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 June 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) 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 12, 2010








American
Bio Medica Corporation





Index
to Quarterly Report on Form 10-Q


For
the quarter ended June 30, 2010





PAGEPART
      I – FINANCIAL INFORMATIONItem
      1.
                  Financial
      Statements
                  3Balance
      Sheets as of June 30, 2010 (unaudited) and December 31,
    2009
                  3Unaudited
      Statements of Operations for the six months ended June 30, 2010 and June
      30, 2009
                  4Unaudited
      Statements of Operations for the three months ended June 30, 2010 and June
      30, 2009
                  5Unaudited
      Statements of Cash Flows for the six months ended June 30, 2010 and June
      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
                  18Item
      4.
                  Controls
      and Procedures
                  18PART
      II – OTHER INFORMATIONItem
      1.
                  Legal
      Proceedings
                  18Item
      1A.
                  Risk
      Factors
                  18Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  20Item
      3.
                  Defaults
      Upon Senior Securities
                  20Item
      4.
                  (Removed
      and Reserved)
                  20Item
      5.
                  Other
      Information
                  20Item
      6.
                  Exhibits
                  20Signatures
                  
                  22




2


PART
I - FINANCIAL INFORMATION




Item
1. Financial Statements




American
Bio Medica Corporation


Balance
Sheets





June
      30,
                      
                      
                      December
      31,2010
                      
                      
                      2009(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                      
                      $
                      79,000
                      
                      
                      $
                      35,000Accounts
      receivable, net of allowance for doubtful accounts of $69,000 at June 30,
      2010 and $67,000 at December 31, 2009
                      
                      
                      1,418,000
                      
                      
                      
                      816,000Inventory,
      net of allowance for slow moving and obsolete inventory of $235,000 at
      June 30, 2010 and $271,000 at December 31, 2009
                      
                      
                      4,001,000
                      
                      
                      
                      4,315,000Prepaid
      expenses and other current assets
                      
                      
                      127,000
                      
                      
                      
                      101,000Total
      current assets
                      
                      
                      5,625,000
                      
                      
                      
                      5,267,000Property,
      plant and equipment, net
                      
                      
                      1,486,000
                      
                      
                      
                      1,624,000Debt
      issuance costs, net
                      
                      
                      95,000
                      
                      
                      
                      118,000Other
      assets
                      
                      
                      30,000
                      
                      
                      
                      31,000Total
      assets
                      
                      $
                      7,236,000
                      
                      
                      $
                      7,040,000LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilitiesAccounts
      payable
                      
                      $
                      778,000
                      
                      
                      $
                      678,000Accrued
      expenses and other current liabilities
                      
                      
                      443,000
                      
                      
                      
                      506,000Wages
      payable
                      
                      
                      291,000
                      
                      
                      
                      215,000Line
      of credit
                      
                      
                      483,000
                      
                      
                      
                      260,000Current
      portion of long-term debt
                      
                      
                      911,000
                      
                      
                      
                      107,000Current
      portion of unearned grant
                      
                      
                      10,000
                      
                      
                      
                      10,000Total
      current liabilities
                      
                      
                      2,916,000
                      
                      
                      
                      1,776,000Other
      liabilities
                      
                      
                      138,000
                      
                      
                      
                      136,000Long-term
      debt
                      
                      
                      754,000
                      
                      
                      
                      1,606,000Related
      party note
                      
                      
                      124,000
                      
                      
                      
                      124,000Unearned
      grant
                      
                      
                      20,000
                      
                      
                      
                      20,000Total
      liabilities
                      
                      
                      3,952,000
                      
                      
                      
                      3,662,000COMMITMENTS
      AND CONTINGENCIESStockholders'
      equity:Preferred
      stock; par value $.01 per share; 5,000,000 shares authorized, none issued
      and outstanding at June 30, 2010 and December 31, 2009Common
      stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768
      issued and outstanding at June 30, 2010 and December 31,
    2009
                      
                      
                      217,000
                      
                      
                      
                      217,000Additional
      paid-in capital
                      
                      
                      19,313,000
                      
                      
                      
                      19,299,000Accumulated
      deficit
                      
                      
                      (16,246,000
                      )
                      
                      
                      (16,138,000
                      )Total
      stockholders’ equity
                      
                      
                      3,284,000
                      
                      
                      
                      3,378,000Total
      liabilities and stockholders’ equity
                      
                      $
                      7,236,000
                      
                      
                      $
                      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 Six Months Ended
                      June 30,2010
                    
                    
                    2009Net
      sales
                    
                    $
                    5,552,000
                    
                    
                    $
                    5,063,000Cost
      of goods sold
                    
                    
                    3,140,000
                    
                    
                    
                    2,988,000Gross
      profit
                    
                    
                    2,412,000
                    
                    
                    
                    2,075,000Operating
      expenses:Research
      and development
                    
                    
                    216,000
                    
                    
                    
                    208,000Selling
      and marketing
                    
                    
                    1,021,000
                    
                    
                    
                    1,070,000General
      and administrative
                    
                    
                    1,172,000
                    
                    
                    
                    1,171,0002,409,000
                    
                    
                    
                    2,449,000Operating
      income / (loss)
                    
                    
                    3,000
                    
                    
                    
                    (374,000
                    )Other
      income / (expense):Interest
      income
                    
                    
                    
                    
                    
                    
                    1,000Interest
      expense
                    
                    
                    (108,000
                    )
                    
                    
                    (96,000
                    )Other
      expense
                    
                    
                    
                    
                    
                    
                    (2,000
                    )(108,000
                    )
                    
                    
                    (97,000
                    )Net
      loss before tax
                    
                    
                    (105,000
                    )
                    
                    
                    (471,000
                    )Income
      tax expense
                    
                    
                    (3,000
                    )Net
      loss
                    
                    $
                    (108,000
                    )
                    
                    $
                    (471,000
                    )Basic
      and diluted loss per common share
                    
                    $
                    0.00
                    
                    
                    $
                    (0.02
                    )Weighted
      average number of shares outstanding – basic & diluted
                    
                    
                    21,744,768
                    
                    
                    
                    21,744,768





The
accompanying notes are an integral part of the financial
statements


4





American
Bio Medica Corporation


Statements
of Operations


(Unaudited)





For The Three Months
                      Ended
                      June 30,2010
                    
                    
                    2009Net
      sales
                    
                    $
                    3,126,000
                    
                    
                    $
                    2,808,000Cost
      of goods sold
                    
                    
                    1,665,000
                    
                    
                    
                    1,652,000Gross
      profit
                    
                    
                    1,461,000
                    
                    
                    
                    1,156,000Operating
      expenses:Research
      and development
                    
                    
                    114,000
                    
                    
                    
                    106,000Selling
      and marketing
                    
                    
                    534,000
                    
                    
                    
                    572,000General
      and administrative
                    
                    
                    591,000
                    
                    
                    
                    648,0001,239,000
                    
                    
                    
                    1,326,000Operating
      income / (loss)
                    
                    
                    222,000
                    
                    
                    
                    (170,000
                    )Other
      expense:Interest
      expense
                    
                    
                    (55,000
                    )
                    
                    
                    (49,000
                    )(55,000
                    )
                    
                    
                    (49,000
                    )Net
      income / (loss) before tax
                    
                    
                    167,000
                    
                    
                    
                    (219,000
                    )Income
      tax expenseNet
      income / (loss)
                    
                    $
                    167,000
                    
                    
                    $
                    (219,000
                    )Basic
      and diluted income / (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 Six Months
                  EndedJune 30,2010
                
                
                2009Cash
      flows from operating activities:Net
      loss
                
                $
                (108,000
                )
                
                $
                (471,000
                )Adjustments
      to reconcile net loss to net cash provided by / (used in) operating
      activities:Depreciation
                
                
                148,000
                
                
                
                171,000Loss
      on disposal of property, plant and equipment
                
                
                
                
                
                
                2,000Amortization
      of debt issuance costs
                
                
                36,000
                
                
                
                17,000Provision
      for bad debts
                
                
                12,000Provision
      for slow moving and obsolete inventory
                
                
                (36,000
                )Share-based
      payment expense
                
                
                13,000Changes
      in:Accounts
      receivable
                
                
                (614,000
                )
                
                
                (292,000
                )Inventory
                
                
                350,000
                
                
                
                1,091,000Prepaid
      expenses and other current assets
                
                
                (38,000
                )
                
                
                (25,000
                )Other
      assets
                
                
                1,000
                
                
                
                (4,000
                )Accounts
      payable
                
                
                100,000
                
                
                
                (180,000
                )Accrued
      expenses and other current liabilities
                
                
                (63,000
                )
                
                
                (60,000
                )Wages
      payable
                
                
                76,000
                
                
                
                89,000Other
      liabilities
                
                
                2,000
                
                
                
                (7,000
                )Net
      cash provided by / (used in) operating activities
                
                
                (121,000
                )
                
                
                331,000Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                
                
                (10,000
                )
                
                
                (25,000
                )Net
      cash used in investing activities
                
                
                (10,000
                )
                
                
                (25,000
                )Cash
      flows from financing activities:Payments
      on debt financing
                
                
                (48,000
                )
                
                
                (63,000
                )Net
      proceeds from line of credit
                
                
                223,000
                
                
                
                143,000Net
      cash provided by financing activities
                
                
                175,000
                
                
                
                80,000Net
      increase in cash and cash equivalents
                
                
                44,000
                
                
                
                386,000Cash
      and cash equivalents - beginning of period
                
                
                35,000
                
                
                
                201,000Cash
      and cash equivalents - end of period
                
                $
                79,000
                
                
                $
                587,000Supplemental
      disclosures of cash flow informationCash
      paid during period for interest
                
                $
                108,000
                
                
                $
                96,000





The
accompanying notes are an integral part of the financial
statements


6





Notes to
financial statements (unaudited)




June
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, they 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 June 30, 2010, and the results of its
operations for the three and six month periods ended June 30, 2010 and June 30,
2009, and cash flows for the six month periods ended June 30, 2010 and June 30,
2009.




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


7


Recently
Adopted Accounting Standards




In April 2010, the
FASB issued Update No. 2010-17, “Revenue Recognition—Milestone Method (Topic
605), Milestone Method of Revenue Recognition”, (“ASU No. 2010-17”). ASU No.
2010-17 provides guidance on the criteria that should be met for determining
whether the milestone method of revenue recognition is appropriate. A vendor can
recognize consideration that is contingent upon achievement of a milestone in
its entirety as revenue in the period in which the milestone is achieved only if
the milestone meets all criteria to be considered substantive. Determining
whether a milestone is substantive is a matter of judgment made at the inception
of the arrangement and ASU No. 2010-17 provides guidance on criteria that must
be met for a milestone to be considered substantive.




Under ASU
No. 2010-17, a milestone should be considered substantive in its entirety. An
individual milestone may not be bifurcated. An arrangement may include more than
one milestone, and each milestone should be evaluated separately to determine
whether the milestone is substantive. Accordingly, an arrangement may contain
both substantive and nonsubstantive milestones. A vendor’s decision to use the
milestone method of revenue recognition for transactions relating to research
and development deliverables is a policy election. Other proportional revenue
recognition methods also may be applied as long as the application of those
other methods does not result in the recognition of consideration in its
entirety in the period the milestone is achieved. The amendments in ASU No.
2010-17 are effective on a prospective basis for milestones achieved in fiscal
years, and interim periods within those years, beginning on or after June 15,
2010. Early adoption is permitted. We are currently evaluating the impact, if
any; the adoption of this guidance would have on our financial
statements.




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




Basic net income / (loss) per common
share is calculated by dividing the net income / (loss) by the weighted average
number of outstanding common shares during the period. Diluted net income /
(loss) per common share includes the weighted average dilutive effect of stock
options and warrants. Potential common shares outstanding as of June 30, 2010
and 2009:




June 30, 2010
                    
                    
                    June 30, 2009Warrants
                    
                    
                    75,000
                    
                    
                    
                    75,000Options
                    
                    
                    3,401,580
                    
                    
                    
                    3,762,080




The
number of securities not included in the diluted net loss per common share for
the three and six months ended June 30, 2010 and June 30, 2009 (because the
effect would have been anti-dilutive) were 3,476,580 and 3,837,080,
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 or operations and cash flows of the Company. We are aware of
no significant litigation loss contingencies for which management believes it is
both probable that a liability has been incurred and that the amount of the loss
can be reasonably estimated. We are unaware of any proceedings being
contemplated by governmental authorities as of the date of this
report.


8


Note
D – Line of Credit and Debt




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




On July
1, 2009, we entered into a Financing Agreement (the “Refinancing Agreement”)
with Rosenthal to refinance a line of credit held by First Niagara Bank (“First
Niagara”). Under the Refinancing Agreement, Rosenthal agreed to provide the
Company with up to $1,500,000 under a revolving secured line of credit
(“Rosenthal Line of Credit”) that 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 Refinancing Agreement we
pay certain administrative fees and interest is payable monthly and is charged
at variable rates, with minimum monthly interest of $4,000. We must maintain
certain financial covenants so long as any obligations are due under the
Rosenthal Line of Credit. As of the date of this report, we are in compliance
with these covenants. The Rosenthal 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.




The
amount outstanding on the Rosenthal Line of Credit was $483,000 at June 30, 2010
and $260,000 at December 31, 2009. Additional loan availability as of June 30,
2010 was $439,000, for a total loan availability of $922,000 as of June 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 six
months ended June 30, 2010, we have amortized $7,000 in costs. We use the
Rosenthal Line of Credit for working capital.




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 six months ended June
30, 2010, we have amortized $12,000 of expense. The balance of the Mortgage
Consolidation Loan was $907,000 at June 30, 2010 and $953,000 at December 31,
2009.




Copier
Lease




On May 8,
2007, we purchased a copier through an equipment lease with RICOH in the amount
of $17,000.  The term of the lease is five (5) years with an interest
rate of 14.11%. The amount outstanding on this lease was $8,000 at June 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
Completion Date). All warrants issued to Cantone were immediately exercisable
upon issuance. We incurred $131,000 in expenses related to the offering,
including $12,000 in expense related to warrants issued to Cantone. We amortized
$16,000 of expense related to these debt issuance costs for the six months ended
June 30, 2010 and $17,000 for the six months ended June 30, 2009. We have also
accrued interest expense related to the Series A Debentures of $31,000 at June
30, 2010 and December 31, 2009.


9




Note
E – Stock Option Grants




As a
condition to the Refinancing Agreement, our Chief Executive Officer, Stan
Cipkowski  (“Cipkowski”) was required to execute a Validity Guarantee
(the “Validity Guarantee”) that includes representations and warranties with
respect to the validity of our receivables and guarantees the accuracy of our
reporting to Rosenthal related to our receivables and inventory. 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. In accordance with the
provisions of ASC Topic 718, “Accounting for Stock Options and
Other Stock Based Compensation”,previously referred to as SFAS 123(R),
we will recognize $78,000 in share-based payment expense amortized over the
required service period of 3 years. We recognized $13,000 in share-based payment
expense for this grant in the six months ended June 30, 2010 and as of June 30,
2010; there was $52,000 in unrecognized expense with 24 months
remaining.




As
another condition to the Refinancing Agreement, our 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
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 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),
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
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.




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 six months ended June 30,
2010, sales 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 of 2010. Although we are encouraged by this
improvement, 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.




During
the six months ended June 30, 2010, we sustained a net loss of $108,000 from net
sales of $5,552,000. We had net cash used in operating activities of $121,000
for the six months ended June 30, 2010.  In response to the state of
the global economy, we previously initiated 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. 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 six months ended June 30, 2010, we continued to market and distribute our
urine and oral fluid-based point of collection tests for drugs of abuse (“DOA”)
and our Rapid Reader® drug screen result and data management system, and we also
performed bulk test strip contract manufacturing services for unaffiliated third
parties.




Plan
of Operations




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




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




Results
of operations for the six months ended June 30, 2010 compared to the six months
ended June 30, 2009




NET SALES:Net sales for the
six months ended June 30, 2010 increased 9.7% when compared to net sales for the
six months ended June 30, 2009. National accounts and other non-government
direct sales increased in the first half of 2010 when compared to the first half
of 2009 (although sales are still depressed from pre-recession levels of 2008).
We believe this improvement is a result of positive movement in our Workplace
market as unemployment rates improve in many areas throughout the country,
although according to published reports, much of the country has yet to improve.
According to the Bureau of Labor Statistics report dated June 2010, regional and
state unemployment rates were generally lower, with 39 states and the District
of Columbia recording unemployment rate decreases, 5 states reporting increases
and 6 states reporting no change.




11


Sales to the Clinical market, which
includes pain management and drug rehabilitation, increased in the first half of
2010. 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 six months ended June 30, 2010 when compared to the
six months ended June 30, 2009. The improvement in international sales primarily
results from increased sales to Latin America.




Contract
manufacturing sales improved in the six months ended June 30, 2010 when compared
to the six months ended June 30, 2009. Contract manufacturing sales for the six
months ended June 30, 2010 totaled $189,000, compared to $132,000 in the six
months ended June 30, 2009. This improvement is a result of increased contract
manufacturing of a testing product for RSV (Respiratory Syncytial Virus; the
most common cause of lower respiratory tract infections in children worldwide),
and a product for fetal amniotic membrane rupture.




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




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




COST OF GOODS SOLD/GROSS PROFIT:Cost of goods sold for the six months ended June 30, 2010 was 56.6% of
net sales, compared to 59.0% of net sales for the six months ended June 30,
2009. This improvement results from increased product manufacturing efficiencies
and a shift in sales mix from lower margin products to sales of higher margin
products. We continue to evaluate our production personnel levels as well as our
product manufacturing levels to ensure they are adequate to meet current and
anticipated sales demands. Gross profit for the first half of 2010 also improved
when compared to the first half of 2009, as a result of improved cost of goods,
and as sales to our Government market (typically lower margin sales) decline,
and sales to national accounts and other non-government accounts (typically
higher margin sales) increase.




12


OPERATING EXPENSES: Operating
expenses decreased 1.6% for the six months ended June 30, 2010, compared to the
six months ended June 30, 2009. Since we implemented cost-cutting initiatives in
the year ended December 31, 2009 (in response to the unprecedented downturn of
the economy), we continuously assess our operating expenses to ensure they are
adequate to: elicit growth, support sales levels and address market trends and
customer needs. In the first half of 2010, research and development expense
increased slightly, and selling and marketing expense decreased, while general
and administrative expenses remained relatively unchanged; more
specifically:




Research and Development
(“R&D”) expense




R&D
expense for the six months ended June 30, 2010 increased 3.8%, compared to the
six months ended June 30, 2009. This increase is primarily a result of increases
in FDA (U.S. Food and Drug Administration) compliance costs, offset by
reductions in salary and employee related benefits and consulting fees. The
increase in FDA compliance costs stems from the Company’s efforts to respond to
and address a warning letter received from the FDA in July 2009 (see Item 1A;
Risk Factors). 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 six months ended June 30, 2010 decreased 4.6%,
compared to the six months ended June 30, 2009. This decrease primarily results
from reductions in sales salaries due to decreased personnel and adjustments in
base salaries, postage and marketing salaries, partially offset by increases in
sales employment taxes and sales commissions (as a result of increased sales).
In the six months ended June 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 six months ended June 30, 2010 remained relatively unchanged,
compared to the six months ended June 30, 2009. Reductions in investor relations
expense, consulting fees, accounting fees and legal fees were offset by
increases in shipping supplies, general and administrative salaries and
benefits, patent and license costs, repairs and maintenance costs and bank
service fees. Included in G&A expense in the six months ended June 30, 2010
is $13,000 in share-based payment related to the issuance of two stock option
grants in the third quarter of 2009 (see Part I, Item 1, Note E); this expense
did not occur in the six months ended June 30, 2009.




13




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




NET SALES:Net sales for the
three months ended June 30, 2010 increased 11.3%, compared to net sales for the
three months ended June 30, 2009. National accounts and other non-government
direct sales increased in the second quarter of 2010, compared to the second
quarter of 2009 (although sales are still depressed from pre-recession levels of
2008). We believe this improvement is a result of positive movement in our
Workplace market as unemployment rates improve in many areas throughout the
country, although according to published reports, much of the country has yet to
improve. According to the Bureau of Labor Statistics report dated June 2010,
regional and state unemployment rates were generally lower, with 39 states and
the District of Columbia recording unemployment rate decreases, 5 states
reporting increases and 6 states reporting no change.




Sales to the Clinical market, which
includes pain management and drug rehabilitation, increased in the second
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 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 second quarter of 2010, compared to the second
quarter of 2009. The improvement in international sales primarily results from
increased sales to Latin America.




Contract
manufacturing sales improved in the second quarter of 2010, compared to the
second quarter of 2009. Contract manufacturing sales for the three months ended
June 30, 2010 totaled $70,000, compared to $38,000 in the three months ended
June 30, 2009. This improvement is a result of increased contract manufacturing
of testing products for RSV and fetal amniotic membrane rupture.




The
improvements in sales discussed above were partially offset by decreased sales
in our Government market in the second quarter of 2010. Sales in our Government
market continue to be negatively impacted as government entities decrease
purchasing levels in attempts to close deficits in their budgets, 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/GROSS PROFIT:




Cost of
goods sold for the three months ended June 30, 2010 was 53.3% of net sales,
compared to 58.8% for the three months ended June 30, 2009. This improvement
results from increased product manufacturing efficiencies and a shift in sales
mix from lower margin products to sales of higher margin products. We continue
to evaluate our production personnel levels as well as our product manufacturing
levels to ensure they are adequate to meet current and anticipated sales
demands. Gross profit for the second quarter of 2010 also improved, compared to
the second quarter of 2009, as a result of improved cost of goods, and as sales
to our Government market (typically lower margin sales) decline, and sales to
national account and other non-government accounts (typically higher margin
sales) increase.




OPERATING
EXPENSES:




Operating
expenses decreased 6.6% for the three months ended June 30, 2010, compared to
the three months ended June 30, 2009. Since we implemented cost-cutting
initiatives in the year ended December 31, 2009 (in response to the
unprecedented downturn of the economy), we continuously assess our operating
expenses to ensure they are adequate to: elicit growth, support sales levels and
address market trends and customer needs. In the second quarter of 2010,
research and development expense increased slightly, while selling and marketing
expense and general and administrative expense decreased; more
specifically:




14


Research and Development
(“R&D”) expense




R&D
expense for the three months ended June 30, 2010 increased 7.5%, compared to the
three months ended June 30, 2009. This increase is primarily a result of
increases in FDA compliance costs, offset by reductions in salary and employee
related benefits and consulting fees. The increase in FDA compliance costs stems
from the Company’s efforts to respond to and address a warning letter received
from the FDA in July 2009 (see Item 1A; Risk Factors). 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 June 30, 2010 decreased 6.6%,
compared to the three months ended June 30, 2009. This decrease primarily
results from reductions in postage, marketing salaries and advertising expense,
partially offset by increases in sales employee taxes and trade show related
expenses. In the three months ended June 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 June 30, 2010 decreased 8.8%, compared to the
three months ended June 30, 2009. Reductions in investor relations expense,
consulting fees, legal fees and outside service fees were partially offset by
increases in shipping supplies, general and administrative salaries and benefits
and repairs and maintenance costs. Included in G&A expense in the three
months ended June 30, 2010 is $7,000 in share-based payment related to the
issuance of two stock option grants in the third quarter of 2009 (see Part I,
Item 1, Note E); this expense did not occur in the three months ended June 30,
2009.




Liquidity
and Capital Resources as of June 30, 2010




Our cash
requirements depend on numerous factors, including product development
activities, sales and marketing efforts, market acceptance of new products, and
effective management of inventory and production personnel and output levels in
response to sales forecasts. We expect to devote substantial capital resources
to continue product development and/or enhancement, refine manufacturing
efficiencies and support direct sales efforts. We will examine other growth
opportunities including strategic alliances, and expect such activities will be
funded from existing cash and cash equivalents, issuance of additional equity or
debt securities or additional borrowings subject to market and other conditions.
Our financial statements for the year ended December 31, 2009 were prepared
assuming we will continue as a going concern. As of the date of this report, our
current cash balances, together with cash generated from future operations and
amounts available under current credit facilities may not be sufficient to fund
operations for the next 12 months if sales levels do not continue to improve or
if sales levels start to decline. 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.




15


As of
June 30, 2010, we had a Mortgage Consolidation Loan with First Niagara and a
Line of Credit with Rosenthal. (See Part 1, Item 1, Note D).




16


Working
capital




Our
working capital decreased $783,000 at June 30, 2010, when compared to working
capital at December 31, 2009. At December 31, 2009, our Mortgage Consolidation
Loan with First Niagara was classified as a long-term liability. In the first
quarter of 2010, we reclassified our Mortgage Consolidation Loan with First
Niagara from long-term to short-term, as the maturity date of the Mortgage
Consolidation Loan is January 2011. The balance of the Mortgage Consolidation
Loan was $907,000 at June 30, 2010 and $953,000 at December 31, 2009. (See Part
I, Item 1, Note D).




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, offset by decreases in inventory and increases in
accounts payable and wages payable resulted in cash used in operating activities
of $121,000 for the six months ended June 30, 2010. The primary use of cash in
the six months ended June 30, 2010 and June 30, 2009 was funding of
operations.




Net cash
used in investing activities in the six months ended June 30, 2010 and June 30,
2009 was for investment in property, plant and equipment.




Net cash
provided by financing activities in the six months ended June 30, 2010 and June
30, 2009 consisted of net proceeds from our line of credit, offset by payments
on debt financing. Net proceeds from the line of credit for the six months ended
June 30, 2010 was $223,000, compared to $143,000 during the six months ended
June 30, 2009.




In the
six months ended June 30, 2010, our loan availability under the Rosenthal Line
of Credit was greater than the loan availability under the prior line of credit
with First Niagara in the six months ended June 30, 2009, and we used this
increased loan availability to fund operations. Our balance on the Rosenthal
Line of Credit was $483,000 as of June 30, 2010 with additional loan
availability of $439,000; for a total loan availability of $922,000 as of June
30, 2010. As our receivables increase under the Rosenthal Line of Credit, we are
required to drawdown more frequently on the Rosenthal Line of Credit to fund
operations.




At June
30, 2010, we had cash and cash equivalents of $79,000.




Outlook




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




17


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




Item
3. Quantitative and Qualitative Disclosures About Market Risk




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




Item
4. Controls and Procedures




(a)
Evaluation of Disclosure Controls and Procedures




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




(b)
Changes in Internal Control Over Financial Reporting




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




PART
II – OTHER INFORMATION




Item
1. Legal Proceedings




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




Item
1A. Risk Factors




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




We
depend on key personnel to manage our business effectively.




We are
dependent on the expertise and experience of our senior management for our
future success. The loss of a member of senior management could negatively
impact our business and results of operations. On July 28, 2010, we terminated
the employment of one member of our senior management, our Executive Vice
President & Chief Science Officer. This officer had been employed pursuant
to an employment agreement, which contained non-compete provisions. The
employment agreement expired on May 31, 2010, and was not renewed. As of the
date of this report, we have not appointed anyone to fill the vacancy created by
this termination. There can be no assurance that we will be able to recruit a
qualified replacement to fill this vacancy. Although we retain a number of
qualified and skilled employees in our research and development / bulk
manufacturing facility in New Jersey (the facility at which this position is
based), if we were unable to fill this vacancy, the operations and production
levels of our facility in New Jersey could be negatively affected.




18


We have
employment agreements in place with current members of our senior management.
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.




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 our primary markets,
and it has been our belief that marketing clearance from the FDA is not required
to sell our products in non-clinical markets (such as Workplace and Government),
but is required to sell our products in the Clinical and over-the-counter
(consumer) markets. However, in July 2009, we received a warning letter from the
FDA, which alleges we are marketing our point of collection oral fluid drug
test, OralStat, in workplace settings without marketing clearance or approval
(see Current Report on Form 8-K filed with the United States Securities and
Exchange Commission (“SEC”) on August 5, 2009).




On August
18, 2009 we responded to the FDA warning letter received in July 2009, setting
forth our belief that FDA clearance was not required in non-clinical markets;
such belief is based upon legal advice from our FDA counsel. On October 27,
2009, we received another letter from the FDA (“October 2009 Letter”), which
stated that they did not agree with our interpretation of certain FDA
regulations. We responded to the October 2009 Letter on December 8, 2009. After
additional communications with the FDA, both directly and through our FDA
counsel, in March 2010, we elected to file a pre-IDE marketing submission in an
effort to obtain FDA 510(k) marketing clearance, although we continue to
maintain that 510(k) is not required to market our oral fluid point of
collection drug tests in the Workplace market. A pre-IDE marketing submission is
a process that allows us to provide the FDA with the design of our clinical
protocol for studies that will be used to support our 510(k) submission. The FDA
responded to our pre-IDE marketing submission, and as of the date of this
report, we are taking the necessary actions that will enable us to submit a
510(k) marketing clearance application to the FDA, and any additional actions
that may be required to address the jurisdictional question raised by our FDA
counsel.




Currently
there are many other oral fluid point of collection drug tests being sold in the
Workplace market by our competitors, none of which have received FDA marketing
clearance. Therefore, we are one of the first companies, if not the first
company to file a submission to obtain FDA marketing clearance to sell our point
of collection oral fluid drug tests in the Workplace market, and the cost of
obtaining such 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. Our point of collection oral fluid drug tests
currently account for approximately 20% of our sales; if we were unable to
market and sell our point of collection oral fluid drug tests in the Workplace
market, this could 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 us appropriate
marketing clearances required to comply with the changes, if and when we apply
for them.




19


We
may incur additional significant increased costs as a result of operating as a
public company, and our management will be required to devote substantial time
to new compliance initiatives.




We may
incur significant legal, accounting and other expenses as a result of our
required compliance with certain regulations. More specifically, the
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as rules
subsequently implemented by the SEC, impose various requirements on public
companies. Our management and other personnel must devote a substantial amount
of time to these compliance requirements. Moreover, these rules and regulations
have increased our legal and financial compliance costs and make some activities
more time-consuming and costly.




The
Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal controls for financial reporting and disclosure controls and
procedures. In particular, beginning with our year ended December 31, 2007,
management was required to perform system and process evaluation and testing of
the effectiveness of our internal controls over financial reporting, as required
by Section 404(a) of the Sarbanes-Oxley Act. Section 404(b) of the
Sarbanes-Oxley Act required companies to obtain auditor’s attestation related to
their assessment of the effectiveness of our internal controls over financial
reporting. The compliance deadline for smaller reporting companies to comply
with Section 404(b) had been extended by the SEC to annual reports covering
fiscal years ended on or after June 15, 2010, or in our case for our annual
report covering our year ended December 31, 2010.




On July
21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Wall Street Reform Act”). Section 989G of the Wall
Street Reform Act expressly exempts issuers that are neither “large accelerated
filers” nor “accelerated filers” (which includes smaller reporting companies)
from the requirement contained in Section 404(b) of the Sarbanes Oxley Act to
provide an auditor attestation of internal control over financial
reporting.




Although
we are no longer required to comply with Section 404(b), we remain subject to
Section 404(a) (that is, management’s report on our internal controls over
financial reporting). Our testing may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses. As
a result, our compliance with Section 404(a) may require that we incur
substantial accounting expense and expend significant management efforts. We do
not have an internal audit group, and we may need to hire additional accounting
and financial staff with appropriate public company experience and technical
accounting knowledge to ensure compliance with these regulations and/or to
correct such material weaknesses. If we are not able to comply with the
requirements of Section 404(a), or if we identify deficiencies in our internal
controls over financial reporting, the market price of our common shares could
decline, and we could be subject to sanctions or investigations by the SEC or
other regulatory authorities, which would require additional financial and
management resources.




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




31.1
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer
  20


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


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 Officer/Executive Vice President, FinancePrincipal
      Financial OfficerPrincipal
      Accounting
Officer




Dated:
August 12, 2010




22