, as the maturity date of the Mortgage Consolidation Loan is January 2011. The balance of the Mortgage Consolidation Loan was $907,000$879,000 at JuneSeptember 30, 2010 and $953,000 at December 31, 2009. (See Part I, Item 1, Note D). We are actively seeking replacement financing for the Mortgage Consolidation Loan.
 
We have historically satisfied 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
 
We have never paid any dividends on our common shares and anticipate that all future earnings, if any, will be retained for use in our business, and therefore, we do not anticipate paying any cash dividends.
 
Cash Flows
 
Increases in prepaid expenses and other current assets and accounts receivable and decreases in accrued expenses and accounts payable, offset by decreases in inventory and increases in accounts payable and wages payable resulted in cash used in operating activities of $121,000$323,000 for the sixnine months ended JuneSeptember 30, 2010. The primary use of cash in the sixnine months ended JuneSeptember 30, 2010 and JuneSeptember 30, 2009 was funding of operations.
 
Net cash used in investing activities of $57,000 and $28,000 in the sixnine months ended JuneSeptember 30, 2010 and JuneSeptember 30, 2009, respectively, was for investment in property, plant and equipment.
 
Net cash provided by financing activities in the sixnine months ended JuneSeptember 30, 2010 and JuneSeptember 30, 2009 consisted primarily of net proceeds from our line of credit, offset by payments on debt financing. Financing activities in the nine months ended September 30, 2009 also included debt issuance costs. Net proceeds from the line of credit for the sixnine months ended JuneSeptember 30, 2010 was $223,000,$488,000, compared to $143,000$148,000 during the sixnine months ended JuneSeptember 30, 2009. Net cash provided by financing activities was $411,000 in the nine months ended September 30, 2010, and $11,000 in the nine months ended September 30, 2009.
 
In the sixnine months ended JuneSeptember 30, 2010, our loan availability under the Rosenthal Line of Credit, which was not in place until the third quarter of 2009, was greater than the loan availability under the prior line of credit with First Niagara in the sixnine months ended JuneSeptember 30, 2009, and we used this increased loan availability to fund operations. Our balanceThe amount outstanding on the Rosenthal Line of Credit was $483,000 as of June$749,000 at September 30, 2010 with additional loan availability as of $439,000;$336,000; for a total loan availability of $922,000$1,085,000 as of JuneSeptember 30, 2010. As our receivables increase, under the Rosenthal Line of Credit, we are required to drawdowndraw down more frequently on the Rosenthal Line of Credit to fund operations.
 
At JuneSeptember 30, 2010, we had cash and cash equivalents of $79,000.$66,000.

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Outlook
 
Our primary short-term working capital needs relate to our efforts to increase high volume sales efforts in the DOA testing market, that will yield high volume sales, refiningto refine manufacturing and production capabilities and establishingestablish adequate inventory levels to support expected sales, while continuing support of research and development activities. We believe that our current infrastructure is sufficient to support our business; however, if at some point in the future we experience renewed growth in sales, we may be required to increase our infrastructure to support sales. It is also possible that additional investments in research and development, and increased expenditures in selling and marketing and general and administrative may be necessary in the future to: develop new products, enhance current products to meet the changing needs of the point of collection DOA testing market, grow contract manufacturing operations, promote our products in our markets and institute changes that may be necessary to comply with various public company reporting requirements, as well as FDA requirements related to the marketing and use of our products. We have takencontinue to take measures to attempt to control the rate of increase of these costs to be consistent with any sales growth rate we may experience in the near future.
 
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We believe that we may need to raise additional capital in the future to continue operations. If events and circumstances occur such that we do not meet our current operating plans, or we are unable to raise sufficient additional equity or debt financing, or credit facilities are insufficient or not available, we may be required to further reduce expenses or take other steps which could have a material adverse effect on our future performance.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
As a smaller reporting company, we are not required to provide the information required by this item.
 
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 our 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, our internal control over financial reporting.
 
PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings
 
See Part I, Item 1, Note C in the Notes to interim Financial Statements included in this report for a description of pending legal proceedings in which we may be a party.
 
Item 1A. Risk Factors
 
There have been no material changes to our risk factors set forth in Part I, Item 1A, in our Annual Report on Form 10-K for the year ended December 31, 2009 except as set forth below:
 
We depend on key personnel to manage our business effectively.
 
We are dependent on the expertise and experience of our senior management for our future success. The loss of a member of senior management could negatively impact our business and results of operations. On July 28, 2010, we terminated the employment of one member of our senior management, our Executive Vice President & Chief Science Officer. This officer had been employed pursuant to an employment agreement, which contained non-compete provisions.agreement. The employment agreement expired on May 31, 2010, and was not renewed. As of the date of this report, we have not appointed anyone to fill the vacancy created by this termination. There can be no assurance thattermination; however, in the third quarter of 2010, we will be ableappointed an individual to recruit a qualified replacement to fill this vacancy. Although we retain a numberthe position of qualifiedVice President of Science and skilled employees in our research and development / bulk manufacturing facility in New Jersey (the facility at which this position is based), if we were unable to fill this vacancy, the operations and production levels of our facility in New Jersey could be negatively affected.Technology.
 
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We have employment agreements in place with current members of our senior management.management, including our new Vice President of Science and Technology. There can be no assurance that any of our senior management will continue their employment. We maintain key man insurance for our Chief Executive Officer Stan Cipkowski.

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Any adverse changes in our regulatory framework could negatively impact our business.
 
Our urine point of collection products have received 510(k) marketing clearance from the FDA, and have therefore met FDA requirements for professional use. Our oral fluid point of collection products have not received 510(k) marketing clearance from the FDA. We have also been granted a CLIA waiver from the FDA related to our Rapid TOX product line. Workplace and Government are ourthe Company’s primary markets, and it has been our belief (based on advice from legal counsel) that marketing clearance from the FDA is not required to sell our productsdrug tests in non-clinical (i.e. non-medical) markets (such as Workplaceworkplace and Government)criminal justice/law enforcement), but is required to sell our products in the Clinicalclinical and over-the-counter (consumer) markets. We do not sell our oral fluid drug tests in clinical or over-the-counter (consumer) markets. In addition, there are many other oral fluid point of collection drug tests currently being sold in the Workplace market by our competitors, none of which have received FDA marketing clearance.
However, in July 2009, we received a warning letter from the FDA, which alleges we are marketing our point of collection oral fluid drug test, OralStat, in workplace settings without marketing clearance or approval (see Current Report on Form 8-K filed with the United States Securities and Exchange Commission (“SEC”)SEC on August 5, 2009).
 
On August 18, 2009 we respondedWe have communicated to the FDA warning letter received in July 2009, setting forth our belief that FDAmarketing clearance wasis not required in non-clinical markets; and that such belief is based upon legal advice from our FDA counsel. On October 27, 2009, we received another letter fromTo date, the FDA (“October 2009 Letter”), which stated that they diddoes not agree with our interpretation of certain FDA regulations. We respondedregulations related to the October 2009 Letter on December 8, 2009. After additional communications withmedical devices, and the FDA both directly and through ourcontinues to assert jurisdiction of drug testing performed in the workplace. Although we do not concede that the FDA counsel,has jurisdiction over drug testing when performed in March 2010,the workplace, we electedhave informed the FDA that we are willing to file a pre-IDE marketing submission in an effort to obtain FDA 510(k) marketing clearance althoughapplication, however, we continuehave also advised the FDA that specific technical and scientific issues exist when attempting to maintain that 510(k) is not required to marketutilize FDA’s draft guidance for our oral fluid point of collection drug tests. More specifically, that technical and scientific issues exist when trying to use the draft guidance for oral fluid drug tests because the draft guidance was written for urine drug tests. Although we have met with the FDA, the FDA has yet to provide the additional guidance we have requested regarding the issues identified. This has impacted our ability to collect the data needed to obtain marketing clearance, but we continue to move forward with our efforts to resolve these issues with the FDA, collect the necessary supporting data and to obtain marketing clearance.
In response to communications and interactions with the FDA over the course of the last several months, on October 16, 2010, we voluntarily and temporarily suspended selling and marketing of our oral fluid drugs of abuse products in the Workplace market. A pre-IDE marketing submission is a process that allows us to provide the FDA with the design of our clinical protocol for studies that will be used to support our 510(k) submission. The FDA responded to our pre-IDE marketing submission, and as of the date of this report, we are taking the necessary actions that will enable us to submit a 510(k) marketing clearance application to the FDA, and any additional actions that may be required to address the jurisdictional question raised by our FDA counsel.
 
Currently there are many other oral fluid point of collection drug tests being sold in the Workplace market by our competitors, none of which have received FDA marketing clearance. Therefore, we are one of the first companies, if not the first company to file a submission to obtain FDA marketing clearance to sell our point of collection oral fluid drug tests in the Workplace market, and theThe cost of obtaining suchmarketing clearance could be material and incurring such cost could have a negative impact on our efforts to improve our performance and to achieve profitability. Furthermore, there can be no assurance that we will obtain marketing clearance from the FDA.FDA, especially since we would be among the first companies to apply for such marketing clearance. Our point of collection oral fluid drug tests currently account for approximately 20% of our sales;sales and a material portion of these sales are to the Workplace market; if we werecontinue to be unable to market and sell our point of collection oral fluid drug tests in the Workplace market, this couldwill negatively impact our revenues.
 
Although we are currently unaware of any additional changes in regulatory standards related to any of our markets, if regulatory standards were to further change in the future, there can be no assurance that the FDA will grant usthe Company appropriate marketing clearances required to comply with the changes, if and when we apply for them.
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We may incurwill continue to take the necessary actions that will enable the Company to submit a marketing clearance application to the FDA, and/or any additional significant increased costs as a result of operating as a public company, and our management willactions that may be required to devote substantial time to new compliance initiatives.address the jurisdictional question raised by our counsel.
 
We may incur significant legal, accounting and other expenses as a result of our required compliance with certain regulations. More specifically, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as rules subsequently implemented by the SEC, impose various requirements on public companies. Our management and other personnel must devote a substantial amount of time to these compliance requirements. Moreover, these rules and regulations have increased our legal and financial compliance costs and make some activities more time-consuming and costly.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, beginning with our year ended December 31, 2007, management was required to perform system and process evaluation and testing of the effectiveness of our internal controls over financial reporting, as required by Section 404(a) of the Sarbanes-Oxley Act. Section 404(b) of the Sarbanes-Oxley Act required companies to obtain auditor’s attestation related to their assessment of the effectiveness of our internal controls over financial reporting. The compliance deadline for smaller reporting companies to comply with Section 404(b) had been extended by the SEC to annual reports covering fiscal years ended on or after June 15, 2010, or in our case for our annual report covering our year ended December 31, 2010.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Wall Street Reform Act”). Section 989G of the Wall Street Reform Act expressly exempts issuers that are neither “large accelerated filers” nor “accelerated filers” (which includes smaller reporting companies) from the requirement contained in Section 404(b) of the Sarbanes Oxley Act to provide an auditor attestation of internal control over financial reporting.
Although we are no longer required to comply with Section 404(b), we remain subject to Section 404(a) (that is, management’s report on our internal controls over financial reporting). Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. As a result, our compliance with Section 404(a) may require that we incur substantial accounting expense and expend significant management efforts. We do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to ensure compliance with these regulations and/or to correct such material weaknesses. If we are not able to comply with the requirements of Section 404(a), or if we identify deficiencies in our internal controls over financial reporting, the market price of our common shares could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
ItemItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4. (Removed and Reserved)
 
Item 5. Other Information
 
None.
 
Item 6.  Exhibits
31.1Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

2017
 
31.2Rule 13a-14(a)/15d-14(a) Certification of Chief Financial31.1       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
 32.1Certification 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 Financial Officer
 Principal Accounting Officer

Dated: August 12,November 15, 2010

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