UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D. C. 20549
 FORM
10-Q
  x
              Quarterly
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934
                For
      the quarterly period ended June 30,
      2009
   ̈
              Transition
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934
                For
      the transition period from             
      to
  Commission
File Number: 0-28666
  AMERICAN
BIO MEDICA CORPORATION
 
 (Exact
name of registrant as specified in its charter)
  New
      York
                    14-1702188(State
      or other jurisdiction of
                    (I.R.S.
      Employerincorporation
      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)
  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)     
    x
Yes      ̈
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 company
              x
  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 13, 2009
  
  American
Bio Medica Corporation
 
 Index
to Quarterly Report on Form 10-Q
 For
the quarter ended June 30, 2009
 
 PAGEPART
      I – FINANCIAL INFORMATIONItem
      1.
                Financial
      StatementsBalance
      Sheets as of June 30, 2009 (unaudited) and December 31,
    2008
                3Unaudited
      Statements of Operations for the six months ended June 30, 2009 and June
      30, 2008
                4Unaudited
      Statements of Operations for the three months ended June 30, 2009 and June
      30, 2008
                5Unaudited
      Statements of Cash Flows for the six months ended June 30, 2009 and June
      30, 2008
                6Notes
      to Financial Statements
                7Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                14Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                19Item
      4.
                Controls
      and Procedures
                19PART
      II – OTHER INFORMATIONItem
      1.
                Legal
      Proceedings
                19Item
      1A.
                Risk
      Factors
                19Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                21Item
      3.
                Defaults
      Upon Senior Securities
                21Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                21Item
      5.
                Other
      Information
                21Item
      6.
                Exhibits
                21Signatures
                
                22
  2
  PART
I - FINANCIAL INFORMATION
  Item
1. Financial Statements
  American
Bio Medica Corporation
 Balance
Sheets
 
 June
      30,
                        
                        
                        December
      31,2009
                        
                        
                        2008(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                        
                        $
                        587,000
                        
                        
                        $
                        201,000Accounts
      receivable - net of allowance for doubtful accounts of $105,000 at both
      June 30, 2009 and December 31, 2008
                        
                        
                        1,453,000
                        
                        
                        
                        1,161,000Inventory
      – net of reserve for slow moving and obsolete inventory of $308,000 at
      both June 30, 2009 and December 31, 2008
                        
                        
                        4,461,000
                        
                        
                        
                        5,552,000Prepaid
      expenses and other current assets
                        
                        
                        122,000
                        
                        
                        
                        97,000Total
      current assets
                        
                        
                        6,623,000
                        
                        
                        
                        7,011,000Property,
      plant and equipment, net
                        
                        
                        1,813,000
                        
                        
                        
                        1,961,000Debt
      issuance costs
                        
                        
                        100,000
                        
                        
                        
                        117,000Other
      assets
                        
                        
                        51,000
                        
                        
                        
                        47,000Total
      assets
                        
                        $
                        8,587,000
                        
                        
                        $
                        9,136,000LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilitiesAccounts
      payable
                        
                        $
                        1,389,000
                        
                        
                        $
                        1,568,000Accrued
      expenses and other current liabilities
                        
                        
                        484,000
                        
                        
                        
                        544,000Wages
      payable
                        
                        
                        319,000
                        
                        
                        
                        230,000Line
      of credit
                        
                        
                        575,000
                        
                        
                        
                        431,000Current
      portion of long-term debt
                        
                        
                        1,036,000
                        
                        
                        
                        1,098,000Current
      portion of unearned grant
                        
                        
                        10,000
                        
                        
                        
                        10,000Total
      current liabilities
                        
                        
                        3,813,000
                        
                        
                        
                        3,881,000Other
      long-term liabilities
                        
                        
                        200,000
                        
                        
                        
                        207,000Long-term
      debt
                        
                        
                        758,000
                        
                        
                        
                        760,000Unearned
      grant
                        
                        
                        30,000
                        
                        
                        
                        30,000Total
      liabilities
                        
                        
                        4,801,000
                        
                        
                        
                        4,878,000COMMITMENTS
      AND CONTINGENCIESStockholders'
      equity:Preferred
      stock; par value $.01 per share; 5,000,000 shares authorized, none issued
      and outstanding at June 30, 2009 and December 31, 2008Common
      stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768
      issued and outstanding at both June 30, 2009 and December 31,
      2008
                        
                        
                        217,000
                        
                        
                        
                        217,000Additional
      paid-in capital
                        
                        
                        19,279,000
                        
                        
                        
                        19,279,000Accumulated
      deficit
                        
                        
                        (15,710,000
                        )
                        
                        
                        (15,238,000
                        )Total
      stockholders’ equity
                        
                        
                        3,786,000
                        
                        
                        
                        4,258,000Total
      liabilities and stockholders’ equity
                        
                        $
                        8,587,000
                        
                        
                        $
                        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 Six Months EndedJune
      30,2009
                  
                  
                  2008Net
      sales
                  
                  $
                  5,063,000
                  
                  
                  $
                  6,764,000Cost
      of goods sold
                  
                  
                  2,988,000
                  
                  
                  
                  3,719,000Gross
      profit
                  
                  
                  2,075,000
                  
                  
                  
                  3,045,000Operating
      expenses:Research
      and development
                  
                  
                  208,000
                  
                  
                  
                  316,000Selling
      and marketing
                  
                  
                  1,070,000
                  
                  
                  
                  1,484,000General
      and administrative
                  
                  
                  1,171,000
                  
                  
                  
                  1,441,0002,449,000
                  
                  
                  
                  3,241,000Operating
      loss
                  
                  
                  (374,000
                  )
                  
                  
                  (196,000
                  )Other
      income (expense):Interest
      income
                  
                  
                  1,000
                  
                  
                  
                  2,000Interest
      expense
                  
                  
                  (96,000
                  )
                  
                  
                  (66,000
                  )Other
      expense
                  
                  
                  (2,000
                  )
                  
                  
                  (4,000
                  )(97,000
                  )
                  
                  
                  (68,000
                  )Loss
      before tax
                  
                  
                  (471,000
                  )
                  
                  
                  (264,000
                  )Income
      taxNet
      loss after tax
                  
                  $
                  (471,000
                  )
                  
                  $
                  (264,000
                  )Basic
      and diluted loss per common share
                  
                  $
                  (0.02
                  )
                  
                  $
                  (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 EndedJune
      30,2009
                  
                  
                  2008Net
      sales
                  
                  $
                  2,808,000
                  
                  
                  $
                  3,465,000Cost
      of goods sold
                  
                  
                  1,652,000
                  
                  
                  
                  1,847,000Gross
      profit
                  
                  
                  1,156,000
                  
                  
                  
                  1,618,000Operating
      expenses:Research
      and development
                  
                  
                  106,000
                  
                  
                  
                  178,000Selling
      and marketing
                  
                  
                  572,000
                  
                  
                  
                  716,000General
      and administrative
                  
                  
                  648,000
                  
                  
                  
                  758,0001,326,000
                  
                  
                  
                  1,652,000Operating
      loss
                  
                  
                  (170,000
                  )
                  
                  
                  (34,000
                  )Other
      income (expense):Interest
      income
                  
                  
                  
                  
                  
                  
                  1,000Interest
      expense
                  
                  
                  (49,000
                  )
                  
                  
                  (31,000
                  )Other
      expense(49,000
                  )
                  
                  
                  (30,000
                  )Loss
      before tax
                  
                  
                  (219,000
                  )
                  
                  
                  (64,000
                  )Income
      taxNet
      loss after tax
                  
                  $
                  (219,000
                  )
                  
                  $
                  (64,000
                  )Basic
      and diluted loss per common share
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.00Weighted
      average number of shares outstanding – basic & diluted
                  
                  
                  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 EndedJune
      30,2009
                              
                              
                              2008Cash
      flows from operating activities:Net
      loss
                              
                              $
                              (471,000
                              )
                              
                              $
                              (264,000
                              )Adjustments
      to reconcile net loss to net cash provided by / (used in) operating
      activities:Depreciation
                              
                              
                              171,000
                              
                              
                              
                              181,000Loss
      on disposal of fixed assets
                              
                              
                              2,000
                              
                              
                              
                              4,000Amortization
      of debt issuance costs
                              
                              
                              17,000Changes
      in:Accounts
      receivable
                              
                              
                              (292,000
                              )
                              
                              
                              (216,000
                              )Inventory
                              
                              
                              1,091,000
                              
                              
                              
                              (187,000
                              )Prepaid
      expenses and other current assets
                              
                              
                              (25,000
                              )
                              
                              
                              (31,000
                              )Other
      non-current assets
                              
                              
                              (4,000
                              )
                              
                              
                              50,000Accounts
      payable
                              
                              
                              (180,000
                              )
                              
                              
                              243,000Accrued
      expenses and other current liabilities
                              
                              
                              (60,000
                              )
                              
                              
                              236,000Patent
      sublicense
                              
                              
                              
                              
                              
                              
                              (50,000
                              )Wages
      payable
                              
                              
                              89,000
                              
                              
                              
                              31,000Other
      long-term liabilities
                              
                              
                              (7,000
                              )Net
      cash provided by / (used in) operating activities
                              
                              
                              331,000
                              
                              
                              
                              (3,000
                              )Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                              
                              
                              (25,000
                              )
                              
                              
                              (25,000
                              )Net
      cash used in investing activities
                              
                              
                              (25,000
                              )
                              
                              
                              (25,000
                              )Cash
      flows from financing activities:Payments
      on debt financing
                              
                              
                              (63,000
                              )
                              
                              
                              (59,000
                              )Net
      proceeds (payments) from line of credit
                              
                              
                              143,000
                              
                              
                              
                              (157,000
                              )Net
      cash provided by / (used in) financing activities
                              
                              
                              80,000
                              
                              
                              
                              (216,000
                              )Net
      increase / (decrease) in cash and cash equivalents
                              
                              
                              386,000
                              
                              
                              
                              (244,000
                              )Cash
      and cash equivalents - beginning of period
                              
                              
                              201,000
                              
                              
                              
                              336,000Cash
      and cash equivalents - end of period
                              
                              $
                              587,000
                              
                              
                              $
                              92,000Supplemental
      disclosures of cash flow informationCash
      paid during period for interest
                              
                              $
                              96,000
                              
                              
                              $
                              66,000
 
 The
accompanying notes are an integral part of the financial
statements
  6
 
 Notes to
financial statements (unaudited)
  June
30, 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
June 30, 2009, and the results of its operations for the three and six month
periods ended June 30, 2009 and June 30, 2008, and cash flows for the six month
periods ended June 30, 2009 and June 30, 2008.
  Operating
results for the three and six months ended June 30, 2009 are not necessarily
indicative of results that may be expected for the year ending December 31,
2009. Amounts at December 31, 2008 are derived from the Company’s audited
financial statements included in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2008.
  During
the six months ended June 30, 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-K for the year ended December 31, 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, 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-K for
the year ended December 31, 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 the Company’s financial
assets and liabilities on January 1, 2008. Certain provisions of SFAS No. 157
relating to the Company’s nonfinancial assets and liabilities became effective
January 1, 2009. The implementation of SFAS No. 157 does not materially affect
the Company’s interim financial statements.
  SFAS No.
157 establishes a hierarchy for ranking the quality and reliability of the
information used to determine fair values.  SFAS No. 157 requires that
assets and liabilities 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.
  Level
3:  Unobservable inputs for the asset or liability.
  7
  The
Company endeavors to utilize the best available information in measuring fair
value.  Financial assets and liabilities are classified based on the lowest
level of input that is significant to the fair value measurement. The following
methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
  Cash and
Cash Equivalents – The carrying amount reported in the balance sheet for cash
and 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,” (“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. The Company adopted SFAS No. 141(R) and SFAS No. 160 as of January
1, 2009 and this adoption had no impact on the Company’s interim financial
statements.
  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.  The Company adopted SFAS No. 161 as
of January 1, 2009 and this adoption had no impact on the Company’s interim
financial statements.
  In
May 2009, the FASB issued SFAS No. 165 - “Subsequent Events” (“SFAS No. 165”).
SFAS No. 165 establishes the accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date, that is,
whether that date represents the date the financial statements were issued or
were available to be issued. SFAS No. 165 is effective for interim and annual
periods ending after June 15, 2009.  SFAS No. 165 requires additional
disclosures only, and therefore did not have an impact on the Company’s
financial position, results of operations or cash flows.  We have evaluated
subsequent events through August 14, 2009, the date we have issued this
Quarterly Report on Form 10-Q.
  In June
2009, the FASB issued SFAS No. 166 – “Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140” (“SFAS No. 166”). SFAS No. 166
amends FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities,” by: eliminating the concept of a qualifying
special-purpose entity (“QSPE”); clarifying and amending the derecognition
criteria for a transfer to be accounted for as a sale; amending and clarifying
the unit of account eligible for sale accounting; and requiring that a
transferor initially measure at fair value and recognize all assets obtained
(for example beneficial interests) and liabilities incurred as a result of a
transfer of an entire financial asset or group of financial assets accounted for
as a sale. Additionally, on and after the effective date, existing QSPEs (as
defined under previous accounting standards) must be evaluated for consolidation
by reporting entities in accordance with the applicable consolidation guidance.
SFAS No. 166 requires enhanced disclosures about, among other things, a
transferor’s continuing involvement with transfers of financial assets accounted
for as sales, the risks inherent in the transferred financial assets that have
been retained, and the nature and financial effect of restrictions on the
transferor’s assets that continue to be reported in the statement of financial
position. SFAS No. 166 will be effective as of the beginning of interim and
annual reporting periods that begin after November 15, 2009. The Company is
currently evaluating the impact that this standard will have on its financial
statements.
  8
  In June
2009, the FASB issued SFAS No. 167 – “Amendments to FASB Interpretation No.
46(R)” (“SFAS No. 167”). SFAS No. 167 FAS No. 167 amends FIN 46(R),
“Consolidation of Variable Interest Entities,” and changes the consolidation
guidance applicable to a variable interest entity (“VIE”). It also amends the
guidance governing the determination of whether an enterprise is the primary
beneficiary of a VIE, and is, therefore, required to consolidate an entity, by
requiring a qualitative analysis rather than a quantitative analysis. The
qualitative analysis will include, among other things, consideration of who has
the power to direct the activities of the entity that most significantly impact
the entity’s economic performance and who has the obligation to absorb losses or
the right to receive benefits of the VIE that could potentially be significant
to the VIE. This standard also requires continuous reassessments of whether an
enterprise is the primary beneficiary of a VIE. Previously, FIN 46(R) required
reconsideration of whether an enterprise was the primary beneficiary of a VIE
only when specific events had occurred. QSPEs, which were previously exempt from
the application of this standard, will be subject to the provisions of this
standard when it becomes effective. SFAS No. 167 also requires enhanced
disclosures about an enterprise’s involvement with a VIE. SFAS No. 167 will be
effective as of the beginning of interim and annual reporting periods that begin
after November 15, 2009. The Company is currently evaluating the impact that
this standard will have on its financial statements.
  In June
2009, the FASB issued SFAS No. 168 – “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles—a replacement of
FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 replaces SFAS No. 162 –
“The Hierarchy of Generally Accepted Accounting Principles” and identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with GAAP in the United States. SFAS No. 168 will
become effective for financial statements issued for interim and annual periods
ending after September 15, 2009. The Company does not expect the adoption of
SFAS No. 168 to have any material impact on its financial
statements.
  Note
B – Net Loss Per Common Share
  Basic net
loss per common share is calculated by dividing the net loss by the weighted
average number of outstanding common shares during the period. Diluted net loss
per common share includes the weighted average dilutive effect of stock options
and warrants.
  Potential
common shares outstanding as of June 30, 2009 and 2008:
  June 30, 2009
                      
                      
                      June 30, 2008Warrants
                      
                      
                      75,000
                      
                      
                      
                      150,000Options
                      
                      
                      3,762,080
                      
                      
                      
                      3,768,080
  For the
three and six months ended June 30, 2009 and June 30, 2008, the number of
securities not included in the diluted EPS because the effect would have been
anti-dilutive were 3,837,080 and 3,918,080, 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.
  Note
D – Reclassifications
  Certain
items have been reclassified to conform to the current
presentation.
  Note
E – Lines of Credit and Long-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 ten (10) years with a twenty (20) year amortization. The interest rate
is fixed at 7.5% for the first five (5) years. Beginning with year six (6) and
through the end of the loan term, the rate changes to 2% above the Federal Home
Loan Bank of New York five (5) year term, fifteen (15) year Amortization
Advances Rate. The Company’s monthly payment is $6,293 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 $730,000 and $739,000 at June 30, 2009 and
December 31, 2008, respectively.
  9
  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 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 machinery and equipment 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 $303,000 and $356,000 at June 30, 2009 and December
31, 2008, respectively.
  FNFG Line of
Credit
  Through
June 30, 2009, the Company had a Line of Credit with FNFG (“FNFG Line of
Credit”). As a result of the Company’s Forbearance Agreement with FNFG (see
caption titled “FNFG Forbearance Agreement”), the maximum amount available under
the FNFG Line of Credit was the lesser of $650,000, or the Net Borrowing
Capacity. Net Borrowing Capacity was defined as Gross Borrowing Capacity less
the Inventory Value Cap. Gross Borrowing Capacity was 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 was defined as the
lesser of $400,000, or the combined value of items (ii) and (iii) of Gross
Borrowing Capacity. The interest rate on the Line of Credit was prime plus
4%.
  The
Company was required to maintain certain financial covenants (see caption titled
“FNFG Forbearance Agreement”). There was no requirement for annual repayment of
all principal on the FNFG Line of Credit, which was payable on demand. The
amount outstanding on the FNFG Line of Credit was $575,000 at June 30, 2009 and
$431,000 at December 31, 2008. The Company refinanced the FNFG Line of Credit on
July 1, 2009 (see caption titled “Rosenthal and Rosenthal, Inc. (“Rosenthal”)
Line of Credit”).
  FNFG Forbearance
Agreement
  On
February 4, 2009, although the Company was current with the payment schedules
for its Real Estate Mortgage, Term Note and FNFG Line of Credit (together, the
“Credit Facilities”), the Company received a notice from FNFG that an event of
default had occurred under the Loan Documents related to the Credit Facilities;
consisting of, among other things, the Company’s failure to comply with the
maximum monthly net loss covenant.
  On March
12, 2009, the Company entered into a Forbearance Agreement (the “Forbearance
Agreement”) addressing the Company’s non-compliance with the maximum monthly net
loss and the minimum debt service coverage ratio covenants (“Existing
Defaults”). Under the terms of the Forbearance Agreement, FNFG forbore from
exercising its rights and remedies arising under the Loan Documents from the
Existing Defaults. The Forbearance Agreement was to be in effect until June 1,
2009; unless earlier terminated or thereafter extended (the “Forbearance
Period”).
  The
maximum available under the FNFG Line of Credit during the Forbearance Period
was decreased from $750,000 to the lesser of $650,000 or the Net Borrowing
Capacity. During the Forbearance Period, interest accrued 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 and Term Note during the Forbearance Period remained
unchanged. In the event of default under the Forbearance Agreement, interest
under the FNFG Line of Credit would increase to the greater of prime plus 6%, or
10% per annum.
  During
the Forbearance Period, FNFG waived any further recourse relating to the
Existing Defaults provided the Company showed a net loss no greater than
$300,000 for the quarter ending March 31, 2009. On or before May 1, 2009, the
Company was required to provide to FNFG a commitment from a bona-fide third
party lender for a full refinancing of the Credit Facilities, to close on or
before June 1, 2009.  The Company was in compliance with the net loss
requirement for the quarter ended March 31, 2009, and throughout the quarter
ended June 30, 2009, remained in compliance with its payment schedules under the
Credit Facilities.
  10
  During
the Forbearance Period, FNFG continued to place a hold on one of the Company’s
cash accounts but agreed to release up to $5,000 per month from the account to
be used for the purpose of paying Corporate Fuel Securities, LLC, (“Corporate
Fuel”), a financial advisory firm engaged by the Company to find and evaluate
alternative funding sources; Corporate Fuel was referred to the Company by FNFG.
The Company began making payments to Corporate Fuel on March 1, 2009. As of June
30, 2009, there was $60,000 remaining in this frozen account.
  On May 6,
2009, the Company and FNFG entered into Letter Agreement (the “May Letter
Agreement”) which revised the terms and conditions of the Forbearance Agreement.
The May Letter Agreement extended to May 15, 2009, the Company’s obligation to
obtain a commitment from a bona-fide third party lender for a full refinancing
of the FNFG Line of Credit to close on or before June 1, 2009. The May Letter
Agreement also required the Company to obtain, on or before June 1, 2009,
commitments from a bona-fide third party lender for a full refinancing of the
Real Estate Mortgage and Term Note to close on or before July 1,
2009.
  The
Company was unable to close on a full refinancing of the FNFG Line of Credit,
and to obtain the required commitment to refinance the Term Note and Real Estate
Mortgage by June 1, 2009, however, the Company was in the final stages of
completing a full refinance of the FNFG Line of Credit. On June 3, 2009, the
Company and FNFG entered into a Letter Agreement (the “June Letter Agreement”),
which further amended the Forbearance Agreement. The June Letter Agreement
required the Company to close on a full refinancing of the FNFG Line of Credit
on or before June 12, 2009, and to obtain, on or before July 1, 2009,
commitments from a bona-fide third party lender for a full refinancing of the
Real Estate Mortgage and Term Note, to close on or before August 1,
2009.
  Although
the Company did not close on a full refinancing of the FNFG Line of Credit by
June 12, 2009, through its financial advisor, the Company continued to be in
close contact with FNFG apprising them of developments related to the
refinancing of the FNFG Line of Credit. As discussed further below, the Company
did close on a refinancing of the FNFG Line of Credit on July 1,
2009.
  On July
6, 2009, the Company and FNFG entered into a Letter Agreement (the “July Letter
Agreement”), which further amended the Forbearance Agreement. The July Letter
Agreement extended the Forbearance Period to September 30, 2009, unless earlier
terminated by FNFG upon default or extended by mutual agreement, and required
the Company to close on a full refinancing of the FNFG Line of Credit on or
before July 31, 2009. The July Letter Agreement also amended the Forbearance
Agreement to require the Company to obtain, on or before September 1, 2009,
legally binding and executed commitment letters from a bona-fide third party
lender setting forth the terms of a full refinancing of the Company’s Real
Estate Mortgage and Term Note to close on or before September 30,
2009.
  The July
Letter Agreement also required the Company to provide FNFG, on or before July 3,
2009, with written evidence that it provided compensation for and retained a
qualified capital/financial consultant reasonably acceptable to FNFG through at
least September 30, 2009, to assist the Company in the process of obtaining a
full and timely refinancing of the Real Estate Mortgage and Term Note. All other
terms of the Forbearance Agreement remain in full force and effect and all
rights and remedies of the parties are fully reserved. To comply with the
capital/financial consultant requirement, on July 2, 2009, the Company entered
into a new financial advisory agreement (the “Financial Advisory Agreement”)
with Corporate Fuel to assist the Company in the refinancing process related to
its Real Estate Mortgage and Term Note. Under the Financial Advisory Agreement,
Corporate Fuel will continue to act as the Company’s financial advisor through
December 31, 2009 and on July 8, 2009, Corporate Fuel received a retainer of
$15,000 to pay for its services through September 30, 2009.
  Rosenthal & Rosenthal,
Inc. (“Rosenthal”) Line of Credit
  On April
1, 2009, the Company received a non-binding proposal from Rosenthal and
Rosenthal, Inc. (“Rosenthal”) for a revolving secured line of credit of up to
$1,500,000, subject to completion of due diligence. In connection with this
proposal, the Company paid Rosenthal a non-refundable deposit of $20,000, for
their time and costs involved in the due diligence review and evaluation. A
portion of this deposit was paid from the account currently frozen by FNFG. Upon
closing this refinancing (see below), the Company was refunded $5,000 of the
deposit as a credit to the outstanding Rosenthal Line of Credit
balance.
  11
  On July
1, 2009 (the “Closing Date”), the Company entered into a Financing Agreement
(the “Refinancing Agreement”) with Rosenthal to refinance the FNFG Line of
Credit. Under the Refinancing Agreement, Rosenthal agreed to provide the Company
with up to $1,500,000 under a revolving secured line of credit (“Line of
Credit”) that is collateralized by a first security interest in all of the
Company’s receivables, inventory, and intellectual property, and a second
security interest in the Company’s machinery and equipment, leases, leasehold
improvements, furniture and fixtures. The maximum availability of $1,500,000
(“Maximum Availability”) is subject to an availability formula (the
“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. Upon entering into the Refinancing Agreement,
the Company’s availability under the Line of Credit  (“Loan Availability”)
was $1,170,000. From the Loan Availability, the Company drew approximately
$646,000 to pay off funds drawn against the FNFG Line of Credit. The remaining
Loan Availability is being used by the Company for working capital.
  The
Company was charged a facility fee of 1% of the amount of the Maximum Facility,
which was payable on the Closing Date and is payable on each anniversary of the
Closing Date thereafter. Under the Refinancing Agreement, the Company will also
pay an administrative fee of $1,500 per month for as long as the Line of Credit
is in place.
  Interest
on outstanding borrowings (which do not exceed the Availability Formula) is
payable monthly and is charged at variable annual rates equal to (a) 4% above
the JPMorgan Chase Bank prime rate (“Prime Rate”) for amounts borrowed with
respect to eligible accounts receivable (the “Effective Rate”), and (b) 5% above
the Prime Rate for amounts borrowed with respect to eligible inventory (the
“Inventory Rate”). Any loans or advances, which exceed the Availability Formula
will be charged at the rate of 3% per annum in excess of the Inventory Rate (the
“Over-Advance Rate”). If the Company were to default under the Refinancing
Agreement, interest on outstanding borrowings would be charged at the rate of 3%
per annum above the Over Advance Rate. The minimum interest charges payable to
Rosenthal each month are $4,000.
  So long
as any obligations are due to Rosenthal under the Line of Credit, the Company
must maintain working capital of not less than $2,000,000 and tangible net
worth, as defined by the Refinancing Agreement, of not less than $4,000,000 at
the end of each fiscal quarter. Under the Refinancing Agreement, tangible net
worth is defined as (a) the aggregate amount of all Company assets (in
accordance with generally acceptable accounting principles, or GAAP), excluding
such other assets as are properly classified as intangible assets under GAAP,
less (b) the aggregate amount of liabilities (excluding liabilities that are
subordinate to Rosenthal).  Failure to comply with the working capital and
tangible net worth requirements defined under the Refinancing Agreement would
constitute an event of default and all amounts outstanding would, at Rosenthal’s
option, be immediately due and payable without notice or demand. Upon the
occurrence of any such default, in addition to other remedies provided under the
Agreement, the Company would 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 default until the date of full payment of all amounts to Rosenthal.
However, in no event would the default rate exceed the maximum rate permitted by
law.
  As a
condition to the financing, the Company’s Chief Executive Officer, Stan
Cipkowski  (“Cipkowski”) was required to execute a Validity Guarantee (the
“Validity Guarantee”). Under the Validity Guarantee, Cipkowski provides
representations and warranties with respect to the validity of the Company’s
receivables and guarantees the accuracy of the Company’s reporting to Rosenthal
related to the Company’s receivables and inventory. The Validity Guarantee
places Cipkowski’s personal assets at risk in the event of a breach of such
representations, warranties and guarantees. As compensation for his execution of
the Validity Guarantee, Cipkowski’s current employment contract has been
extended to be coterminous with the Line of Credit; all other terms and
provisions of Cipkowski’s current employment contract remain unchanged. On July
1, 2009, Cipkowski was also awarded an option grant representing 500,000 common
shares of the Company under the Company’s Fiscal 2001 stock option 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 three (3) years in equal
installments.
  As
another condition to the financing, the Company’s President and Chairman of the
Board, Edmund Jaskiewicz (“Jaskiewicz”) was required to execute an Agreement of
Subordination and Assignment (“Subordination Agreement”) related to $124,000
currently owed to Jaskiewicz by the Company (the “Jaskiewicz Debt”). Under the
Subordination Agreement, the Jaskiewicz Debt shall not be payable, shall be
junior in right to the Rosenthal facility and no payment may be accepted or
retained by Jaskiewicz unless and until the Company has paid and satisfied in
full any obligations to Rosenthal.   Furthermore, the Jaskiewicz Debt
was assigned and transferred to Rosenthal as collateral for the Rosenthal
facility.
  12
  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 the Company’s Fiscal 2001 stock option 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 is immediately exercisable. Upon the 2nd and 3rd
anniversary of the original stock option grant, Jaskiewicz will 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.
  The
Refinancing Agreement terminates on May 31, 2012; however, the Company may
terminate the Agreement on any anniversary of the Closing Date with at least 90
days and not more than 120 days advance written notice to Rosenthal. If the
Company elects to terminate the Refinancing Agreement prior to the expiration
date, the Company will pay to Rosenthal a fee of (a) 3% of the Maximum
Availability if such termination occurs prior to the first anniversary of the
Closing Date, (b) 2% of the Maximum Availability if such termination occurs on
or after the first anniversary of the Closing Date but prior to the second
anniversary of the Closing Date, and (c) 1% of the Maximum Availability if such
termination occurs on or after the second anniversary of the Closing Date. The
Line of Credit is payable on demand and Rosenthal may terminate the Refinancing
Agreement at any time by giving the Company 45 days advance written
notice.
  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 14.11%.  The amount outstanding on this lease was $11,000
and $13,000 at June 30, 2009 and December 31, 2008, respectively.
  Series A Debenture
Financing
  On August
15, 2008, the Company completed its offering of the Series A Debentures and
received gross proceeds of $750,000 (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 $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. Pursuant to a Registration Rights Agreement, the
Company was to use reasonable efforts to register the Conversion Shares and the
shares of Common Stock issuable upon exercise of the Placement Agent Warrants,
and the Company filed a Registration Statement on Form S-3 on April 15, 2009,
and further amended the Registration Statement on May 5, 2009. The Registration
Statement was declared effective by the Commission on June 10,
2009.
  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.
  As
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 CRI a 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 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 CRI were immediately exercisable upon issuance.
  The
Company has incurred $131,000 in costs related to the offering. Included in
these costs was $12,000 of non-cash compensation expense related to the issuance
of the Placement Agent Warrants to CRI. These costs will be amortized over the
term of the Series A Debentures. For the six months ended June 30, 2009, the
Company amortized $17,000 of expense related to these debt issuance costs. The
Company has also accrued $31,000 in interest expense at June 30, 2009 related to
the Series A Debentures.
  13
  Note
F – Subsequent Events
  The
Company adopted the requirements of SFAS No. 165 and has evaluated subsequent
events through the filing date of this Quarterly Report on Form 10-Q. 
There were no subsequent events required to be recognized or disclosed in the
financial statements except as disclosed herein in Note E.
  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-K for the year ended December 31, 2008.
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 six months ended June 30, 2009, the Company sustained a net loss of $471,000
from net sales of $5,063,000. The Company had net cash provided by operating
activities of $331,000 for the first six months of 2009.
  During
the first half of 2009, the Company continued to experience year over year
declines in sales as a result of the general condition of the global economy;
although the rate of the decline did improve from the declines experienced in
the first quarter of 2009. To improve its financial condition during this time,
the Company has implemented a number of cost cutting initiatives. The Company
also continued 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.
  Plan
of Operations
  The
Company’s sales strategy continues to be a focus on direct sales, while
identifying new contract manufacturing opportunities and pursuing new national
accounts. During the six months ended June 30, 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 six months ended June 30, 2009.
  Results
of operations for the six months ended June 30, 2009 compared to the six months
ended June 30, 2008
  NET SALES: Net sales in the
first half of 2009 decreased $1,701,000 or 25.1% when compared to net sales for
the first half of 2008. Sales in the first half of 2009 continued to be affected
by global economic conditions and price pressures; although, as previously
noted, year over year sales declines experienced in the second quarter of 2009
were less than year over year declines experienced in the first quarter of 2009.
In the first quarter of 2009, we started offering our customers a modified
version of our Rapid TOX Cup® product, the Rapid TOX Cup II, to address sales
declines in the Government/Criminal Justice market due to competition with
foreign manufacturers (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). To date, the Rapid TOX Cup II product is being well
received by our customers. In the first half of 2009, we did close a number of
accounts in the Government/Criminal Justice market as a result of offering the
Rapid TOX Cup II so, although price pressure from foreign competitors in our
Government/Criminal Justice market continues to negatively impact that market;
early indications are that we may be able to mitigate that impact with the Rapid
TOX Cup II.
  14
  Sales in
our Corporate/Workplace market (which includes our national account division)
continue to be negatively impacted as new and existing employment levels of our
customers either remain lower or in some cases decrease further. International
Sales and Contract Manufacturing sales also declined in the first half of
2009.
  Until the
economy recovers, we expect to continue to see declines in our core markets
(Corporate/Workplace and Government/Criminal Justice) as a result of declines in
the employment and hiring levels of our customers, and price pressure in our
markets, but we are hopeful that these decline rates will either stabilize or
improve. We are optimistic that sales in our International markets will either
recover or decline at a lower rate. To combat the sales 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). 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.
  When
comparing the first half of 2009 to the first half of 2008, sales of Rapid TOX®,
Rapid TOX Cup (which includes Rapid TOX Cup II) and Rapid STATTM increased.
Increases in these product lines were offset by declines in sales of InCup®,
Rapid Drug Screen®, Rapid TEC®, OralStat® and Rapid Reader®. 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 lower cost or increased ease of use.
  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
(Respiratory Syncytial Virus).  Contract manufacturing sales during the
first half of 2009 totaled $132,000, down from $271,000 in the same period a
year ago. This decrease is primarily the result of declines in sales of the RSV
product and the fetal amniotic membrane rupture test, which were offset by
increases in sales of the HIV test.
  COST OF GOODS SOLD: Cost of
goods sold for the six months ending June 30, 2009 increased to 59.0% of net
sales, compared to 55.0% of net sales for the same period a year ago. In the
fourth quarter of 2008, we experienced a sharp decline in sales. To address this
decline, in the first quarter of 2009 we decreased product manufacturing and
reduced labor and overhead costs in efforts to improve our gross profit margin
going forward, anticipating that sales will either continue to stay at lower
levels or further decline until the economy recovers. Due to the timing of these
efforts, the impact was not realized throughout the entire first half of 2009.
As a result of the sales decline, we began to cut back on the amount of product
being manufactured, however, even though we began reducing labor and overhead
costs, some of our labor and overhead costs are fixed and such fixed costs were
allocated to a reduced number of manufactured products.
  In
addition, in the second quarter of 2009, sales in the Corporate/Workplace market
(typically better margin sales) continued to decline while sales in the
Government/Criminal Justice (typically lower margin sales due to price pressures
from foreign manufacturers) improved. And finally, in the second quarter of
2009, the sales decline was not as great as in the first quarter of 2009,
therefore to meet manufacturing needs, we increased our level of production
personnel (from the lower levels required in the first quarter of 2009), which
impacted our labor and overhead costs.
  OPERATING EXPENSES: Operating
expenses declined 24.4%, when comparing the first half of 2009 to the first half
of 2008. To improve its results of operations during the global economic crisis,
the Company implemented a number of cost cutting initiatives and these
initiatives have resulted in decreases in expenses in all three divisions as
described in the following detail:
  Research and Development
(“R&D”) expense
  R&D
expenses for the first six months of 2009 decreased 34.2% when compared to the
first six months of 2008. The greatest savings was in salary expense. In June
2008, the Vice President of Product Development retired and the Company has not
filled this position, nor do we expect to fill this position in the future.
Additional savings in FDA compliance costs, consulting fees, utilities, supplies
and travel were minimally offset by an increase in repairs and maintenance
costs. Our R&D department continues to focus their efforts on the
enhancement of current products and exploration of contract manufacturing
opportunities.
  Selling and Marketing
expense
  Selling
and marketing expenses for the first six months of 2009 decreased 27.9% when
compared to the first six months of 2008. Reductions in sales salaries and
commissions, sales employee related benefits, sales auto expense, travel related
expense, customer relations, trade show related expense, supplies, royalty
expense, marketing consulting fees, advertising expense and depreciation were
partially offset by increases in marketing salaries, dues and subscriptions, and
postage. A number of these reductions stem from our cost cutting initiatives
that began in 2008.
  15
  In the
first half 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 target markets, which include, but are not limited to, Corporate/Workplace,
and Government/Criminal Justice. 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 the receipt of our CLIA
waiver for our Rapid TOX product line in August 2008. CLIA stands for Clinical
Laboratory Improvement Amendments, and the Clinical Laboratory Improvement
Amendments 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.
  General and Administrative
(“G&A”) expense
  G&A
expenses for the first six months of 2009 decreased 18.7% when compared to the
first six months of 2008. Decreases in investor relations expense, quality
assurance salaries and supplies, warehouse salaries, shipping supplies, CLIA
waiver expense, insurance costs, patents, licenses and permits, office and
computer supplies, bad debts and bank service fees were partially offset by
increases in consulting fees, debt placement fees, legal expenses, auto expense,
ISO fees, outside service fees, telephone, repairs and maintenance, payroll
service fees and depreciation.
  Results
of operations for the three months ended June 30, 2009 compared to the three
months ended June 30, 2008
  NET SALES: Net sales for the
second quarter of 2009 decreased $657,000 or 19.0% when compared to net sales
for the second quarter of 2008. Sales in the second quarter of 2009 continued to
be affected by global economic conditions and price pressures; although, as
previously noted, year over year sales declines experienced in the second
quarter of 2009 were less than year over year declines experienced in the first
quarter of 2009. In the first quarter of 2009, we started offering our customers
a modified version of our Rapid TOX Cup® product, the Rapid TOX Cup II, to
address sales declines in the Government/Criminal Justice market due to
competition with foreign manufacturers (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). To date, the Rapid TOX Cup II product is
being well received by our customers. In the second quarter of 2009, we did
close a number of accounts in the Government/Criminal Justice market as a result
of offering the Rapid TOX Cup II so, although price pressure from foreign
competitors in our Government/Criminal Justice market continues to negatively
impact that market; early indications are that we may be able to mitigate that
impact with the Rapid TOX Cup II.
  Sales in
our Corporate/Workplace market (which includes our national account division)
continued to be negatively impacted in the second quarter of 2009 as new and
existing employment levels of our customers either remain lower or in some cases
decrease further. International Sales and Contract Manufacturing sales also
declined in the second quarter of 2009.
  Until the
economy recovers, we expect to continue to see declines in our core markets
(Corporate/Workplace and Government/Criminal Justice) as a result of declines in
the employment and hiring levels of our customers, and price pressure in our
markets, but we are hopeful that these decline rates will either stabilize or
improve. We are optimistic that sales in our International markets will either
recover or decline at a lower rate. To combat the sales 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).
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.
  When
comparing the second quarter of 2009 to the second quarter of 2008, sales of
OralStat, Rapid TOX, Rapid TOX Cup (which includes Rapid TOX Cup II) increased.
Increases in these product lines were offset by declines in sales of InCup,
Rapid Drug Screen, Rapid TEC, Rapid STAT and Rapid Reader. 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 lower cost or increased ease of use.
  16
  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.
Contract manufacturing sales during the second quarter of 2009 totaled $38,000,
down from $139,000 in the same period a year ago. This decrease is the result of
declines in sales of the RSV product and the fetal amniotic membrane rupture
test.
  COST OF GOODS SOLD: Cost of
goods sold for the second quarter of 2009 increased to 58.8% compared to 53.3%
of net sales for the same period a year ago. In the fourth quarter of 2008, we
experienced a sharp decline in sales. To address this decline, in the first
quarter of 2009 we decreased product manufacturing and reduced labor and
overhead costs and in efforts to improve our gross profit margin going forward,
anticipating that sales will either continue to stay at lower levels or further
decline until the economy recovers. As a result of the sales decline, we began
to cut back on the amount of product being manufactured, however, even though we
began reducing labor and overhead costs, some of our labor and overhead costs
are fixed and such fixed costs were allocated to a reduced number of
manufactured products. In the second quarter of 2009, the sales decline was not
as great as in the first quarter of 2009, therefore to meet manufacturing needs,
we increased the level of our production personnel (from the lower levels
required in the first quarter of 2009), which impacted our labor and overhead
costs in the second quarter of 2009. In addition, in the second quarter of 2009,
sales in the Corporate/Workplace market (typically better margin sales)
continued to decline while sales in the Government/Criminal Justice (typically
lower margin sales due to price pressures from foreign manufacturers)
improved.
  OPERATING EXPENSES: Operating
expenses declined 19.7%, when comparing the second quarter of 2009 to the second
quarter of 2008. To improve its results of operations during the global economic
crisis, the Company implemented a number of cost cutting initiatives and these
initiatives have resulted in decreases in expenses in all three divisions as
described in the following detail:
  Research and development
(“R&D”) expense
  R&D
expenses for the second quarter of 2009 decreased 40.4% when compared to the
second quarter of 2008. The greatest savings was in salary expense. In June
2008, the Vice President of Product Development retired and the Company has not
filled this position, nor do we expect to fill this position in the future.
Additional savings in consulting fees, FDA compliance costs, supplies, travel
and utilities were minimally offset by an increase in repairs and maintenance
costs and employee benefit costs. Our R&D department continues to focus
their efforts on the enhancement of current products and exploration of contract
manufacturing opportunities.
  Selling and marketing
expense
  Selling
and marketing expenses for the second quarter of 2009 decreased 20.1% when
compared to the second quarter of 2008. Reductions in sales salaries, sales
employee related benefits, sales auto expense, travel related expense, customer
relations, trade show related expense, supplies, royalty expense, marketing
consulting fees, marketing employee benefits, and depreciation were partially
offset by increases in marketing salaries, sales commissions, dues and
subscriptions, postage and advertising related costs. A number of these
reductions stem from our cost cutting initiatives that began in
2008.
  In the
second 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/Criminal Justice. 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 the receipt of our CLIA
waiver for our Rapid TOX product line in August 2008.
  General and administrative
(“G&A”) expense
  G&A
expenses for the second quarter of 2009 decreased 14.5% when compared to the
second quarter of 2008. Reduction in investor relations, warehouse salaries,
shipping supplies, CLIA waiver expense, patents, licenses and permits, office
supplies, postage, repairs and maintenance, bad debts, bank and payroll services
fees were partially offset by increases in quality assurance employee benefits
and supplies, legal fees, debt placement fees, ISO fees, outside service fees,
telephone and communication costs, dues and subscriptions and depreciation. In
the second quarter of 2009, we incurred increased legal and consulting expenses
related to the refinancing of our line of credit with FNFG (see Item 1, Note E);
these expenses did not occur in the second quarter of 2008.
  17
  Liquidity
and Capital Resources as of June 30, 2009
  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 product development, refine manufacturing efficiencies, and support
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 does not believe that its current cash balances, together
with cash generated from future operations and amounts available under our
credit facilities will be sufficient to fund operations for the next twelve
months. If cash generated from operations is not sufficient to satisfy our
working capital and capital expenditure requirements, we will be required to
sell additional equity or obtain additional credit facilities. There is no
assurance that such financing will be available or that the Company will be able
to complete financing on satisfactory terms, if at all.
  As of
June 30, 2009, the Company had a Line of Credit, a Real Estate Mortgage and a
Term Note with FNFG, however, the FNFG Line of Credit was refinanced on July 1,
2009 (see Item 1, Note E).
  Working
capital
  The
Company’s working capital decreased $320,000 at June 30, 2009, when compared to
working capital at December 31, 2008. In the fourth quarter of 2008, the Company
reclassified its long-term bank debt with FNFG to short-term as a result of the
Company’s covenant default under the Loan Documents related to its credit
facilities with FNFG and the subsequent forbearance (See Item 1, 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 wages payable offset by increases in accounts
receivable and decreases in accounts payable and accrued expenses, resulted in
cash provided by operations of $331,000 in the first half of 2009.  The
primary use of cash in the first half of 2009 was funding of
operations.
  Net cash
used in investing activities in the first half of both 2009 and 2008 was for
investment in property, plant and equipment.
  Net cash
provided by financing activities in the first half of 2009 consisted of net
proceeds from our Line of Credit offset by payments on outstanding debt. Net
cash used in financing activities in the first half of 2008 consisted of
payments on our Line of Credit and outstanding debt.
  At June
30, 2009, the Company had cash and cash equivalents of $587,000.
  Outlook
  The
Company's primary short-term working capital needs relate to 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 continuing support of its research and
development program. The Company believes that its current infrastructure is
sufficient to support its business, however, 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.
  18
  The
Company believes that it may 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
  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
  There
have been no material changes to our risk factors set forth in Part I, Item 1A,
“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
2008 except as set forth below:
  If
we fail to meet the continued listing requirements of the NASDAQ Capital Market,
our securities could be delisted.
  Our
securities are listed on the NASDAQ Capital Market. The NASDAQ Stock Market
(“NASDAQ”) Marketplace Rules impose requirements for companies listed on the
NASDAQ Capital Market to maintain their listing status, including but not
limited to minimum common share bid price of $1.00, and  $2,500,000 in
shareholders' equity or $500,000 in net income in the last fiscal year. As of
the date of this report and for the past twelve months our common shares are
trading and have traded below the minimum bid requirement. In October 2008,
NASDAQ advised us that, because of the extraordinary market conditions, NASDAQ
was suspending enforcement of the bid price and market value requirements
through January 16, 2009. In December 2008, March 2009 and July 2009, NASDAQ
further extended this suspension, and as of the date of this report, the rules
are expected to be reinstated on August 3, 2009. Upon reinstatement of the
rules, the Company will have 22 days, or until August 24, 2009 to regain
compliance. The Company can regain compliance, either during the suspension or
during the compliance period resuming after the suspension, by achieving a $1.00
closing bid price for a minimum of ten (10) consecutive trading
days.
  19
  Although
these suspensions have provided us more time to regain compliance with the
minimum bid price requirement, as of the date of this report, we are not in
compliance with NASDAQ’s minimum bid price requirement. Our continued failure to
regain compliance with NASDAQ listing requirements will more than likely result
in delisting of our securities. Delisting could reduce the ability of investors
to purchase or sell our securities as quickly and as inexpensively as they have
done historically and could subject transactions in our securities to the penny
stock rules.
  Furthermore,
failure to obtain listing on another market or exchange may make it more
difficult for traders to sell our securities. Broker-dealers may be less willing
or able to sell or make a market in our securities because of the penny stock
disclosure rules. Not maintaining a listing on a major stock market may result
in a decrease in the trading price of our securities due to a decrease in
liquidity and less interest by institutions and individuals in investing in our
securities. Delisting from NASDAQ could also make it more difficult for us to
raise capital in the future.
  As
of the date of this report, we are operating under a Forbearance Agreement with
FNFG.
  On
February 4, 2009, although the Company was current with the payment schedules
for its Credit Facilities with FNFG, FNFG notified the Company of the Existing
Defaults (see caption titled “FNFG Forbearance Agreement”, above). Under the
terms of the Forbearance Agreement, FNFG forbore from exercising its rights and
remedies arising under the Loan Documents from the Existing Defaults. In
accordance with the July Letter Agreement, the Company is required to produce to
FNFG, on or before September 1, 2009, legally binding and executed commitment
letters from a bona-fide third party lender setting forth the terms of a full
refinancing of the Company’s Term Note and Real Estate Mortgage, to close on or
before September 30, 2009, and to provide FNFG, by July 3, 2009, written
evidence that the Company had provided compensation for and retained a qualified
capital/financial consultant reasonably acceptable to FNFG through at least
September 30, 2009, to assist the Company in the process of obtaining a full and
timely refinancing of the Term Note and Real Estate Mortgage.
  Although
the Company did refinance its line of credit on July 1, 2009 and retained a
financial consultant as required under the amended Forbearance Agreement, if we
are unable to maintain compliance with any of the other conditions of the
Forbearance Agreement, or if we are unable to secure a full refinancing of the
Real Estate Mortgage and Term Note as required, FNFG will have the right to
accelerate the Real Estate Mortgage and the Term Note. If the Company is unable
to obtain an extension of the Forbearance Period and FNFG were to exercise its
right to accelerate the Real Estate Mortgage and Term Note, it is unlikely that
the Company would have the funds available to pay the Real Estate Mortgage and
Term Note, and FNFG would be entitled to enforce its rights and remedies
available under the Loan Documents, including but not limited to foreclosure of
its liens on the Company’s assets.
  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 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
FDA and are therefore for forensic use only. We have also been granted a CLIA
waiver from FDA related to Rapid TOX, our urine point of collection product
line. Corporate/Workplace and Government/Criminal Justice are our primary
markets, and it has been our belief that marketing clearance from FDA is not
required for the sale of our products in non-clinical markets (such as
Corporate/Workplace and Government/Criminal Justice), but is required in the
clinical and over-the-counter (consumer) markets. However, in July 2009, we
received a warning letter from FDA, which alleges we are marketing our oral
fluid drug screen, OralStat, in workplace settings without marketing clearance
or approval (see Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 5, 2009).
  Currently
there are many oral fluid point of collection products being sold in the
workplace market, none of which have received FDA marketing clearance.
Therefore, if we are required to be one of the first companies to obtain FDA
marketing clearance to sell our oral fluid products in the workplace market, it
is entirely possible that the cost of such clearance would be material and
incurring such cost could have a negative impact on our ability to improve our
loss from operations or achieve income from operations. Furthermore, there can
be no assurance that we would obtain such marketing clearance from FDA. Our oral
fluid products currently account for a material percentage of our sales; if we
were unable to market and sell our oral fluid products in the workplace market,
this could negatively impact our revenues.
  Although
we are currently unaware of any changes in regulatory standards related to any
of our markets, if regulatory standards were to change in the future, there can
be no assurance that FDA will grant us the appropriate marketing clearances
required to comply with the changes, if and when we apply for
them.
  20
  Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
  None.
  Item
3. Defaults Upon Senior Securities
  None.
  Item
4. Submission of Matters to a Vote of Security Holders
  The
following matters were voted upon at the Company’s Annual Meeting of
Shareholders (the “Meeting”) held at the Holiday Inn, in East Greenbush, New
York on June 16, 2009.
  PROPOSAL
NUMBER 1 – ELECTION OF DIRECTORS
  Total
      Shares in Attendance:
              18,948,639
              Outstanding
      Shares as of Record Date (April 20, 2009)
              21,744,768
 
 Director
                
                For
                
                
                Percent of
                  Votes
                
                
                Withheld
                
                
                Percent of
                  VotesRichard
      P. Koskey
                
                
                17,905,463
                
                
                
                94.5
                
                
                
                1,079,176
                
                
                
                5.7Stan
      Cipkowski
                
                
                17,956,088
                
                
                
                94.8
                
                
                
                1,028,551
                
                
                
                5.4
  All
nominees for election to the Board of Directors were elected for a three year
term ending in 2012, or until their successors are elected and duly qualified.
In addition to those directors elected at the Meeting, Edmund M. Jaskiewicz,
Daniel W. Kollin, Carl A. Florio and Jean Neff continued their term of office
after the Meeting.
  There
were no other matters voted upon at the Meeting.
  Item 5.  Other
Information
  None.
  Item
6.  Exhibits
  31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.1
              
              Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
              
              Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
  21
  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 ParkerStefan
      ParkerChief
      Financial OfficerExecutive
      Vice President, FinancePrincipal
      Financial Officer and duly authorized
Officer
 
 Dated:
August 14, 2009
  22