UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D. C. 20549


FORM
10-Q




x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934




For
the quarterly period ended September 30,
2010




 ̈
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934




For
the transition period
from              to




Commission
File Number: 0-28666




AMERICAN
BIO MEDICA CORPORATION





(Exact
name of registrant as specified in its charter)




New
      York
                          
                          14-1702188(State
      or other jurisdiction of
                          
                          (I.R.S.
      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)    xYes    ̈
No




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act




Large
      accelerated filer
                 ̈
                Accelerated
      filer
                 ̈Non-accelerated
      filer
                 ̈
                Smaller
      reporting 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 November 15, 2010








American
Bio Medica Corporation





Index
to Quarterly Report on Form 10-Q


For
the quarter ended September 30, 2010





PAGEPART
      I – FINANCIAL INFORMATIONItem
      1.
                      Financial
      StatementsBalance
      Sheets as of September 30, 2010 (unaudited) and December 31,
      2009
                      3Unaudited
      Statements of Operations for the nine months ended September 30, 2010 and
      September 30, 2009
                      4Unaudited
      Statements of Operations for the three months ended September 30, 2010 and
      September 30, 2009
                      5Unaudited
      Statements of Cash Flows for the nine months ended September 30, 2010 and
      September 30, 2009
                      6Notes
      to Financial Statements
                      7Item
      2.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      11Item
      3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      16Item
      4.
                      Controls
      and Procedures
                      16PART
      II – OTHER INFORMATIONItem
      1.
                      Legal
      Proceedings
                      16Item
      1A.
                      Risk
      Factors
                      16Item
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      17Item
      3.
                      Defaults
      Upon Senior Securities
                      17Item
      4.
                      (Removed
      and Reserved)
                      17Item
      5.
                      Other
      Information
                      17Item
      6.
                      Exhibits
                      17Signatures
                      
                      19


2


PART
I - FINANCIAL INFORMATION




Item
1. Financial Statements




American
Bio Medica Corporation


Balance
Sheets





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





The
accompanying notes are an integral part of the financial
statements


3





American
Bio Medica Corporation


Statements
of Operations


(Unaudited)





For
      The Nine Months EndedSeptember 30,2010
                        
                        
                        2009Net
      sales
                        
                        $
                        8,082,000
                        
                        
                        $
                        7,563,000Cost
      of goods sold
                        
                        
                        4,793,000
                        
                        
                        
                        4,463,000Gross
      profit
                        
                        
                        3,289,000
                        
                        
                        
                        3,100,000Operating
      expenses:Research
      and development
                        
                        
                        244,000
                        
                        
                        
                        316,000Selling
      and marketing
                        
                        
                        1,532,000
                        
                        
                        
                        1,587,000General
      and administrative
                        
                        
                        1,757,000
                        
                        
                        
                        1,755,0003,533,000
                        
                        
                        
                        3,658,000Operating
      loss
                        
                        
                        (244,000
                        )
                        
                        
                        (558,000
                        )Other
      income / (expense):Interest
      income
                        
                        
                        
                        
                        
                        
                        1,000Interest
      expense
                        
                        
                        (160,000
                        )
                        
                        
                        (152,000
                        )Other
      expense
                        
                        
                        
                        
                        
                        
                        (3,000
                        )(160,000
                        )
                        
                        
                        (154,000
                        )Net
      loss before tax
                        
                        
                        (404,000
                        )
                        
                        
                        (712,000
                        )Income
      tax expense
                        
                        
                        (4,000
                        )Net
      loss
                        
                        $
                        (408,000
                        )
                        
                        $
                        (712,000
                        )Basic
      and diluted loss per common share
                        
                        $
                        (0.02
                        )
                        
                        $
                        (0.03
                        )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 EndedSeptember 30,2010
                        
                        
                        2009Net
      sales
                        
                        $
                        2,530,000
                        
                        
                        $
                        2,501,000Cost
      of goods sold
                        
                        
                        1,653,000
                        
                        
                        
                        1,476,000Gross
      profit
                        
                        
                        877,000
                        
                        
                        
                        1,025,000Operating
      expenses:Research
      and development
                        
                        
                        28,000
                        
                        
                        
                        108,000Selling
      and marketing
                        
                        
                        511,000
                        
                        
                        
                        517,000General
      and administrative
                        
                        
                        585,000
                        
                        
                        
                        584,0001,124,000
                        
                        
                        
                        1,209,000Operating
      loss
                        
                        
                        (247,000
                        )
                        
                        
                        (184,000
                        )Other
      expense:Interest
      expense
                        
                        
                        (52,000
                        )
                        
                        
                        (56,000
                        )Loss
      on disposal of fixed assets
                        
                        
                        
                        
                        
                        
                        (1,000
                        )(52,000
                        )
                        
                        
                        (57,000
                        )Net
      loss before tax
                        
                        
                        (299,000
                        )
                        
                        
                        (241,000
                        )Income
      tax expense
                        
                        
                        (1,000
                        )Net
      loss
                        
                        $
                        (300,000
                        )
                        
                        $
                        (241,000
                        )Basic
      and diluted loss per common share
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.01
                        )Weighted
      average number of shares outstanding – basic & diluted
                        
                        
                        21,744,768
                        
                        
                        
                        21,744,768





The
accompanying notes are an integral part of the financial
statements


5





American
Bio Medica Corporation


Statements
of Cash Flows


(Unaudited)





For
      The Nine Months EndedSeptember 30,2010
                
                
                2009Cash
      flows from operating activities:Net
      loss
                
                $
                (408,000
                )
                
                $
                (712,000
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                
                
                220,000
                
                
                
                255,000Loss
      on disposal of property, plant and equipment
                
                
                
                
                
                
                3,000Amortization
      of debt issuance costs
                
                
                53,000
                
                
                
                28,000Provision
      for bad debts
                
                
                19,000Provision
      for slow moving and obsolete inventory
                
                
                (48,000
                )Share-based
      payment expense
                
                
                23,000
                
                
                
                8,000Changes
      in:Accounts
      receivable
                
                
                (457,000
                )
                
                
                165,000Inventory
                
                
                612,000
                
                
                
                1,148,000Prepaid
      expenses and other current assets
                
                
                (103,000
                )
                
                
                (48,000
                )Other
      assets
                
                
                1,000
                
                
                
                16,000Accounts
      payable
                
                
                (89,000
                )
                
                
                (631,000
                )Accrued
      expenses and other current liabilities
                
                
                (185,000
                )
                
                
                (251,000
                )Wages
      payable
                
                
                37,000
                
                
                
                39,000Other
      liabilities
                
                
                2,000
                
                
                
                (23,000
                )Net
      cash used in operating activities
                
                
                (323,000
                )
                
                
                (3,000
                )Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                
                
                (57,000
                )
                
                
                (28,000
                )Net
      cash used in investing activities
                
                
                (57,000
                )
                
                
                (28,000
                )Cash
      flows from financing activities:Payments
      on debt financing
                
                
                (77,000
                )
                
                
                (96,000
                )Debt
      issuance costs
                
                
                
                
                
                
                (41,000
                )Net
      proceeds from line of credit
                
                
                488,000
                
                
                
                148,000Net
      cash provided by financing activities
                
                
                411,000
                
                
                
                11,000Net
      increase / (decrease) in cash and cash equivalents
                
                
                31,000
                
                
                
                (20,000
                )Cash
      and cash equivalents - beginning of period
                
                
                35,000
                
                
                
                201,000Cash
      and cash equivalents - end of period
                
                $
                66,000
                
                
                $
                181,000Supplemental
      disclosures of cash flow informationCash
      paid during period for interest
                
                $
                179,000
                
                
                $
                171,000Related
      party note issued in lieu of accounts payable
                
                $
                
                
                
                $
                124,000





The
accompanying notes are an integral part of the financial
statements


6





Notes to
financial statements (unaudited)




September
30, 2010




Note
A - Basis of Reporting




The
accompanying unaudited interim financial statements of American Bio Medica
Corporation (the “Company”) have been prepared in accordance with generally
accepted accounting principles in the United States of America (“U.S. GAAP”) for
interim financial information and in accordance with the instructions to Form
10-Q and Regulation S-X. Accordingly, these unaudited interim financial
statements do not include all information and footnotes required by U.S. GAAP
for complete financial statement presentation. These unaudited interim financial
statements should be read in conjunction with our audited financial statements
and related notes contained in our Annual Report on Form 10-K for the year ended
December 31, 2009. In the opinion of management, the interim financial
statements include all normal, recurring adjustments, which are considered
necessary for a fair presentation of the financial position of the Company at
September 30, 2010, and the results of its operations for the three and nine
month periods ended September 30, 2010 and September 30, 2009, and cash flows
for the nine month periods ended September 30, 2010 and September 30,
2009.




Operating
results for the three and nine months ended September 30, 2010 are not
necessarily indicative of results that may be expected for the year ending
December 31, 2010. Amounts at December 31, 2009 are derived from our audited
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2009.




During
the nine months ended September 30, 2010, there were no significant changes to
our critical accounting policies, which are included in our Annual Report on
Form 10-K for the year ended December 31, 2009.




The
preparation of these interim financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate estimates, including those
related to product returns, bad debts, inventories, income taxes, warranty
obligations, and contingencies and litigation. We base estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.




These
unaudited interim financial statements have been prepared assuming that the
Company will continue as a going concern and, accordingly, do not include any
adjustments that might result from the outcome of this uncertainty. Our
independent registered public accounting firm's report on the financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2009, contained an explanatory paragraph regarding our ability to
continue as a going concern. As of the date of this report, our current cash
balances, together with cash generated from future operations and amounts
available under current credit facilities may not be sufficient to fund
operations for the next 12 months if sales levels do not improve. If cash
generated from operations is not sufficient to satisfy our working capital and
capital expenditure requirements, we will be required to sell additional equity
or obtain additional credit facilities. There is no assurance that such
financing will be available or that we will be able to complete financing on
satisfactory terms, if at all.




Recently
Adopted Accounting Standards




There
were no new standards adopted that are expected to have a material impact on our
interim 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 September 30, 2010 and
2009:




September 30,
                    2010
                  
                  
                  September 30, 2009Warrants
                  
                  
                  75,000
                  
                  
                  
                  75,000Options
                  
                  
                  2,826,580
                  
                  
                  
                  3,802,080


7




The
number of securities not included in the diluted net loss per common share for
the three and nine months ended September 30, 2010 and September 30, 2009
(because the effect would have been anti-dilutive) were 2,901,580 and 3,877,080,
respectively.




Note
C – Litigation




From time to time, we are named in
legal proceedings in connection with matters that arose during the normal course
of business. While the ultimate result of any such litigation cannot be
predicted, if we are unsuccessful in defending any such litigation, the
resulting financial losses could have an adverse effect on the financial
position, results of operations and cash flows of the Company. We are aware of
no significant litigation loss contingencies for which management believes it is
both probable that a liability has been incurred and that the amount of the loss
can be reasonably estimated. We are unaware of any proceedings being
contemplated by governmental authorities as of the date of this
report.




Note
D – Line of Credit and Debt




Rosenthal and Rosenthal,
Inc. (“Rosenthal”) Line of Credit




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




The
amount outstanding on the Rosenthal Line of Credit was $749,000 at September 30,
2010 and $260,000 at December 31, 2009. Additional loan availability as of
September 30, 2010 was $336,000, for a total loan availability of $1,085,000 as
of September 30, 2010. We incurred $41,000 in costs related to this refinancing,
and these costs are being amortized over the term of the Rosenthal Line of
Credit. For the nine months ended September 30, 2010, we have amortized $11,000
in costs. We have amortized $4,000 in costs for the three months ended September
30, 2010 and September 30, 2009, and for the nine months ended September 30,
2009. We use the Rosenthal Line of Credit for working capital.


8




Mortgage Consolidation
Loan




On
December 17, 2009, we closed on a refinancing and consolidation of an existing
real estate mortgage and term note with First Niagara. The new credit facility
through First Niagara is a fully secured term loan that matures on January 1,
2011, with a 6.5-year (78 month) amortization (the “Mortgage Consolidation
Loan”). The Mortgage Consolidation Loan continues to be secured by our facility
in Kinderhook, New York as well as various pieces of machinery and equipment. We
must comply with a covenant to maintain a certain level of Liquidity (defined as
any combination of cash, marketable securities or borrowing availability under
one or more credit facilities other than the Mortgage Consolidation Loan). As of
the date of this report, we are in compliance with this covenant.




The
annual interest rate of the Mortgage Consolidation Loan is fixed at 8.75%. The
monthly payment of principal and interest is $16,125. We have incurred
approximately $28,000 in costs associated with this refinancing, which are
included in prepaid expenses and other current assets, and will be amortized
over the term of the Mortgage Consolidation Loan. For the three and nine months
ended September 30, 2010, we have amortized $6,000 and $18,000 of expense,
respectively. The balance of the Mortgage Consolidation Loan was $879,000 at
September 30, 2010 and $953,000 at December 31, 2009.




Copier
Leases




On May 8,
2007, we purchased a copier through an equipment lease with RICOH in the amount
of $17,000. The term of the lease is five (5) years with an interest rate of
14.11%. The amount outstanding on this lease was $7,000 at September 30, 2010
and $10,000 at December 31, 2009.




Debenture
Financing




In August
2008, we completed an offering of Series A Debentures and received gross
proceeds of $750,000. The net proceeds of the offering of Series A Debentures
were $631,000 after $54,000 of placement agent fees and expenses, legal and
accounting fees of $63,000 and $2,000 of state filing fees. The Series A
Debentures accrue interest at a rate of 10% per annum (payable by the Company
semi-annually) and mature on August 1, 2012. As placement agent, Cantone
Research, Inc. (“Cantone”) received a Placement Agent fee of $52,500, or 7% of
the gross principal amount of Series A Debentures sold. In addition, we issued
Cantone a four-year warrant to purchase 30,450 shares of the Company’s common
stock at an exercise price of $0.37 per share (the closing price of the
Company’s common shares on the date of closing) and a four-year warrant to
purchase 44,550 shares of the Company’s common stock at an exercise price of
$0.40 per share (the closing price of the Company’s common stock on the Series A
Debentures Completion Date). All warrants issued to Cantone were immediately
exercisable upon issuance. We incurred $131,000 in expenses related to the
offering, including $12,000 in expense related to warrants issued to Cantone. We
amortized $24,000 of expense related to these debt issuance costs in both the
nine months ended September 30, 2010 and in the nine months ended September 30,
2009. We amortized $8,000 of expense related to these debt issuance costs in
both the three months ended September 30, 2010 and September 30, 2009. We have
also accrued interest expense related to the Series A Debentures of $13,000 at
September 30, 2010 and $31,000 at December 31, 2009.




Note
E – Stock Option Grants




As a
condition to the Financing Agreement with Rosenthal, our Chief Executive
Officer, Stan Cipkowski  (“Cipkowski”) was required to execute a
Validity Guarantee (the “Validity Guarantee”) that includes representations and
warranties with respect to the validity of our receivables and guarantees the
accuracy of our reporting related to our receivables and inventory to Rosenthal.
The Validity Guarantee places Cipkowski’s personal assets at risk in the event
of a breach of such representations, warranties and guarantees. As part of the
compensation for his execution of the Validity Guarantee, on July 1, 2009,
Cipkowski was awarded an option grant representing 500,000 common shares of the
Company under our Fiscal 2001 Stock Option Plan (the “2001 Plan”), at an
exercise price of $0.20, the closing price of the Company’s common shares on the
date of the grant. The option grant vests over 3 years in equal installments,
and the first 33% of the grant vested on July 1, 2010. In accordance with the
provisions of ASC Topic 718, “Accounting for Stock Options and
Other Stock Based Compensation”,previously referred to as SFAS 123(R),
we will recognize $78,000 in share-based payment expense amortized over the
required service period of 3 years. We recognized $20,000 in share-based payment
expense for this grant in the nine months ended September 30, 2010. We
recognized $7,000 in share-based payment expense for this grant in the nine
months ended September 30, 2009 and in both the three months ended September 30,
2010 and September 30, 2009. As of September 30, 2010 there was $46,000 in
unrecognized expense with 21 months remaining.


9


As
another condition to the Financing Agreement with Rosenthal, our President and
Chairman of the Board, Edmund M. Jaskiewicz (“Jaskiewicz”) was required to
execute an Agreement of Subordination and Assignment (“Subordination Agreement”)
related to $124,000 owed to Jaskiewicz by the Company as of June 29, 2009 (the
“Jaskiewicz Debt”). Under the Subordination Agreement, the Jaskiewicz Debt is
not payable, is junior in right to the Rosenthal Line of Credit and no payment
may be accepted or retained by Jaskiewicz unless and until we have paid and
satisfied in full any obligations to Rosenthal. Furthermore, the Jaskiewicz Debt
was assigned and transferred to Rosenthal as collateral for the Rosenthal Line
of Credit.




As
compensation for his execution of the Subordination Agreement, on July 1, 2009
Jaskiewicz was awarded an option grant representing 50,000 common shares of the
Company under our Fiscal 2001 Stock Option Plan (the “Fiscal 2001 Plan”), at an
exercise price of $0.20, the closing price of the Company’s common shares on the
date of the grant. The option grant was immediately exercisable. In accordance
with ASC Topic 718, “Accounting for Stock Options and
Other Stock Based Compensation”, previously referred to as SFAS 123(R),
(“ASC Topic 718”), we recognized $8,000 during the year ended December 31, 2009
in share-based payment expense related to the grant of Jaskiewicz’s options upon
issuance of the grant.




Furthermore,
upon the 2nd and 3rd anniversary of the original stock option grant, Jaskiewicz
is to be awarded additional option grants of 50,000 each (“Additional Grants”).
The exercise prices of the Additional Grants will be the closing price of the
Company’s common shares on the date of each grant, and the Additional Grants
will be immediately exercisable. The Additional Grants shall only be awarded if
the Jaskiewicz Debt, or any remaining portion thereof, has not been repaid. If
the Jaskiewicz Debt has been repaid in full, no Additional Grants will be
issued. On July 1, 2010, Jaskiewicz was awarded an option grant representing
50,000 common shares of the Company under our Fiscal 2001 Plan, at an exercise
price of $0.07, the closing price of the Company’s common shares on the date of
the grant. The option grant is immediately exercisable. In accordance with ASC
Topic 718, upon issuance of the grant in the three and nine months ended
September 30, 2010, we recognized $3,000 in share-based payment expense related
to this second option grant to Jaskiewicz.




Note
F – Subsequent Event




On
October 16, 2010, we voluntarily and temporarily suspended selling and marketing
of our point of collection oral fluid drugs of abuse products in the Workplace
market. This decision was made in response to communications and interactions
with the FDA over the course of the last several months related to the warning
letter we received from the FDA in July 2009 which alleges we are marketing our
point of collection oral fluid drug test, OralStat, in workplace settings
without marketing clearance or approval (see Current Report on Form 8-K filed
with the United States Securities and Exchange Commission (“SEC”) on August 5,
2009). It has been our belief (based on advice from legal counsel) that
marketing clearance from the FDA is not required to sell our drug tests in
non-clinical (i.e. non-medical) markets (such as Workplace and criminal
justice/law enforcement), but is required to sell our products in the clinical
and over-the-counter (consumer) markets. We do not sell our oral fluid drug
tests in clinical or over-the-counter (consumer) markets. In addition, there are
many other oral fluid point of collection drug tests currently being sold in the
Workplace market by our competitors, none of which have received FDA marketing
clearance. Our point of collection oral fluid drug tests currently account for
approximately 20% of our sales, and a material portion of these sales are to the
Workplace market; if we continue to be unable to market and sell our point of
collection oral fluid drug tests in the Workplace market, this will negatively
impact our revenues. We continue to take the necessary actions that will enable
the Company to submit a marketing clearance application to the FDA, and/or any
additional actions that may be required to address the jurisdictional question
raised by ABMC counsel.


10


Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations




General




The
following discussion of our financial condition and the results of operations
should be read in conjunction with the interim Financial Statements and Notes
thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This
discussion contains, in addition to historical statements, forward-looking
statements that involve risks and uncertainties. Our actual future results could
differ significantly from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, the factors discussed in the section titled “Risk
Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009
and in this Quarterly Report on Form 10-Q. Any forward-looking statement speaks
only as of the date on which such statement is made and we do not intend to
update any such forward-looking statements.




Overview




During the nine months ended September
30, 2010, our business continued to be impacted by global economic conditions.
However, sales began to improve in the first quarter of 2010, and this
improvement continued into the second quarter and third quarter of 2010;
although improvement in the third quarter of 2010 was minimal. We are encouraged
by this improvement, but given the limited improvement in sales in the third
quarter of 2010, we continue to believe it will be some time before significant
economic growth occurs allowing employment rates and government budgets to
return to pre-recession levels, allowing the Company to sustain consistent sales
improvement. In addition, it is possible that we will see a negative impact on
our sales as a result of our temporary and voluntarily cessation of marketing
and selling our oral fluid drug tests in the Workplace market (see Risk Factor
related to regulatory framework). The degree of impact is not yet known, as the
degree of impact is dependent on a number of factors, one of which is the length
of time in which we do not market or sell our oral fluid products in the
Workplace market.




During
the nine months ended September 30, 2010, we sustained a net loss of $408,000
from net sales of $8,082,000. We had net cash used in operating activities of
$323,000 for the nine months ended September 30, 2010. In response to the state
of the global economy, we implemented cost-cutting measures to reduce operating
expenses; these efforts, coupled with the improvement in sales, enabled us to
reach profitability in the second quarter of 2010 and reduce our operating loss
in the third quarter of 2010. We expect to continue our efforts to reduce or
sustain current operating expenses, which would allow us to maintain
profitability or minimize losses going forward. However, given the uncertainty
of the global economy, there can be no assurance that our sales levels will
continue to improve or that we will be able to maintain profitability or
minimize losses going forward.




During
the nine months ended September 30, 2010, we continued to market and distribute
our urine and oral fluid-based point of collection tests for drugs of abuse
(“DOA”) and our Rapid Reader® drug screen result and data management system, and
we also performed bulk test strip contract manufacturing services for
unaffiliated third parties.




Plan
of Operations




Our sales
strategy continues to focus on direct sales, including but not limited to the
pursuit of new national accounts, while identifying new contract manufacturing
opportunities. Simultaneously with these efforts, we will continue to focus on
the reduction of manufacturing costs and operating expenses, enhancement of our
current products and development of new product platforms and configurations to
address market trends.




Our
continued existence is dependent upon several factors, including our ability to
raise revenue levels and reduce costs to generate positive cash flows, and to
obtain working capital by selling additional shares of Company common stock
and/or securing additional credit facilities, as necessary.




Results
of operations for the nine months ended September 30, 2010 compared to the nine
months ended September 30, 2009




NET SALES:Net sales for the
nine months ended September 30, 2010 increased 6.9% when compared to net sales
for the nine months ended September 30, 2009. National accounts and other
non-government direct sales increased in the nine months ended September 30,
2010 when compared to the nine months ended September 30, 2009 (although sales
are still depressed from pre-recession levels of 2008). This improvement when
comparing the nine-month net sales primarily results from positive movement in
the Workplace market due to unemployment rates improving in many areas
throughout the country in the second quarter of 2010; however, this same
positive movement did not occur throughout the third quarter of 2010.
Unemployment rates in the Unites States continue to fluctuate and this, along
with the uncertainty of general economic conditions in the United States
continues to affect our sales levels in the United States. The Bureau of Labor
Statistics (the “Bureau”) report dated September 2010, shows less improvement
than previous reports published by the Bureau with 23 states and the District of
Columbia recording unemployment rate decreases, 11 states recording increases
and 16 states having no rate change. This September report also indicated that
the national jobless rate was 9.6% in September 2010; relatively the same as a
year earlier (9.8%).


11




We
continue to see improvement in sales to the Clinical market, which includes pain
management and drug rehabilitation. The Clinical Laboratory Improvement
Amendments (CLIA) of 1988 established quality standards for laboratory testing
to ensure the accuracy, reliability and timeliness of patient test results
regardless of where the test was performed. As a result, those using CLIA waived
tests are not subject to the more stringent and expensive requirements of
moderate or high complexity laboratories. Our Rapid TOX® product line is CLIA
waived and currently is the only product that includes a CLIA waived assay for
Burprenorphine. Burprenorphine is used to treat certain types of drug
dependency, including opioid addiction, as well as being used in pain
management. Rehabilitation centers and physicians specializing in pain
management need a quality DOA testing kit to assist them in monitoring patient
usage to ensure the narcotics are being used as prescribed and to identify
possible medication usage from other sources that can complicate a patient’s
plan of treatment.




International
sales also improved in the nine months ended September 30, 2010 when compared to
the nine months ended September 30, 2009. The improvement in international sales
primarily results from increased sales to Latin America.




Contract
manufacturing sales improved in the nine months ended September 30, 2010 when
compared to the nine months ended September 30, 2009. This improvement is a
result of increased contract manufacturing of a product for fetal amniotic
membrane rupture.




The
improvements in sales discussed above were partially offset by decreased sales
in our Government market in the nine months ended September 30, 2010 when
compared to nine months ended September 30, 2009. Sales in our Government market
continue to be negatively impacted as government entities decrease purchasing
levels in attempts to close their budget deficits, resulting in decreased buying
under the contracts we currently hold. At the same time, we continue to face
price pressures from foreign manufacturers, which make it more difficult to
secure new government contracts.




We will
continue to focus our sales efforts on national accounts, non-government direct
sales and contract manufacturing, while striving to reduce manufacturing costs.
Reduction in manufacturing costs could enable us to be more cost competitive in
the Government market, which is extremely price sensitive. To that end, we now
offer the Rapid TOX Cup® II; certain raw material costs associated with the
Rapid TOX Cup II are lower, which means we can offer the Rapid TOX Cup II at a
reduced cost to our customers. We remain hopeful that we may be able to mitigate
the negative impact of foreign price pressures and decreased budgets with the
Rapid TOX Cup II. We have obtained a number of new accounts in the Government
market as a result of offering the Rapid TOX Cup II, however, we continue to
experience declines in this market as current contracts are reduced by budget
cuts, and in some cases, we have been unable to retain contracts due to price
competition with competitors who manufacture their products in foreign
countries.




COST OF GOODS SOLD/GROSS PROFIT:Cost of goods sold was relatively unchanged at 59.3% of net sales for the
nine months ended September 30, 2010, compared to 59.0% of net sales for the
nine months ended September 30, 2009. Although we saw improvement in cost of
goods sold in the three and six months ended June 30, 2010 as a result of
increased product manufacturing efficiencies and a shift in sales mix from lower
margin products to sales of higher margin products, a one-time inventory
disposal of $150,000 in the third quarter of 2010 affected cost of goods sold in
the nine months ended September 30, 2010.  Gross profit for the nine
months ended September 30, 2010 was also relatively unchanged from gross profit
in the nine months ended September 30, 2009.




OPERATING EXPENSES: Operating
expenses decreased 3.4% for the nine months ended September 30, 2010, compared
to the nine months ended September 30, 2009. Cost-cutting measures implemented
in the year ended December 31, 2009 remain in effect. In conjunction with these
measures, we continuously assess our operating expenses to ensure they are
adequate to: elicit growth, support sales levels and address market trends and
customer needs. In the nine months ended September 30, 2010, research and
development and selling and marketing expenses decreased, while general and
administrative expenses were relatively unchanged; more
specifically:


12




Research and Development
(“R&D”) expense




R&D
expense for the nine months ended September 30, 2010 decreased 22.8%, compared
to the nine months ended September 30, 2009. This decrease is a result of
reductions in salaries, employee related benefits, consulting costs and
supplies, partially offset by an increase in utility costs. Our R&D
department continues to focus their efforts on the enhancement of current
products, development of new product platforms and exploration of contract
manufacturing opportunities.




Selling and Marketing
expense




Selling
and marketing expense for the nine months ended September 30, 2010 decreased
3.5%, compared to the nine months ended September 30, 2009. Reductions in sales
salaries due to decreased personnel and adjustment in base salaries, postage,
and marketing expenses were partially offset by increases in sales commissions
and sales related travel expense. In the nine months ended September 30, 2010,
we continued to promote our products through selected advertising, participation
at high profile trade shows and other marketing activities. Our direct sales
force continued to focus their selling efforts in our target markets, which
include, but are not limited to, Workplace and Government. Our direct sales team
continues to focus more efforts on the Clinical market, as a result of the
receipt of our CLIA waiver for our Rapid TOX product line. As discussed above,
we have seen some positive impact on our sales in the Clinical market, primarily
through physicians and pain management clinics, as a result of these
efforts.




General and Administrative
(“G&A”) expense




G&A
expense for the nine months ended September 30, 2010 remained relatively
unchanged compared to the nine months ended September 30, 2009. Reductions in
investor relations expense, G&A salaries, directors fees and expenses,
insurance, accounting fees, and patents and license costs were partially offset
by increases in consulting fees (stemming from our efforts to respond to and
address a warning letter received from the FDA in July 2009; see Item 11: Risk
Factors), repairs and maintenance costs, miscellaneous cost stemming from a
vendor related expense, bad debt expense, bank service fees and share-based
payment expense (stemming from options grants issued in the third quarter of
2009 and the third quarter of 2010 (see Part I, Item 1, Note E). Share based
payment expense totaled $23,000 in the nine months ended September 30, 2010 and
$8,000 in the nine months ended September 30, 2009.




Results
of operations for the three months ended September 30, 2010 compared to the
three months ended September 30, 2009




NET SALES:Net sales for the
three months ended September 30, 2010 increased 1.2%, compared to net sales for
the three months ended September 30, 2009. National accounts and other
non-government direct sales increased in the three months ended September 30,
2010 when compared to the three months ended September 30, 2009 (although sales
are still depressed from pre-recession levels of 2008). General economic
conditions and uncertainty in the Workplace market due to fluctuating
unemployment rates affected sales in the third quarter of 2010. The Bureau of
Labor Statistics (the “Bureau”) report dated September 2010, shows less
improvement than previous reports published by the Bureau with 23 states and the
District of Columbia recording unemployment rate decreases, 11 states recording
increases and 16 states having no rate change. This September report also
indicated that the national jobless rate was 9.6% in September 2010; relatively
the same as a year earlier (9.8%).




When comparing the third quarter of
2010 to the third quarter of 2009, sales to the Clinical market, which includes
pain management and drug rehabilitation, increased in the third quarter of 2010.
Our Rapid TOX product line is CLIA waived and presently is the only product that
includes a CLIA waived assay for Burprenorphine. Rehabilitation centers and
physicians specializing in pain management need a quality DOA testing kit to
assist them in monitoring patient usage to ensure that narcotics are being used
as prescribed and to identify possible medication usage from other sources that
can complicate a patient’s plan of treatment.




International
sales also improved in the third quarter of 2010, compared to the third quarter
of 2009. The improvement in international sales primarily results from increased
sales to Latin America.




Contract
manufacturing sales improved in the third quarter of 2010, compared to the third
quarter of 2009. This improvement is a result of increased contract
manufacturing of testing products for fetal amniotic membrane
rupture.


13


Sales in
our Government market continue to be impacted as government entities decrease
purchasing levels in attempts to close their budget deficits, resulting in
decreased buying under the contracts we currently hold. At the same time, we
continue to face price pressures from foreign manufacturers, which make it more
difficult to secure new government contracts.




COST
OF GOODS SOLD/GROSS PROFIT:




Cost of
goods sold for the three months ended September 30, 2010 was 65.3% of net sales,
compared to 59.0% for the three months ended September 30, 2009. The increase in
cost of goods sold stems primarily from a one-time inventory disposal of
$150,000 in the third quarter of 2010 that did not occur in the third quarter of
2009. Gross profit for the third quarter of 2010 declined when compared to the
third quarter of 2009 as a result of the one-time inventory disposal and minimal
sales improvement.




OPERATING
EXPENSES:




Operating
expenses decreased 7.0% for the three months ended September 30, 2010, compared
to the three months ended September 30, 2009. Cost-cutting measures implemented
in the year ended December 31, 2009 remain in effect. In conjunction with these
measures, we continuously assess our operating expenses to ensure they are
adequate to: elicit growth, support sales levels and address market trends and
customer needs. In the three months ended September 30, 2010, research and
development and selling and marketing expenses decreased, while general and
administrative expenses were relatively unchanged; more
specifically:




Research and Development
(“R&D”) expense




R&D
expense for the three months ended September 30, 2010 decreased 74.1%, compared
to the three months ended September 30, 2009. This decrease is primarily a
result of a reclassification of FDA compliance costs in the third quarter of
2010 from R&D expense to G&A expense, reduced expenses for salaries and
related employee benefits, and supply costs, offset by slight increases in
utilities and travel costs. Our R&D department continues to focus their
efforts on the enhancement of current products, development of new product
platforms and exploration of contract manufacturing opportunities.




Selling and Marketing
expense




Selling
and marketing expense for the three months ended September 30, 2010 decreased
1.2%, compared to the three months ended September 30, 2009. This decrease was
primarily a result of reductions in sales salaries (due to reduced personnel and
adjustments to base salary), postage and marketing expenses, offset by an
increase in commission costs. In the three months ended September 30, 2010, we
continued to promote our products through selected advertising, participation at
high profile trade shows and other marketing activities. Our direct sales force
continued to focus their selling efforts in our target markets, which include,
but are not limited to, Workplace and Government. Our direct sales team
continues to focus more efforts on the Clinical market, as a result of the
receipt of our CLIA waiver for our Rapid TOX product line. As discussed above,
we have seen some positive impact on our sales in the Clinical market, primarily
through physicians and pain management clinics, as a result of these
efforts.




General and Administrative
(“G&A”) expense




G&A
expense for the three months ended September 30, 2010 remained relatively
unchanged compared to the three months ended September 30, 2009. Reductions in
investor relations expense, directors fees and expenses, accounting fees and
patent and license costs were partially offset by an increase in consulting fees
(stemming from our efforts to respond to and address a warning letter received
from the FDA in July 2009; see Item 11: Risk Factors) resulting from a
reclassification of FDA compliance costs in the third quarter of 2010 from
R&D expense to G&A expense, and bank service fees. Included in G&A
expense is $9,000 and $8,000 in share-based payment expense in the three months
ended September 30, 2010 and September 30, 2009, respectively (see Part I, Item
1, Note E).


14




Liquidity
and Capital Resources as of September 30, 2010




Our cash
requirements depend on numerous factors, including product development
activities, regulatory and compliance requirements, sales and marketing efforts,
market acceptance of new products, and effective management of inventory and
production personnel and output levels in response to sales forecasts. We expect
to devote substantial capital resources to continue product development and/or
enhancement, refine manufacturing efficiencies, support direct sales efforts and
take the necessary steps to comply with regulatory requirements. We will
continue to examine growth opportunities including strategic alliances, and
expect that such activities will be funded from existing cash and cash
equivalents, issuance of additional equity or debt securities or additional
borrowings subject to market and other conditions. Our financial statements for
the year ended December 31, 2009 were prepared assuming we will continue as a
going concern. As of the date of this report, our current cash balances,
together with cash generated from future operations and amounts available under
current credit facilities may not be sufficient to fund operations for the next
12 months if sales levels do not improve. If cash generated from operations is
not sufficient to satisfy our working capital and capital expenditure
requirements, we will be required to sell additional equity or obtain additional
credit facilities. There is no assurance that such financing will be available
or that we will be able to complete financing on satisfactory terms, if at
all.




As of
September 30, 2010, we had a Mortgage Consolidation Loan with First Niagara and
a Line of Credit with Rosenthal. As of September 30, 2010, we were not in
compliance with the tangible net worth requirement under the Rosenthal Line of
Credit, but Rosenthal has waived the tangible net worth requirements for the
quarter ended September 30, 2010. (See Part 1, Item 1, Note D).




Working
capital




Our
working capital decreased $1,038,000 at September 30, 2010, when compared to
working capital at December 31, 2009. At December 31, 2009, our Mortgage
Consolidation Loan with First Niagara was classified as a long-term liability.
In the first quarter of 2010, we reclassified our Mortgage Consolidation Loan
with First Niagara from long-term to short-term, as the maturity date of the
Mortgage Consolidation Loan is January 2011. The balance of the Mortgage
Consolidation Loan was $879,000 at September 30, 2010 and $953,000 at December
31, 2009. (See Part I, Item 1, Note D). We are actively seeking replacement
financing for the Mortgage Consolidation Loan.




We have
historically satisfied net working capital requirements through cash from
operations, bank debt, occasional proceeds from the exercise of stock options
and warrants (approximately $623,000 since 2002) and through the private
placement of equity securities ($3,299,000 in gross proceeds since August 2001,
with net proceeds of $2,963,000 after placement, legal, transfer agent,
accounting and filing fees).




Dividends




We have
never paid any dividends on our common shares and anticipate that all future
earnings, if any, will be retained for use in our business, and therefore, we do
not anticipate paying any cash dividends.




Cash
Flows




Increases
in prepaid expenses and other current assets and accounts receivable and
decreases in accrued expenses and accounts payable, offset by decreases in
inventory and increases in wages payable resulted in cash used in operating
activities of $323,000 for the nine months ended September 30, 2010. The primary
use of cash in the nine months ended September 30, 2010 and September 30, 2009
was funding of operations.




Net cash
used in investing activities of $57,000 and $28,000 in the nine months ended
September 30, 2010 and September 30, 2009, respectively, was for investment in
property, plant and equipment.




Net cash
provided by financing activities in the nine months ended September 30, 2010 and
September 30, 2009 consisted primarily of net proceeds from our line of credit,
offset by payments on debt financing. Financing activities in the nine months
ended September 30, 2009 also included debt issuance costs. Net proceeds from
the line of credit for the nine months ended September 30, 2010 was $488,000,
compared to $148,000 during the nine months ended September 30, 2009. Net cash
provided by financing activities was $411,000 in the nine months ended September
30, 2010, and $11,000 in the nine months ended September 30, 2009.




In the
nine months ended September 30, 2010, our loan availability under the Rosenthal
Line of Credit, which was not in place until the third quarter of 2009, was
greater than the loan availability under the prior line of credit with First
Niagara in the nine months ended September 30, 2009, and we used this increased
loan availability to fund operations. The amount outstanding on the Rosenthal
Line of Credit was $749,000 at September 30, 2010 with additional loan
availability as of $336,000; for a total loan availability of $1,085,000 as of
September 30, 2010. As our receivables increase, we are required to draw down
more frequently on the Rosenthal Line of Credit to fund operations.




At
September 30, 2010, we had cash and cash equivalents of
$66,000.


15




Outlook




Our
primary short-term working capital needs relate to our efforts to increase high
volume sales in the DOA testing market, to refine manufacturing and production
capabilities and establish adequate inventory levels to support expected sales,
while continuing support of research and development activities. We believe that
our current infrastructure is sufficient to support our business; however, if at
some point in the future we experience renewed growth in sales, we may be
required to increase our infrastructure to support sales. It is also possible
that additional investments in research and development, and increased
expenditures in selling and marketing and general and administrative may be
necessary in the future to: develop new products, enhance current products to
meet the changing needs of the point of collection DOA testing market, grow
contract manufacturing operations, promote our products in our markets and
institute changes that may be necessary to comply with various public company
reporting requirements, as well as FDA requirements related to the marketing and
use of our products. We continue to take measures to attempt to control the rate
of increase of these costs to be consistent with any sales growth rate we may
experience in the near future.




We
believe that we may need to raise additional capital in the future to continue
operations. If events and circumstances occur such that we do not meet our
current operating plans, or we are unable to raise sufficient additional equity
or debt financing, or credit facilities are insufficient or not available, we
may be required to further reduce expenses or take other steps which could have
a material adverse effect on our future performance.




Item
3. Quantitative and Qualitative Disclosures About Market Risk




As a smaller reporting company, we are
not required to provide the information required by this item.




Item
4. Controls and Procedures




(a)
Evaluation of Disclosure Controls and Procedures




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




(b)
Changes in Internal Control Over Financial Reporting




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




PART
II – OTHER INFORMATION




Item
1. Legal Proceedings




See Part
I, Item 1, Note C in the Notes to interim Financial Statements included in this
report for a description of pending legal proceedings in which we may be a
party.




Item
1A. Risk Factors




There have been no material changes to
our risk factors set forth in Part I, Item 1A, in our Annual Report on Form 10-K
for the year ended December 31, 2009 except as set forth below:




We
depend on key personnel to manage our business effectively.




We are
dependent on the expertise and experience of our senior management for our
future success. The loss of a member of senior management could negatively
impact our business and results of operations. On July 28, 2010, we terminated
the employment of one member of our senior management, our Executive Vice
President & Chief Science Officer. This officer had been employed pursuant
to an employment agreement. The employment agreement expired on May 31, 2010,
and was not renewed. As of the date of this report, we have not appointed anyone
to fill the vacancy created by this termination; however, in the third quarter
of 2010, we appointed an individual to the position of Vice President of Science
and Technology.




We have
employment agreements in place with current members of our senior management,
including our new Vice President of Science and Technology. There can be no
assurance that any of our senior management will continue their employment. We
maintain key man insurance for our Chief Executive Officer Stan
Cipkowski.


16




Any
adverse changes in our regulatory framework could negatively impact our
business.




Our urine
point of collection products have received 510(k) marketing clearance from the
FDA, and have therefore met FDA requirements for professional use. Our oral
fluid point of collection products have not received 510(k) marketing clearance
from the FDA. We have also been granted a CLIA waiver from the FDA related to
our Rapid TOX product line. Workplace and Government are the Company’s primary
markets, and it has been our belief (based on advice from legal counsel) that
marketing clearance from FDA is not required to sell our drug tests in
non-clinical (i.e. non-medical) markets (such as workplace and criminal
justice/law enforcement), but is required to sell our products in the clinical
and over-the-counter (consumer) markets. We do not sell our oral fluid drug
tests in clinical or over-the-counter (consumer) markets. In addition, there are
many other oral fluid point of collection drug tests currently being sold in the
Workplace market by our competitors, none of which have received FDA marketing
clearance.




However,
in July 2009, we received a warning letter from the FDA, which alleges we are
marketing our point of collection oral fluid drug test, OralStat, in workplace
settings without marketing clearance or approval (see Current Report on Form 8-K
filed with the SEC on August 5, 2009).




We have
communicated to the FDA our belief that marketing clearance is not required in
non-clinical markets; and that such belief is based upon legal advice from our
counsel. To date, the FDA does not agree with our interpretation of FDA
regulations related to medical devices, and the FDA continues to assert
jurisdiction of drug testing performed in the workplace. Although we do not
concede that the FDA has jurisdiction over drug testing when performed in the
workplace, we have informed the FDA that we are willing to file a marketing
clearance application, however, we have also advised the FDA that specific
technical and scientific issues exist when attempting to utilize FDA’s draft
guidance for our oral fluid point of collection drug tests. More specifically,
that technical and scientific issues exist when trying to use the draft guidance
for oral fluid drug tests because the draft guidance was written for urine drug
tests. Although we have met with the FDA, the FDA has yet to provide the
additional guidance we have requested regarding the issues identified. This has
impacted our ability to collect the data needed to obtain marketing clearance,
but we continue to move forward with our efforts to resolve these issues with
the FDA, collect the necessary supporting data and to obtain marketing
clearance.




In
response to communications and interactions with the FDA over the course of the
last several months, on October 16, 2010, we voluntarily and temporarily
suspended selling and marketing of our oral fluid drugs of abuse products in the
Workplace market.




The cost
of obtaining marketing clearance could be material and incurring such cost could
have a negative impact on our efforts to improve our performance and to achieve
profitability. Furthermore, there can be no assurance that we will obtain
marketing clearance from the FDA, especially since we would be among the first
companies to apply for such marketing clearance. Our point of collection oral
fluid drug tests currently account for approximately 20% of our sales and a
material portion of these sales are to the Workplace market; if we continue to
be unable to market and sell our point of collection oral fluid drug tests in
the Workplace market, this will negatively impact our revenues.




Although
we are currently unaware of any additional changes in regulatory standards
related to any of our markets, if regulatory standards were to further change in
the future, there can be no assurance that the FDA will grant the Company
appropriate marketing clearances required to comply with the changes, if and
when we apply for them. We will continue to take the necessary actions that will
enable the Company to submit a marketing clearance application to the FDA,
and/or any additional actions that may be required to address the jurisdictional
question raised by our counsel.




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




None.




Item
3. Defaults Upon Senior Securities




None.




Item
4. (Removed and Reserved)




Item
5. Other Information




None.




Item
6.  Exhibits


17




31.1       Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer




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




32.1
            Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002




32.2
            Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002


18


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 Officer/Executive Vice President, FinancePrincipal
      Financial OfficerPrincipal
      Accounting Officer





Dated:
November 15, 2010


19