UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D. C. 20549


FORM
10-Q




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




For
the quarterly period ended September 30,
2009




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




For
the transition period
from              to




Commission
File Number: 0-28666




AMERICAN
BIO MEDICA CORPORATION


(Exact
name of registrant as specified in its charter)




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





122
      Smith Road, Kinderhook, New York
                  
                  12106(Address
      of principal executive offices)
                  
                  (Zip
      Code)





518-758-8158


(Registrant's
telephone number, including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days          x
Yes      ̈
No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files)          x
Yes      ̈
No




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




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




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




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




21,744,768
Common Shares as of November 13, 2009





American
Bio Medica Corporation





Index
to Quarterly Report on Form 10-Q


For
the quarter ended September 30, 2009





PAGEPART
      I – FINANCIAL INFORMATIONItem
      1.
                  Financial
      StatementsBalance
      Sheets as of September 30, 2009 (unaudited) and December 31,
      2008
                  3Unaudited
      Statements of Operations for the nine months ended September 30, 2009 and
      September 30, 2008
                  4Unaudited
      Statements of Operations for the three months ended September 30, 2009 and
      September 30, 2008
                  5Unaudited
      Statements of Cash Flows for the nine months ended September 30, 2009 and
      September 30, 2008
                  6Notes
      to Financial Statements
                  7Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  14Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  21Item
      4.
                  Controls
      and Procedures
                  21PART
      II – OTHER INFORMATIONItem
      1.
                  Legal
      Proceedings
                  21Item
      1A.
                  Risk
      Factors
                  21Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  22Item
      3.
                  Defaults
      Upon Senior Securities
                  22Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  22Item
      5.
                  Other
      Information
                  23Item
      6.
                  Exhibits
                  23Signatures
                  24


2


PART
I - FINANCIAL INFORMATION




Item
1. Financial Statements




American
Bio Medica Corporation


Balance
Sheets





September 30,
                          
                          
                          December 31,2009
                          
                          
                          2008(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                          
                          $
                          181,000
                          
                          
                          $
                          201,000Accounts
      receivable - net of allowance for doubtful accounts of $105,000 at
      September 30, 2009 and December 31, 2008
                          
                          
                          996,000
                          
                          
                          
                          1,161,000Inventory
      – net of reserve for slow moving and obsolete inventory of $308,000 at
      September 30, 2009 and December 31, 2008
                          
                          
                          4,404,000
                          
                          
                          
                          5,552,000Prepaid
      expenses and other assets
                          
                          
                          145,000
                          
                          
                          
                          97,000Total
      current assets
                          
                          
                          5,726,000
                          
                          
                          
                          7,011,000Property,
      plant and equipment, net
                          
                          
                          1,732,000
                          
                          
                          
                          1,961,000Debt
      issuance costs
                          
                          
                          130,000
                          
                          
                          
                          117,000Other
      assets
                          
                          
                          31,000
                          
                          
                          
                          47,000Total
      assets
                          
                          $
                          7,619,000
                          
                          
                          $
                          9,136,000LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilitiesAccounts
      payable
                          
                          $
                          813,000
                          
                          
                          $
                          1,568,000Accrued
      expenses and other liabilities
                          
                          
                          293,000
                          
                          
                          
                          544,000Wages
      payable
                          
                          
                          269,000
                          
                          
                          
                          230,000Line
      of credit
                          
                          
                          580,000
                          
                          
                          
                          431,000Current
      portion of long-term debt
                          
                          
                          1,005,000
                          
                          
                          
                          1,098,000Current
      portion of unearned grant
                          
                          
                          10,000
                          
                          
                          
                          10,000Total
      current liabilities
                          
                          
                          2,970,000
                          
                          
                          
                          3,881,000Other
      liabilities
                          
                          
                          184,000
                          
                          
                          
                          207,000Long-term
      debt
                          
                          
                          757,000
                          
                          
                          
                          760,000Related
      party note
                          
                          
                          124,000Unearned
      grant
                          
                          
                          30,000
                          
                          
                          
                          30,000Total
      liabilities
                          
                          
                          4,065,000
                          
                          
                          
                          4,878,000COMMITMENTS
      AND CONTINGENCIESStockholders'
      equity:Preferred
      stock; par value $.01 per share; 5,000,000 shares authorized, none issued
      and outstanding at September 30, 2009 and December 31,
2008Common
      stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768
      issued and outstanding at September 30, 2009 and December 31,
      2008
                          
                          
                          217,000
                          
                          
                          
                          217,000Additional
      paid-in capital
                          
                          
                          19,287,000
                          
                          
                          
                          19,279,000Accumulated
      deficit
                          
                          
                          (15,950,000
                          )
                          
                          
                          (15,238,000
                          )Total
      stockholders’ equity
                          
                          
                          3,554,000
                          
                          
                          
                          4,258,000Total
      liabilities and stockholders’ equity
                          
                          $
                          7,619,000
                          
                          
                          $
                          9,136,000




The
accompanying notes are an integral part of the financial
statements


3





American
Bio Medica Corporation


Statements
of Operations


(Unaudited)





For The Nine Months EndedSeptember 30,2009
                  
                  
                  2008Net
      sales
                  
                  $
                  7,563,000
                  
                  
                  $
                  10,368,000Cost
      of goods sold
                  
                  
                  4,463,000
                  
                  
                  
                  5,822,000Gross
      profit
                  
                  
                  3,100,000
                  
                  
                  
                  4,546,000Operating
      expenses:Research
      and development
                  
                  
                  316,000
                  
                  
                  
                  445,000Selling
      and marketing
                  
                  
                  1,587,000
                  
                  
                  
                  2,197,000General
      and administrative
                  
                  
                  1,755,000
                  
                  
                  
                  1,973,0003,658,000
                  
                  
                  
                  4,615,000Operating
      loss
                  
                  
                  (558,000
                  )
                  
                  
                  (69,000
                  )Other
      income (expense):Interest
      income
                  
                  
                  1,000
                  
                  
                  
                  3,000Interest
      expense
                  
                  
                  (152,000
                  )
                  
                  
                  (107,000
                  )Loss
      on disposal of fixed assets
                  
                  
                  (3,000
                  )
                  
                  
                  (4,000
                  )(154,000
                  )
                  
                  
                  (108,000
                  )Loss
      before tax
                  
                  
                  (712,000
                  )
                  
                  
                  (177,000
                  )Income
      taxNet
      loss
                  
                  $
                  (712,000
                  )
                  
                  $
                  (177,000
                  )Basic
      and diluted loss per common share
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.01
                  )Weighted
      average number of shares outstanding – basic & diluted
                  
                  
                  21,744,768
                  
                  
                  
                  21,744,768





The
accompanying notes are an integral part of the financial
statements


4





American
Bio Medica Corporation


Statements
of Operations


(Unaudited)





For The Three Months EndedSeptember30,2009
                      
                      
                      2008Net
      sales
                      
                      $
                      2,501,000
                      
                      
                      $
                      3,604,000Cost
      of goods sold
                      
                      
                      1,476,000
                      
                      
                      
                      2,104,000Gross
      profit
                      
                      
                      1,025,000
                      
                      
                      
                      1,500,000Operating
      expenses:Research
      and development
                      
                      
                      108,000
                      
                      
                      
                      128,000Selling
      and marketing
                      
                      
                      517,000
                      
                      
                      
                      713,000General
      and administrative
                      
                      
                      584,000
                      
                      
                      
                      532,0001,209,000
                      
                      
                      
                      1,373,000Operating
      income/(loss)
                      
                      
                      (184,000
                      )
                      
                      
                      127,000Other
      expense:Interest
      expense
                      
                      
                      (56,000
                      )
                      
                      
                      (41,000
                      )Loss
      on disposal of fixed assets
                      
                      
                      (1,000
                      )(57,000
                      )
                      
                      
                      (41,000
                      )Income/(Loss)
      before tax
                      
                      
                      (241,000
                      )
                      
                      
                      86,000Income
      taxNet
      income/(loss)
                      
                      $
                      (241,000
                      )
                      
                      $
                      86,000Basic
      and diluted loss per common share
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.00Weighted
      average number of shares outstanding – basic
                      
                      
                      21,744,768
                      
                      
                      
                      21,744,768Dilutive
      effect of stock options and warrants
                      
                      
                      
                      
                      
                      
                      16,954Weighted
      average number of shares outstanding – fully diluted
                      
                      
                      21,744,768
                      
                      
                      
                      21,761,722





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 EndedSeptember30,2009
                
                
                2008Cash
      flows from operating activities:Net
      loss
                
                $
                (712,000
                )
                
                $
                (177,000
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                
                
                255,000
                
                
                
                268,000Loss on disposal of fixed assets
                
                
                3,000
                
                
                
                4,000Amortization
      of debt issuance costs
                
                
                28,000
                
                
                
                5,000Non-cash compensation expense
                
                
                8,000Changes
      in:Accounts
      receivable
                
                
                165,000
                
                
                
                (399,000
                )Inventory
                
                
                1,148,000
                
                
                
                (439,000
                )Prepaid
      expenses and other assets
                
                
                (48,000
                )
                
                
                17,000Other
      assets
                
                
                16,000
                
                
                
                50,000Patent
      sublicense
                
                
                
                
                
                
                (50,000
                )Accounts
      payable
                
                
                (631,000
                )
                
                
                29,000Accrued
      expenses and other liabilities
                
                
                (251,000
                )
                
                
                491,000Other
      liabilities
                
                
                (23,000
                )Wages
      payable
                
                
                39,000
                
                
                
                67,000Net
      cash used in operating activities
                
                
                (3,000
                )
                
                
                (134,000
                )Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                
                
                (28,000
                )
                
                
                (48,000
                )Net
      cash used in investing activities
                
                
                (28,000
                )
                
                
                (48,000
                )Cash
      flows from financing activities:Payments
      on debt financing
                
                
                (96,000
                )
                
                
                (89,000
                )Proceeds
      from long-term debt financing
                
                
                
                
                
                
                750,000Debt
      issuance costs
                
                
                (41,000
                )
                
                
                (120,000
                )Net
      proceeds from (payments on) line of credit
                
                
                148,000
                
                
                
                (304,000
                )Net
      cash provided by financing activities
                
                
                11,000
                
                
                
                237,000Net
      increase / (decrease) in cash and cash equivalents
                
                
                (20,000
                )
                
                
                55,000Cash
      and cash equivalents - beginning of period
                
                
                201,000
                
                
                
                336,000Cash
      and cash equivalents – end of period
                
                $
                181,000
                
                
                $
                391,000Supplemental
      disclosures of cash flow informationCash
      paid during period for interest
                
                $
                171,000
                
                
                $
                107,000Warrants
      issued in connection with long term debt financing
                
                $
                
                
                
                $
                6,000Related
      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, 2009




Note
A - Basis of Reporting




The
accompanying unaudited interim financial statements of American Bio Medica
Corporation (the “Company”) have been prepared in accordance with generally
accepted accounting principles in the United States of America (“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.
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, 2009, and
the results of its operations for the three and nine month periods ended
September 30, 2009 and September 30, 2008, and cash flows for the nine month
periods ended September 30, 2009 and September 30, 2008.




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




During
the nine months ended September 30, 2009, there were no significant changes to
the Company's critical accounting policies, which are included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2008.




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




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




Recently
Adopted Accounting Standards




Codification




Effective
with the quarter ended September 30, 2009, the Company adopted the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 105,
“Generally Accepted Accounting Principles” (“ASC 105”). ASC 105 establishes the
FASB Accounting Standards Codification (“FASB Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
non-governmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The FASB will make all future changes to guidance in
the FASB Codification by issuing Accounting Standards Updates. The FASB
Codification also provides that rules and interpretive releases of the United
States Securities and Exchange Commission (“SEC”) issued under the authority of
federal securities laws will continue to be sources of authoritative U.S. GAAP
for SEC registrants. The FASB Codification does not create any new U.S. GAAP
standards but incorporates existing accounting and reporting standards into a
new topical structure so that users can more easily access authoritative
accounting guidance. The Company has updated all references to authoritative
standards to be consistent with those set forth in the FASB Codification. The
adoption of ASC 105 had no impact on the Company’s interim financial
statements.




7


In September 2006,
the FASB issued guidance that established a common definition of fair value to
be applied to U.S. GAAP guidance requiring the use of fair value, established a
framework for measuring fair value and expanded disclosure about such fair value
measurements. This guidance is contained in ASC Topic 820, “Fair Value
Measurements and Disclosures” (“ASC Topic 820”), previously referred to as SFAS
No. 157, “Fair Value Measurements”. ASC Topic 820 became effective for the
Company’s financial assets and liabilities on January 1, 2008. Certain
provisions of ASC Topic 820 relating to the Company’s nonfinancial assets and
liabilities became effective January 1, 2009.




ASC Topic
820 establishes a hierarchy for ranking the quality and reliability of the
information used to determine fair values.  ASC Topic 820 requires
that assets and liabilities carried at fair value be classified and disclosed in
one of the following three categories:




Level
1:  Unadjusted quoted market prices in active markets for identical
assets or liabilities.




Level
2:  Unadjusted quoted prices in active markets for similar assets or
liabilities, unadjusted quoted prices for identical or similar assets or
liabilities in markets that are not active, or inputs other than quoted prices
are observable for the asset or liability.




Level
3:  Unobservable inputs for the asset or liability.




The
Company endeavors to utilize the best available information in measuring fair
value.  Financial assets and liabilities are classified based on the
lowest level of input that is significant to the fair value measurement. The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:




Cash and
Cash Equivalents – The carrying amount reported in the balance sheet for cash
and cash equivalents approximates its fair value due to the short-term maturity
of these instruments.




Line of
Credit and Long-Term Debt – The carrying amounts of the Company’s borrowings
under its line of credit agreement and other long-term debt approximates fair
value, based upon current interest rates.




The
implementation of ASC Topic 820 does not materially affect the Company’s interim
financial statements.




In December 2007, the
FASB issued guidance that requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and financial effect
of the business combination. This guidance is contained in ASC Topic 805
“Business Combinations” (“ASC Topic 805”), previously referred to as SFAS No.
141(R), “Business Combinations,” and was effective for the Company as of January
1, 2009. The adoption of ASC Topic 805 had no impact on the Company’s interim
financial statements.




The FASB
also issued guidance that requires all entities to report noncontrolling
(minority) interests in subsidiaries as equity in the consolidated financial
statements and eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions. This guidance is contained in ASC Topic 810,
“Noncontrolling Interests in Consolidated Financial Statements” (“ASC Topic
810”), previously referred to as SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, and was effective for the Company as of
January 1, 2009. The adoption of ASC Topic 810 had no impact on the Company’s
interim financial statements.




In March 2008, the
FASB issued guidance that expands the disclosure requirements in ASC Topic 815,
regarding an entity’s derivative instruments and hedging activities, previously
referred to as SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities – an Amendment of FASB Statement No. 133”. The guidance is
contained within ASC Topic 815, “Disclosures about Derivative Instruments and
Hedging Activities – an Amendment of ASC Topic 815” (“ASC Topic 815”). ASC Topic
815 was effective for the Company as of January 1, 2009. The adoption of ASC
Topic 815 had no impact on the Company’s interim financial
statements.




8


In May 2009, the FASB
issued guidance that establishes the accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued and requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether that date represents the date the financial statements
were issued or were available to be issued. This guidance is contained within
ASC Topic 855, “Subsequent Events” (“ASC Topic 855”), previously referred to as
SFAS No. 165 - “Subsequent Events”. ASC Topic 855 was effective for the Company
for interim and annual periods ending after June 15, 2009. ASC Topic 855
requires additional disclosures only, and therefore did not have an impact on
the Company’s interim financial statements.  We have evaluated
subsequent events through November 13, 2009, the date we have issued this
Quarterly Report on Form 10-Q.




As
of the date of this report, the following standards remain authoritative, as
they are not yet integrated into the FASB Codification.




In June 2009, the
FASB issued SFAS No. 166 – “Accounting for Transfers of Financial Assets—an
amendment of FASB Statement No. 140” (“SFAS No. 166”). SFAS No. 166 amends FAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” by: eliminating the concept of a qualifying
special-purpose entity (“QSPE”); clarifying and amending the derecognition
criteria for a transfer to be accounted for as a sale; amending and clarifying
the unit of account eligible for sale accounting; and requiring that a
transferor initially measure at fair value and recognize all assets obtained
(for example beneficial interests) and liabilities incurred as a result of a
transfer of an entire financial asset or group of financial assets accounted for
as a sale. Additionally, on and after the effective date, existing QSPEs (as
defined under previous accounting standards) must be evaluated for consolidation
by reporting entities in accordance with the applicable consolidation guidance.
SFAS No. 166 requires enhanced disclosures about, among other things, a
transferor’s continuing involvement with transfers of financial assets accounted
for as sales, the risks inherent in the transferred financial assets that have
been retained, and the nature and financial effect of restrictions on the
transferor’s assets that continue to be reported in the statement of financial
position. SFAS No. 166 will be effective as of the beginning of interim and
annual reporting periods that begin after November 15, 2009. The Company is
currently evaluating the impact that this standard will have on its financial
statements.




In June 2009, the
FASB issued SFAS No. 167 – “Amendments to FASB Interpretation No. 46(R)” (“SFAS
No. 167”). SFAS No. 167 FAS No. 167 amends FIN 46(R), “Consolidation of Variable
Interest Entities,” and changes the consolidation guidance applicable to a
variable interest entity (“VIE”). It also amends the guidance governing the
determination of whether an enterprise is the primary beneficiary of a VIE, and
is, therefore, required to consolidate an entity, by requiring a qualitative
analysis rather than a quantitative analysis. The qualitative analysis will
include, among other things, consideration of who has the power to direct the
activities of the entity that most significantly impact the entity’s economic
performance and who has the obligation to absorb losses or the right to receive
benefits of the VIE that could potentially be significant to the VIE. This
standard also requires continuous reassessments of whether an enterprise is the
primary beneficiary of a VIE. Previously, FIN 46(R) required reconsideration of
whether an enterprise was the primary beneficiary of a VIE only when specific
events had occurred. QSPEs, which were previously exempt from the application of
this standard, will be subject to the provisions of this standard when it
becomes effective. SFAS No. 167 also requires enhanced disclosures about an
enterprise’s involvement with a VIE. SFAS No. 167 will be effective as of the
beginning of interim and annual reporting periods that begin after November 15,
2009. The Company is currently evaluating the impact that this standard will
have on its financial statements.




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, 2009 and 2008:




September 30,2009
                  
                  
                  September 30, 2008Warrants
                  
                  
                  75,000
                  
                  
                  
                  225,000Options
                  
                  
                  3,802,080
                  
                  
                  
                  3,762,080




For the
three months ended September 30, 2009, the number of securities not included in
the diluted EPS because the effect would have been anti-dilutive was 3,877,080.
For the three months ended September 30, 2008, the number of securities included
in the diluted EPS was 16,954.




9




For the
nine months ended September 30, 2009, the number of securities not included in
the diluted EPS because the effect would have been anti-dilutive was 3,877,080.
For the nine months ended September 30, 2008, the number of securities not
included in the diluted EPS because the effect would have been anti-dilutive was
3,987,080.




Note
C – Litigation




From time to time, the Company is named
in legal proceedings in connection with matters that arose during the normal
course of business.  While the ultimate result of any such litigation
may not determinable, if the Company is 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.  The Company is aware of no significant litigation loss
contingencies for which management believes it is both probable that a liability
has incurred and that the amount of the loss can be reasonably
estimated.




Note
D – Reclassifications




Certain items have been reclassified to
conform to the current presentation.




Note
E – Line of Credit and Debt




Real Estate
Mortgage




On
November 6, 2006, the Company obtained a real estate mortgage (“Real Estate
Mortgage”) related to its facility in Kinderhook, New York. The Real Estate
Mortgage is through First Niagara Financial Group (“FNFG”), in the amount of
$775,000 and has a term of 10 years with a 20 year amortization. The interest
rate is fixed at 7.5% for the first 5 years. Beginning with year 6 and through
the end of the loan term, the rate changes to 2% above the Federal Home Loan
Bank of New York 5 year term, 15 year Amortization Advances Rate. The Company’s
monthly payment is $6,293 with the final payment being due on December 1, 2016.
The loan is collateralized by the Company's facility in Kinderhook, New York and
its personal property.  The amount outstanding on this mortgage was
$725,000 and $739,000 at September 30, 2009 and December 31, 2008,
respectively.




Term
Note




On
January 22, 2007, the Company entered into a note with FNFG in the amount of
$539,000 (the “Term Note”). The Term Note has a fixed interest rate of 7.17% and
has a term of 5 years. The Company’s monthly payment is $10,714 with the final
payment being due on January 23, 2012. The Company has the option of prepaying
the Term Note in full or in part at any time during the term without penalty.
The Term Note is secured by Company machinery and equipment now owned or
hereafter acquired. The proceeds received from the Term Note were used for the
purchase of automation equipment to enhance the Company's manufacturing process
in its New Jersey facility. The amount outstanding on this Term Note was
$277,000 and $356,000 at September 30, 2009 and December 31, 2008,
respectively.




FNFG Forbearance
Agreement




On
February 4, 2009, although the Company was current with the payment schedules
for its Real Estate Mortgage, Term Note and a line of credit with FNFG
(together, the “Credit Facilities”), the Company received a notice from FNFG
that an event of default had occurred under the Loan Documents related to the
Credit Facilities, consisting of, among other things, the Company’s failure to
comply with a maximum monthly net loss covenant.




On March
12, 2009, the Company entered into a Forbearance Agreement (the “Forbearance
Agreement”) addressing the Company’s non-compliance with the maximum monthly net
loss and the minimum debt service coverage ratio covenants (“Existing
Defaults”). Under the terms of the Forbearance Agreement, FNFG forbore from
exercising its rights and remedies arising under the Loan Documents from the
Existing Defaults. The Forbearance Agreement was to be in effect until June 1,
2009; unless earlier terminated or thereafter extended (the “Forbearance
Period”).  Details on the terms of the Forbearance Agreement and
certain subsequent extensions of and amendments to the Forbearance Agreement can
be found in the caption titled “FNFG Forbearance Agreement” in the Company’s
Quarterly Report on Form 10-Q filed with the SEC on August 14,
2009.




On July
6, 2009, the Company and FNFG entered into a Letter Agreement (the “July Letter
Agreement”), which further amended the Forbearance Agreement. The July Letter
Agreement extended the Forbearance Period to September 30, 2009, unless earlier
terminated by FNFG upon default or extended by mutual agreement, and required
the Company to close on a full refinancing of the line of credit with FNFG on or
before July 31, 2009. The Company did refinance the line of credit with FNFG on
July 1, 2009 (see “Rosenthal & Rosenthal, Inc. (“Rosenthal”) Line of
Credit”).




10




The July
Letter Agreement also amended the Forbearance Agreement to require the Company
to obtain, on or before September 1, 2009, legally binding and executed
commitment letters from a bona-fide third party lender setting forth the terms
of a full refinancing of the Company’s Real Estate Mortgage and Term Note to
close on or before September 30, 2009. All other terms of the Forbearance
Agreement remained in full force and effect and all rights and remedies of the
parties remained fully reserved.




The July
Letter Agreement also required the Company to provide FNFG, on or before July 3,
2009, with written evidence that it provided compensation for and retained a
qualified capital/financial consultant reasonably acceptable to FNFG through at
least September 30, 2009, to assist the Company in the process of obtaining a
full and timely refinancing of the Real Estate Mortgage and Term Note. To comply
with the capital/financial consultant requirement, on July 2, 2009, the Company
entered into a new agreement (the “Financial Advisory Agreement”) with Corporate
Fuel to assist the Company in the refinancing process related to its Real Estate
Mortgage and Term Note. Under the Financial Advisory Agreement, Corporate Fuel
would continue to act as the Company’s financial advisor through December 31,
2009, and on July 8, 2009, Corporate Fuel received a retainer of $15,000 to pay
for its services through September 30, 2009.




FNFG Term
Sheet




The
Company did not obtain a full refinancing of the Real Estate Mortgage and Term
Note by September 30, 2009 as required by the July Letter Agreement, and the
Forbearance Agreement expired on September 30, 2009. On October 8, 2009, the
Company accepted and agreed to a non-binding term sheet (the “Term Sheet”)
presented by FNFG related to a restructuring of the Real Estate Mortgage and
Term Note. The Term Sheet does not constitute a commitment on the part of FNFG
and the terms provided are subject to approvals and documentation satisfactory
to FNFG. Under the Term Sheet, the restructured facility would consist of a
fully secured term loan with a one-year (twelve month) term and a 6.5-year (78
month) amortization, which would continue to be secured by the Company’s
facility in Kinderhook, New York and various pieces of machinery and
equipment.  The Company’s monthly payment of principal and interest
would be approximately $16,460 (which compares to monthly payments of principal
and interest of $17,007 currently being made on the Real Estate Mortgage and
Term Note). The interest rate of the restructured facility would be a fixed rate
of 8.75%. Prior to closing on the restructured facility, the Company would be
required to make a principal reduction payment of $25,000 on the current Term
Note and must fully satisfy all professional fees incurred by FNFG. As of the
date of this report, the Company is awaiting the receipt of legal documents from
FNFG related to this restructuring.




As a
result of the Company’s acceptance of the Term Sheet, the Company also notified
Corporate Fuel that their financial advisory services would no longer be
required and therefore, the Financial Advisory Agreement was terminated
effective October 1, 2009.




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




On July
1, 2009 (the “Closing Date”), the Company entered into a Financing Agreement
(the “Refinancing Agreement”) with Rosenthal to refinance the FNFG line of
credit. Under the Refinancing Agreement, Rosenthal agreed to provide the Company
with up to $1,500,000 under a revolving secured line of credit (“Line of
Credit”) that is collateralized by a first security interest in all of the
Company’s receivables, inventory, and intellectual property, and a second
security interest in the Company’s machinery and equipment, leases, leasehold
improvements, furniture and fixtures. The maximum availability of $1,500,000
(“Maximum Availability”) is subject to an availability formula (the
“Availability Formula”) based on certain percentages of accounts receivable and
inventory, and elements of the Availability Formula are subject to periodic
review and revision by Rosenthal. Upon entering into the Refinancing Agreement,
the Company’s availability under the Line of Credit  (“Loan
Availability”) was $1,170,000. From the Loan Availability, the Company drew
approximately $646,000 to pay off funds drawn against the line of credit with
FNFG. The remaining Loan Availability is being used by the Company for working
capital.




The
Company was charged a facility fee of 1% of the amount of the Maximum Facility,
which was payable on the Closing Date and is payable on each anniversary of the
Closing Date thereafter. Under the Refinancing Agreement, the Company will also
pay an administrative fee of $1,500 per month for as long as the Line of Credit
is in place.




11




Interest
on outstanding borrowings (which do not exceed the Availability Formula) is
payable monthly and is charged at variable annual rates equal to (a) 4% above
the JPMorgan Chase Bank prime rate (“Prime Rate”) (never to be deemed to be
below 4%) for amounts borrowed with respect to eligible accounts receivable (the
“Effective Rate”), and (b) 5% above the Prime Rate for amounts borrowed with
respect to eligible inventory (the “Inventory Rate”). Any loans or advances
which exceed the Availability Formula will be charged at the rate of 3% per
annum in excess of the Inventory Rate (the “Over-Advance Rate”). If the Company
were to default under the Refinancing Agreement, interest on outstanding
borrowings would be charged at the rate of 3% per annum above the Over Advance
Rate. The minimum interest charges payable to Rosenthal each month are
$4,000.




So long
as any obligations are due to Rosenthal under the Line of Credit, the Company
must maintain working capital of not less than $2,000,000 and tangible net
worth, as defined by the Refinancing Agreement, of not less than $4,000,000 at
the end of each fiscal quarter. Under the Refinancing Agreement, tangible net
worth is defined as (a) the aggregate amount of all Company assets (in
accordance with 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).  Failure to comply with the working capital and tangible
net worth requirements defined under the Refinancing Agreement would constitute
an event of default and all amounts outstanding would, at Rosenthal’s option, be
immediately due and payable without notice or demand. Upon the occurrence of any
such default, in addition to other remedies provided under the Agreement, the
Company would be required to pay to Rosenthal a charge at the rate of the
Over-Advance Rate plus 3% per annum on the outstanding balance from the date of
default until the date of full payment of all amounts to Rosenthal. However, in
no event would the default rate exceed the maximum rate permitted by
law.




The
Refinancing Agreement terminates on May 31, 2012; however, the Company may
terminate the Agreement on any anniversary of the Closing Date with at least 90
days and not more than 120 days advance written notice to Rosenthal. If the
Company elects to terminate the Refinancing Agreement prior to the expiration
date, the Company will pay to Rosenthal a fee of (a) 3% of the Maximum
Availability if such termination occurs prior to the first anniversary of the
Closing Date, (b) 2% of the Maximum Availability if such termination occurs on
or after the first anniversary of the Closing Date but prior to the second
anniversary of the Closing Date, and (c) 1% of the Maximum Availability if such
termination occurs on or after the second anniversary of the Closing Date. The
Line of Credit is payable on demand and Rosenthal may terminate the Refinancing
Agreement at any time by giving the Company 45 days advance written notice. The
amount outstanding on this Line of Credit was $580,000 at September 30, 2009,
with a Loan Availability of $851,000 as of September 30, 2009. The Company
incurred $41,000 in costs related to this refinancing. These costs will be
amortized over the term of the Rosenthal Line of Credit. For the three and nine
months ended September 30, 2009, the Company amortized $4,000 of these
costs.




Copier
Lease




On May 8,
2007, the Company purchased a copier through an equipment lease with RICOH in
the amount of $17,000.  The term of the lease is five (5) years with
an interest rate of 14.11%.  The amount outstanding on this lease was
$10,000 and $13,000 at September 30, 2009 and December 31, 2008,
respectively.




Series A Debenture
Financing




On August
15, 2008, the Company completed an offering of Series A Debentures and received
gross proceeds of $750,000 (see Current Report on Form 8-K and amendment on Form
8-K/A-1 filed with the SEC on August 8, 2008 and August 18, 2008, respectively).
The net proceeds of the offering of Series A Debentures were $631,000 after
$54,000 of placement agent fees and expenses, legal and accounting fees of
$63,000 and $2,000 of state filing fees. The securities issued in this
transaction were sold pursuant to the exemption from registration afforded by
Rule 506 under Regulation D ("Regulation D") as promulgated by the SEC under the
Securities Act of 1933, as amended (the "1933 Act"), and/or Section 4(2) of the
1933 Act. The common shares underlying the Series A Debentures were later
registered in an effective Registration Statement on Form S-3 filed with the SEC
on April 15, 2009, and further amended on May 5, 2009.




The
Series A Debentures accrue interest at a rate of 10% per annum (payable by the
Company semi-annually) and mature on August 1, 2012. The payment of principal
and interest on the Series A Debentures is subordinate and junior in right of
payment to all Senior Obligations, as defined under the Series A
Debentures.




12




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




The
Company incurred $131,000 in costs related to the offering. Included in these
costs was $12,000 of non-cash compensation expense related to the issuance of
the Placement Agent Warrants to CRI. These costs will be amortized over the term
of the Series A Debentures. For the three and nine months ended September 30,
2009, the Company amortized $8,000 and $24,000 of expense, respectively, related
to these debt issuance costs. The Company has also accrued $13,000 in interest
expense at September 30, 2009 related to the Series A Debentures.




Note
F – Stock Option Grants




As a
condition to the Rosenthal Refinancing Agreement, the Company’s Chief Executive
Officer, Stan Cipkowski  (“Cipkowski”) was required to execute a
Validity Guarantee (the “Validity Guarantee”). Under the Validity Guarantee,
Cipkowski provides representations and warranties with respect to the validity
of the Company’s receivables and guarantees the accuracy of the Company’s
reporting to Rosenthal related to the Company’s receivables and inventory. The
Validity Guarantee places Cipkowski’s personal assets at risk in the event of a
breach of such representations, warranties and guarantees. As 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 the Company’s Fiscal 2001 stock option plan, at an exercise price
of $0.20, the closing price of the Company’s common shares on the date of the
grant. The option grant vests over 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),
over the 3-year vesting period, the Company will recognize $78,000 in non-cash
compensation expense related to the grant of Cipkowski’s options.




As
another condition to the Rosenthal Refinancing Agreement, the Company’s
President and Chairman of the Board, Edmund Jaskiewicz (“Jaskiewicz”) was
required to execute an Agreement of Subordination and Assignment (“Subordination
Agreement”) related to $124,000 currently owed to Jaskiewicz by the Company (the
“Jaskiewicz Debt”). Under the Subordination Agreement, the Jaskiewicz Debt shall
not be payable, shall be junior in right to the Rosenthal facility and no
payment may be accepted or retained by Jaskiewicz unless and until the Company
has paid and satisfied in full any obligations to Rosenthal. Furthermore, the
Jaskiewicz Debt was assigned and transferred to Rosenthal as collateral for the
Rosenthal facility.




As
compensation for his execution of the Subordination Agreement, on July 1, 2009
Jaskiewicz was awarded an option grant representing 50,000 common shares of the
Company under the Company’s Fiscal 2001 stock option plan, at an exercise price
of $0.20, the closing price of the Company’s common shares on the date of the
grant. The option grant 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), the Company will recognize $8,000 in non-cash compensation
expense related to the grant of Jaskiewicz’s options.




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.




Included
in the three and nine months ended September 30, 2009 is $8,000 in non-cash
compensation expense related to the Cipkowski and Jaskiewicz stock option
grants.




Note
G – Related Party Note




As disclosed under Item 1, Note F, the
Jaskiewicz Debt was converted into a note payable in accordance with the terms
of the Subordination Agreement.  The amount outstanding on this note
was $124,000 at September 30, 2009.




13




Note
H – Employment Agreement




As another part of Cipkowski’s
compensation for his execution of the Validity Guarantee (See Item 1, Note F),
on July 1, 2009, the Company entered into a new employment contract with
Cipkowski that is coterminous with the Rosenthal Line of Credit; all other terms
and provisions of Cipkowski’s former employment contract remain unchanged (See
Exhibit 10.32 to this quarterly report on Form 10-Q).




Note
I – Subsequent Events




The
Company has adopted the requirements of ASC Topic 855, “Subsequent Events”,previously referred to as SFAS No. 165, and has evaluated subsequent
events through the filing date of this Quarterly Report on Form
10-Q.  There were no subsequent events required to be recognized or
disclosed in the financial statements.




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




General




The
following discussion of the Company's financial condition and the results of
operations should be read in conjunction with the interim Financial Statements
and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
This discussion contains, in addition to historical statements, forward-looking
statements that involve risks and uncertainties. Our actual future results could
differ significantly from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, the factors discussed in the section titled "Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008
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, 2009, the Company sustained a net loss of $712,000 from net sales of
$7,563,000. The Company had net cash used in operating activities of $3,000 for
the nine months ended September 30, 2009.




During
the nine months ended September 30, 2009, the Company continued to experience
year over year declines in sales as a result of the general condition of the
global economy. To improve its financial condition during this time, the Company
has implemented a number of cost cutting initiatives. The Company also continued
to take steps to reduce manufacturing costs related to its products to increase
the Company’s gross margin. Simultaneously with these efforts, the Company
continues to focus on the development of new products to address market trends
and needs.




The
Company's continued existence is dependent upon several factors, including its
ability to raise revenue levels and reduce costs to generate positive cash
flows, and to sell additional shares of the Company's common stock to fund
operations and/or obtain additional credit facilities, if and when
necessary.




Plan
of Operations




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




Results
of operations for the nine months ended September 30, 2009 compared to the nine
months ended September 30, 2008




NET SALES:Net sales for the
nine months ended September 30, 2009 decreased $2,805,000, or 27.1%, when
compared to net sales for the nine months ended September 30, 2008. Sales in the
nine months ended September 30, 2009 continue to be affected by global economic
conditions and price pressures.




Sales in
our core markets (Corporate/Workplace and Government/Criminal Justice) continue
to be negatively impacted by general economic conditions. Sales in our
Corporate/Workplace market (which includes our national account division)
continue to be negatively impacted as new and existing employment levels of our
customers either remain lower or in some cases decrease further. Sales in our
Government/Criminal Justice market are being negatively impacted due to
government accounts decreasing 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.




14




To
address the sales decline we are experiencing with our current customers in the
Corporate/Workplace market, we hope to close new accounts (including, but not
limited to, new national accounts). We will continue to focus our sales efforts
on national accounts, direct sales and contract manufacturing, while striving to
reduce manufacturing costs, which could enable us to be more cost competitive.
To address sales declines in the Government/Criminal Justice market, we launched
the Rapid TOX Cup® II in the first quarter of 2009. 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 have closed a number of
new accounts in the Government/Criminal Justice market as a result of offering
the Rapid TOX Cup II, and we remain hopeful that we may be able to mitigate the
negative impact of foreign price pressures with the Rapid TOX Cup
II.




International
Sales and Contract Manufacturing sales also declined in the nine months ended
September 30, 2009. The decline in International Sales resulted from sales
decreases in all areas outside of the United States as poor economic conditions
continue to be of a global nature. The Company’s contract manufacturing
operations currently include the manufacture of a HIV test, a test for fetal
amniotic membrane rupture, and a test for RSV (Respiratory Syncytial
Virus).  Contract manufacturing sales during the nine months ended
September 30, 2009 totaled $206,000, down from $414,000 in the same period a
year ago as a result of declines in all areas of contract
manufacturing.




While we
remain encouraged by reports of improvement in certain aspects of global
economic conditions, until the economy fully recovers, we expect to continue to
see declines in our core markets (Corporate/Workplace and Government/Criminal
Justice) as a result of declines in the employment and hiring levels of our
customers, decreased municipal budgets and price pressure in our markets, but we
are hopeful that these decline rates will stabilize and eventually improve. We
are optimistic that sales in our International markets and Contract
Manufacturing will either recover or decline at a lower rate.




COST OF GOODS SOLD/GROSS
PROFIT: Cost of good sold for the nine months ended September 30, 2009
increased to 59.0% of net sales, compared to 56.2% of net sales for the same
period a year ago. We began to experience significant sales declines in the
latter part of the fourth quarter of 2008. To address these declines, in the
first quarter of 2009 we decreased product manufacturing and reduced labor and
overhead costs in an effort to have production output fall in line with
anticipated demand in the future, anticipating that sales will either continue
to stay at lower levels or further decline until the economy fully recovers.
Although we have cut back on the amount of product being manufactured, certain
direct labor and overhead costs are fixed and such fixed costs are now being
allocated to a reduced number of manufactured products, thus increasing our
manufacturing cost per unit.  In addition, because the sales decline
in the second quarter of 2009 was not as great as in the first quarter of 2009,
we increased our level of production personnel (from the lower levels required
in the first quarter of 2009) to meet manufacturing needs. We have not yet
reverted to the production personnel levels of the first quarter of 2009, as we
are uncertain whether we will return to the lower sales levels experienced
during that period. Therefore, 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.




In
addition, gross profit in the nine months ended September 30, 2009, continued to
be affected by sales declines in the Corporate/Workplace market (typically
higher margin sales), typically lower margin rates for new contracts in the
Government/Criminal Justice market due to price pressures from foreign
manufacturers, and continued price pressure in all markets.




OPERATING EXPENSES: Operating
expenses declined 20.7% for the nine months ended September 30, 2009, compared
to the same period a year ago. To improve its results of operations during the
global economic crisis, the Company implemented a number of cost cutting
initiatives, which have resulted in decreases in expenses in all areas as
described in the following detail:




15


Research and Development
(“R&D”) expense




R&D
expenses for the nine months ended September 30, 2009 decreased 29.0% when
compared to the nine months ended September 30, 2008. The greatest savings was
in salary expense; in June 2008, the Vice President of Product Development
retired and the Company has not filled this position, nor do we expect to fill
this position in the future. Additional savings in consulting fees, FDA
compliance costs, utilities, supplies and materials and travel were minimally
offset by increases in repairs and maintenance and employee benefit 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 expenses for the nine months ended September 30, 2009 decreased
27.8% when compared to the nine months ended September 30, 2008. Reductions in
sales salaries and commissions, sales employee benefit costs, sales auto
expense, travel related expenses, postage, royalty expense, customer relations,
marketing consulting fees, advertising and promotional expenses were partially
offset by increases in product sample costs, marketing salaries, marketing
employee benefit costs, marketing dues and subscriptions and expenses related to
our attendance at national trade shows.  A number of these reductions
stem from our cost cutting initiatives that began in 2008.




In the nine months ended September 30,
2009, we continued to promote our products through selected advertising,
participation at high profile trade shows and other marketing activities. Our
direct sales force continued to focus their selling efforts in our target
markets, which include, but are not limited to, Corporate/Workplace and
Government/Criminal Justice. In addition, beginning in the fourth quarter of
2008, our direct sales force began to focus more efforts on the
Clinical/Physician/Hospital market, as a result of the receipt of our CLIA
waiver for our Rapid TOX product line in August 2008. CLIA stands for Clinical
Laboratory Improvement Amendments, and the Clinical Laboratory Improvement
Amendments of 1988 established quality standards for laboratory testing to
ensure the accuracy, reliability and timeliness of patient test results
regardless of where the test was performed. As a result, those using CLIA waived
tests are not subject to the more stringent and expensive requirements of
moderate or high complexity laboratories. While we have seen some positive
impact on sales as a result of these efforts to sell into CLIA waived markets,
to date the impact has not been significant.




General and Administrative
(“G&A”) expense




G&A
expenses for the nine months ended September 30, 2009 decreased 11.0% when
compared to the nine months ended September 30, 2008. Decreases in investor
relations expense, warehouse salaries, shipping supplies, directors expenses,
CLIA waiver expense, insurance costs, patents, licenses and permits, travel
related costs, office and computer supplies, contributions, bad debts and bank
service fees were partially offset by increases in quality assurance salaries
and employee benefits, G&A salaries and employee benefits, consulting fees,
accounting fees, legal expense, auto expense, telephone and communication costs,
repairs and maintenance, depreciation and non-cash compensation expense. The
non-cash compensation expense in the nine months ended September 30, 2009 was
related to the issuance of two stock option grants in the third quarter of 2009
(see Item 1, Note F) and this expense did not occur in the nine months ended
September 30, 2008.




Results
of operations for the three months ended September 30, 2009 compared to the
three months ended September 30, 2008




NET SALES: Net sales for the
third quarter of 2009 decreased $1,103,000 or 30.6% when compared to net sales
for the third quarter of 2008. Sales in the third quarter of 2009 continued to
be affected by global economic conditions and price pressures.




Sales in
our core markets (Corporate/Workplace and Government/Criminal Justice) continue
to be negatively impacted by general economic conditions. Sales in our
Corporate/Workplace market (which includes our national account division)
continue to be negatively impacted as new and existing employment levels of our
customers either remain lower or in some cases decrease further. Sales in our
Government/Criminal Justice market are being negatively impacted due to
government accounts decreasing 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 have made it more difficult to secure new government
contracts.




16


To
address the sales decline we are experiencing with our current customers in the
Corporate/Workplace market, we hope to close new accounts (including, but not
limited to, new national accounts). We will continue to focus our sales efforts
on national accounts, direct sales and contract manufacturing, while striving to
reduce manufacturing costs, which could enable us to be more cost competitive.
To address sales declines in the Government/Criminal Justice market we launched
the Rapid TOX Cup II in the first quarter of 2009. 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 have closed a number of
new accounts in the Government/Criminal Justice market as a result of offering
the Rapid TOX Cup II, and we remain hopeful that we may be able to mitigate the
negative impact of foreign price pressures with the Rapid TOX Cup
II.




17


International
Sales and Contract Manufacturing sales also declined in the third quarter of
2009. The decline in International Sales resulted from sales decreases in all
areas outside of the United States as poor economic conditions continue to be of
a global nature. The Company’s contract manufacturing operations currently
include the manufacture of a HIV test, a test for fetal amniotic membrane
rupture, and a test for RSV. Contract manufacturing sales during the three
months ended September 30, 2009 totaled $74,000, down from $181,000 in the same
period a year ago as a result of declines in all areas of contract
manufacturing.




While
we remain encouraged by reports of improvement in certain aspects of global
economic conditions, until the economy fully recovers, we expect to continue to
see declines in our core markets (Corporate/Workplace and Government/Criminal
Justice) as a result of declines in the employment and hiring levels of our
customers, decreased government budgets and price pressure in our markets, but
we are hopeful that these decline rates will stabilize and eventually improve.
We are optimistic that sales in our International markets and Contract
Manufacturing will either recover or decline at a lower rate.




COST OF GOODS SOLD/GROSS
PROFIT: Cost of goods sold for the third quarter of 2009 increased
slightly to 59.0% of net sales, compared to 58.4% of net sales for the same
period a year ago. We began to experience significant sales declines in the
latter part of the fourth quarter of 2008. To address these declines, in the
first quarter of 2009 we decreased product manufacturing and reduced labor and
overhead costs in an effort to have production output fall in line with
anticipated demand in the future, anticipating that sales will either continue
to stay at lower levels or further decline until the economy fully recovers.
Although we have cut back on the amount of product being manufactured, certain
direct labor and overhead costs are fixed and such fixed costs are now being
allocated to a reduced number of manufactured products, thus increasing our
manufacturing cost per unit.  In addition, because the sales decline
in the second quarter of 2009 was not as great as in the first quarter of 2009,
we increased our level of production personnel from the lower levels required in
the first quarter of 2009to
meet manufacturing needs. We have not yet reverted to the production personnel
levels of the third quarter of 2008, as we are uncertain whether we will return
to the lower sales levels experienced more recently. Therefore, 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.




In
addition, gross profit in the three months ended September 30, 2009, continued
to be affected by sales declines in the Corporate/Workplace market (typically
higher margin sales), the securitization of a number of new contracts in the
Government/Criminal Justice market (typically lower margin sales due to price
pressures from foreign manufacturers) and price pressure we continue to combat
in all markets.




OPERATING EXPENSES: Operating
expenses declined 11.9%, comparing the third quarter of 2009 to the third
quarter of 2008. To improve its results of operations during the global economic
crisis, the Company implemented a number of cost cutting initiatives, which have
resulted in decreases in expenses in all areas as described in the following
detail:




Research and development
(“R&D”) expense




R&D
expenses for the third quarter of 2009 decreased 15.6% when compared to the
third quarter of 2008. Decreases in consulting fees, FDA compliance costs,
utilities and phone costs were partially offset by increases in salaries and
benefits. Our R&D department continues to focus their efforts on the
enhancement of current products and exploration of contract manufacturing
opportunities.




Selling and marketing
expense




Selling
and marketing expenses for the third quarter of 2009 decreased 27.5% when
compared to the third quarter of 2008. Reductions in sales salaries &
commissions, sales employee benefit costs, travel related expense, postage,
royalty expense and marketing consulting fees were partially offset by increases
in advertising related expense, marketing salaries and employee benefits, dues
& subscriptions and expenses related to our attendance at national trade
shows. A number of these reductions stem from our cost cutting initiatives that
began in 2008 and continued into 2009.




18


In the
third quarter of 2009, we continued to promote our products through selected
advertising, participation at high profile trade shows and other marketing
activities. Our direct sales force continued to focus their selling efforts in
our target markets, which include but are not limited to, Corporate/Workplace,
and Government/Criminal Justice. In addition, beginning in the fourth quarter of
2008, our direct sales force began to focus more efforts on the
Clinical/Physician/Hospital market, as a result of the receipt of our CLIA
waiver for our Rapid TOX product line in August 2008. While we have seen some
positive impact on sales as a result of these efforts to sell into CLIA waived
markets, to date the impact has not been significant.




General and administrative
(“G&A”) expense




G&A
expenses for the third quarter of 2009 increased 9.8% when compared to the third
quarter of 2008. Decreases in investor relations expense, warehouse salaries,
shipping supplies, insurance costs, licenses & permits, travel related
costs, computer supplies, outside service fees and bank service fees were offset
by increases in quality assurance salaries and employee benefits, G&A
salaries and employee benefits, accounting fees, legal expense, patents and
licenses, repairs and maintenance, bad debts and non-cash compensation expense.
The non-cash compensation expense in the third quarter of 2009 was related to
the issuance of two stock option grants (see Item 1, Note F) and this expense
did not occur in the third quarter of 2008.




19


Liquidity
and Capital Resources as of September 30, 2009




The
Company's cash requirements depend on numerous factors, including product
development activities, sales and marketing efforts, market acceptance of its
new products, and effective management of inventory levels in response to sales
forecasts. The Company expects to devote substantial capital resources to
continue product development, refine manufacturing efficiencies and support
direct sales efforts. The Company will examine other growth opportunities
including strategic alliances, and expects such activities will be funded from
existing cash and cash equivalents, issuance of additional equity or debt
securities or additional borrowings subject to market and other conditions. The
Company’s financial statements for the fiscal year ended December 31, 2008 were
prepared assuming it will continue as a going concern. As of the date of this
report, the Company does not believe that its current cash balances, together
with cash generated from future operations and amounts available under its
credit facilities will be sufficient to fund operations for the next 12 months
if the Company continues to experience current sales levels. If cash generated
from operations is not sufficient to satisfy our working capital and capital
expenditure requirements, we will be required to sell additional equity or
obtain additional credit facilities. There is no assurance that such financing
will be available or that the Company will be able to complete financing on
satisfactory terms, if at all.




As of
September 30, 2009, the Company had a Real Estate Mortgage and a Term Note with
FNFG and a Line of Credit with Rosenthal. (see Item 1, Note E).




Working
capital




The
Company’s working capital decreased $374,000 at September 30, 2009, when
compared to working capital at December 31, 2008. In the fourth quarter of 2008,
the Company reclassified its Credit Facilities with FNFG from long-term to
short-term as a result of the Company’s covenant default under the Loan
Documents related to the Credit Facilities and the subsequent forbearance (See
Item 1, Note E). The Company refinanced the FNFG line of credit with Rosenthal
on July 1, 2009.




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




Dividends




The
Company has never paid any dividends on its common shares and anticipates that
all future earnings, if any, will be retained for use in the Company's business
and it does not anticipate paying any cash dividends.




Cash
Flows




Increases
in prepaid expenses and decreases in accounts payable and accrued expenses
offset by decreases in inventory and accounts receivable and increases in wages
payable resulted in cash used in operating activities of $3,000 for the nine
months ended September 30, 2009. The primary use of cash in the nine months
ended September 30, 2009 and September 30, 2008 was funding of
operations.




Net cash
used in investing activities in the nine months ended September 30, 2009 and
September 30, 2008 was for investment in property, plant and
equipment.




Net cash
provided by financing activities in the nine months ended September 30, 2009
consisted of net proceeds from our line of credit offset by payments on
outstanding debt. Net cash provided by financing activities in the nine months
ended September 30, 2008 consisted of proceeds from a debenture offering offset
by payments on our Term Note and Real Estate Mortgage and net payments on our
line of credit.




At
September 30, 2009, the Company had cash and cash equivalents of
$181,000.




Outlook




The
Company's primary short-term working capital needs relate to focusing sales
efforts on segments of the drugs of abuse testing market that will yield high
volume sales, refining its manufacturing and production capabilities and
establishing adequate inventory levels to support expected sales, while
continuing support of its research and development activities. The Company
believes that its current infrastructure is sufficient to support its business;
however, if at some point in the future the Company experiences renewed growth
in sales, it may be required to increase its current infrastructure to support
sales. It is also possible that additional investments in research and
development, selling and marketing and general and administrative may be
necessary in the future to: develop new products, enhance current products to
meet the changing needs of the point of collection testing market, grow contract
manufacturing operations, promote the Company’s products in its markets and
institute changes that may be necessary to comply with various new public
company reporting requirements, including but not limited to requirements
related to internal controls over financial reporting. However, the Company has
taken measures to control the rate of increase of these costs to be consistent
with any sales growth rate of the Company.




20




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




Item
3. Quantitative and Qualitative Disclosures About Market Risk




Not applicable




Item
4. Controls and Procedures




(a)
Evaluation of Disclosure Controls and Procedures




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




(b)
Changes in Internal Control Over Financial Reporting




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




PART
II – OTHER INFORMATION




Item
1. Legal Proceedings




See Part
I, Item 1, “Note C – Litigation” in the Notes to interim Financial Statements
included in this report for a description of pending legal proceedings in which
the Company is a party.




Item
1A. Risk Factors




There have been no material changes to
our risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2008 except as set forth
below:




Our
securities are currently trading on Pink OTC Markets, Inc., commonly referred to
as the “Pink Sheets”, and may be determined to be a “penny stock,” making it
more difficult for a broker-dealer to trade our common stock and making it more
difficult for an investor to acquire or dispose of our common stock in the
secondary market.




Our
common shares were delisted from the NASDAQ Capital Market in September 2009 and
are currently trading on the Pink Sheets. Therefore, our common shares may be
subject to so-called “penny stock” rules. The SEC has adopted regulations that
define a “penny stock” to be any equity security that has a market price per
share of less than $5.00, subject to certain exceptions, such as any securities
listed on a national securities exchange. For any transaction involving a “penny
stock,” unless exempt, the rules impose additional sales practice requirements
on broker-dealers, subject to certain exceptions. For these reasons, a
broker-dealer may find it more difficult to trade our common stock and an
investor may find it more difficult to acquire or dispose of our common stock on
the secondary market, therefore, broker-dealers may be less willing or able to
sell or make a market in our securities because of the penny stock disclosure
rules. Not maintaining a listing on a major stock market may result in a
decrease in the trading price of our securities due to a decrease in liquidity
and less interest by institutions and individuals in investing in our
securities, and could also make it more difficult for us to raise capital in the
future.




21




As
of the date of this report, we have not obtained a full refinancing of our Term
Note and Real Estate Mortgage with FNFG; a condition to our previous Forbearance
Agreement.




On
February 4, 2009, although the Company was current with the payment schedules
for its Credit Facilities with FNFG, FNFG notified the Company of the Existing
Defaults (see caption titled “FNFG Forbearance Agreement”, above). As disclosed
in Item 1, Note E under the caption titled “FNFG Term Sheet” the Company did not
obtain a full refinancing of the Real Estate Mortgage and Note by September 30,
2009 as required by the July Letter Agreement, and the Forbearance Agreement
expired on September 30, 2009. On October 8, 2009, the Company accepted and
agreed to a non-binding term sheet (the “Term Sheet”) presented by FNFG related
to a restructuring of the Real Estate Mortgage and Term Note. The Term Sheet
does not constitute a commitment on the part of FNFG and the terms provided are
subject to approvals and documentation satisfactory to FNFG. If the Company and
FNFG fail to close on the restructuring, and FNFG were to accelerate the Real
Estate Mortgage and Term Note, it is unlikely that the Company would have the
funds available to pay the Real Estate Mortgage and Term Note, and FNFG would be
entitled to enforce its rights and remedies available under the Loan Documents,
including but not limited to foreclosure of its liens on the Company’s
assets.




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




Our urine
point of collection products have received 510(k) marketing clearance from the
United States Food and Drug Administration (“FDA”), and have therefore met FDA
requirements for professional use. Our oral fluid point of collection products
have not received 510(k) marketing clearance from FDA. We have also been granted
a CLIA waiver from FDA related to Rapid TOX, our urine point of collection
product line. Corporate/Workplace and Government/Criminal Justice are our
primary markets, and it has been our belief that marketing clearance from FDA is
not required to sell our products in non-clinical markets (such as
Corporate/Workplace and Government/Criminal Justice), 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 FDA, which alleges we are
marketing our oral fluid drug screen, OralStat, in workplace settings without
marketing clearance or approval (see Current Report on Form 8-K filed with the
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. On October 27, 2009, we
received another letter from FDA, which stated they did not agree with our
interpretation of certain FDA regulations. We are required to respond to this
most recent communication within 30 working days from the date we received the
letter and the Company intends to respond as required.




Currently
there are many other oral fluid point of collection products being sold in the
workplace market by our competitors, none of which have received FDA marketing
clearance. Therefore, if we are required to be one of the first companies to
obtain FDA marketing clearance to sell our oral fluid products in the workplace
market, it is entirely possible that the cost of such clearance would be
material and incurring such cost could have a negative impact on our ability to
improve our loss from operations or achieve income from operations. Furthermore,
there can be no assurance that we would obtain such marketing clearance from
FDA. Our oral fluid products currently account for approximately 18% of our
sales; if we were unable to market and sell our oral fluid products in the
workplace market, this could negatively impact our revenues.




Although
we are currently unaware of any changes in regulatory standards related to any
of our markets, if regulatory standards were to change in the future, there can
be no assurance that FDA will grant us the appropriate marketing clearances
required to comply with the changes, if and when we apply for them.




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




None.




Item
3. Defaults Upon Senior Securities




None.




Item
4. Submission of Matters to a Vote of Security Holders




None.




22




Item 5.  Other
Information




None.




Item
6.  Exhibits




10.32
            Employment
      Contract between the Company and Stan
Cipkowski




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


23


SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.





AMERICAN
      BIO MEDICA CORPORATION(Registrant)By: /s/ Stefan ParkerStefan
      ParkerChief
      Financial OfficerExecutive
      Vice President, FinancePrincipal
      Financial Officer and duly authorized
Officer





Dated:
November 13, 2009


24