10QSB/A 1 v059483_10qsba.txt SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-QSB/A |X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended March 31, 2006. |_| 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 small business issuer as specified in its charter) New York 14-1702188 ------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 122 Smith Road, Kinderhook, New York 12106 ------------------------------------------- (Address of principal executive offices) 800-227-1243 --------------------------- (Issuer's telephone number) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for 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. Yes |X| No |_| Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X| State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: 21,459,768 Common Shares as of December 1, 2006 Transitional Small Business Disclosure Format: Yes |_| No |X| PART I FINANCIAL INFORMATION American Bio Medica Corporation Balance Sheets
March 31, December 31, 2006 2005 (Unaudited) ------------ ------------ Assets Current assets: Cash and cash equivalents $ 526,000 $ 446,000 Accounts receivable, net of allowance of $105,000 at both March 31, 2006 and December 31, 2005 1,417,000 1,370,000 Inventory-net of reserve for slow moving and obsolete inventory of $250,000 at both March 31, 2006 and December 31, 2005 3,929,000 4,444,000 Prepaid and other current assets 282,000 109,000 ------------ ------------ Total current assets 6,154,000 6,369,000 Property, plant and equipment, net 1,466,000 1,562,000 Other assets 107,000 7,000 ------------ ------------ Total assets $ 7,727,000 $ 7,938,000 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 678,000 $ 1,380,000 Accrued liabilities 158,000 130,000 Wages payable 184,000 177,000 Line of credit 359,000 Current portion of mortgages and notes payable 23,000 36,000 Current portion of unearned grant 10,000 10,000 ------------ ------------ Total current liabilities 1,412,000 1,733,000 Long term portion of mortgages and notes payable 590,000 592,000 Long term portion of unearned grant 60,000 60,000 Other long term liabilities 100,000 ------------ ------------ Total liabilities 2,162,000 2,385,000 ------------ ------------ Stockholders' equity: Preferred stock; par value $.01 per share; 5,000,000 shares authorized; none issued and outstanding Common stock; par value $.01 per share; 50,000,000 shares authorized; 21,359,768 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively 214,000 214,000 Additional paid-in capital 18,853,000 18,853,000 Accumulated deficit (13,502,000) (13,514,000) ------------ ------------ Total stockholders' equity 5,565,000 5,553,000 ------------ ------------ Total liabilities and stockholders' equity $ 7,727,000 $ 7,938,000 ============ ============
The accompanying notes are an integral part of the financial statements 2 American Bio Medica Corporation Statements of Operations (Unaudited) For The Three Months Ended March 31, ---------------------------- 2006 2005 ------------ ------------ Net sales $ 3,423,000 $ 3,122,000 Cost of goods sold 1,781,000 1,479,000 ------------ ------------ Gross profit 1,642,000 1,643,000 ------------ ------------ Operating expenses: Research and development 154,000 159,000 Selling and marketing 784,000 757,000 General and administrative 672,000 656,000 ------------ ------------ 1,610,000 1,572,000 ------------ ------------ Operating income 32,000 71,000 ------------ ------------ Other income (expense): Other income 15,000 Interest income 1,000 1,000 Interest expense (17,000) (12,000) ------------ ------------ (16,000) 4,000 ------------ ------------ Income before provision for income taxes 16,000 75,000 Income taxes 5,000 1,000 ------------ ------------ Net income $ 11,000 $ 74,000 ============ ============ Basic income per common share $ 0.00 $ 0.00 ============ ============ Diluted income per common share $ 0.00 $ 0.00 ============ ============ Weighted average shares outstanding - basic 21,359,768 21,284,768 Dilutive effect of stock options and warrants 150,372 255,637 ------------ ------------ Weighted average shares outstanding - diluted 21,510,140 21,540,405 ============ ============ The accompanying notes are an integral part of the financial statements 3 American Bio Medica Corporation Statements of Cash Flows (Unaudited)
For The Three Months Ended March 31, ---------------------- 2006 2005 --------- --------- Cash flows from operating activities: Net income $ 11,000 $ 74,000 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 95,000 89,000 Changes in: Accounts receivable (45,000) (244,000) Inventory 522,000 111,000 Prepaid and other current assets (172,000) 31,000 Accounts payable (700,000) (611,000) Accrued liabilities 25,000 (40,000) Unearned Grant (5,000) Wages payable 6,000 (12,000) --------- --------- Net cash used in operating activities (258,000) (607,000) --------- --------- Cash flows from investing activities: Purchase of property, plant and equipment (6,000) (59,000) --------- --------- Net cash used in investing activities (6,000) (59,000) --------- --------- Cash flows from financing activities: Proceeds from exercise of warrants 2,000 Debt payments (15,000) (17,000) Proceeds from line of credit 359,000 Proceeds from grant 25,000 --------- --------- Net cash provided by financing activities 344,000 10,000 --------- --------- Net increase / (decrease) in cash and cash equivalents 80,000 (656,000) Cash and cash equivalents - beginning of period 446,000 995,000 --------- --------- Cash and cash equivalents - end of period $ 526,000 $ 339,000 ========= ========= Supplemental disclosures of cash flow information Cash paid during period for interest $ 17,000 $ 12,000
The accompanying notes are an integral part of the financial statements 4 Notes to financial statements (unaudited) March 31, 2006 Note A - Basis of Reporting The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, such statements include all adjustments, which are considered necessary for a fair presentation of the financial position of American Bio Medica Corporation (the "Company" or "ABMC") at March 31, 2006, and the results of its operations, and cash flows for the three-month periods ended March 31, 2006 and 2005. The results of operations for the three-month period ended March 31, 2006 are not necessarily indicative of the operating results for the full year. These financial statements should be read in conjunction with the Company's audited financial statements and related disclosures for the year ended December 31, 2005 included in the Company's Form 10-KSB. During the year ended December 31, 2005, the Company incurred a net loss of $376,000 from net sales of $13,015,000, and had net cash used in operating activities of $372,000. During the three months ended March 31, 2006, the Company earned a net income of $11,000 from net sales of $3,423,000. The Company had net cash outflows from operating activities of $258,000 for the first three months of 2006 primarily as a result of increases in accounts receivable and prepaid expenses, and reductions in accrued expenses and accounts payable offset by reductions in inventory. The reduction in accounts payable stems from first quarter payments for inventory purchases made in the fourth quarter of 2005. During the first quarter of 2006, the Company continued to take steps to improve its financial prospects including focusing on research and development and sales and marketing. Additionally, the Company replaced three regional sales managers in the northeast, southwest and south-central U.S. 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, if necessary. NEW ACCOUNTING STANDARDS In November 2004, the FASB issued SFAS No. 151 "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, FAS 151 requires that allocation of fixed and production facilities overhead to conversion costs should be based on normal capacity of the production facilities. The provisions in FAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of FAS 151 did not have a significant effect on its financial statements. In November 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets -- An Amendment of APB Opinion No. 29" ("FAS 153"). The provisions of this statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. This statement eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance -- that is, transactions that are not expected to result in significant changes in the cash flows of the reporting entity. The adoption of FAS 153 did not have a significant effect on its financial statements. In December 2004, the FASB issued FAS No. 123 (revised 2004), "Share-Based Payment", ("FAS No. 123(R)"), which amends FAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. FAS No. 123(R) requires compensation expense to be recognized for all share-based payments made to employees based on the fair value of the award at the date of grant, eliminating the intrinsic value alternative allowed by FAS No. 123. Generally, the approach to determining fair value under the original pronouncement has not changed. However, there are revisions to the accounting guidelines established, such as accounting for forfeitures, which will change our accounting for stock-based awards in the future. 5 FAS No. 123(R) must be adopted in the first interim or annual period beginning after December 15, 2005. The statement allows companies to adopt its provisions using either of the following transition alternatives: (i) The modified prospective method, which results in the recognition of compensation expense using FAS 123(R) for all share-based awards granted after the effective date and the recognition of compensation expense using FAS 123 for all previously granted share-based awards that remain unvested at the effective date; or (ii) The modified retrospective method, which results in applying the modified prospective method and restating prior periods by recognizing the financial statement impact of share-based payments in a manner consistent with the pro forma disclosure requirements of FAS No. 123. The modified retrospective method may be applied to all prior periods presented or previously reported interim periods of the year of adoption. ABMC adopted FAS No. 123(R) on January 1, 2006 using the modified prospective method. Because we previously accounted for share-based payments to our employees using the intrinsic value method, our results of operations have not included the recognition of compensation expense for the issuance of stock option awards. The Company accelerated the vesting of all outstanding stock options to December 14, 2005. No new options were granted during the first quarter of 2006. FAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement may reduce our net operating cash inflows and increase our net financing cash flows in periods after adoption. The impact that this change in reporting will have on future periods cannot be determined at this time because the benefit recognized is dependent upon attributes that vary for each option exercise. In May 2005, the FASB issued FAS No. 154. "Accounting Changes and Error Corrections" which replaced APB Opinion No. 20 and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. FAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. FAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. The Company does not believe that the adoption of FAS No. 154 will have a significant effect on its financial statements. In February 2006 the FASB issued FAS No. 155 "Accounting for Certain Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140". This Statement amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. 6 This Statement: a. Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation b. Clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133 c. Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation d. Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives e. Amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company does not believe that the adoption of FAS No. 155 will have a significant effect on its financial statements. In March 2006 the FASB issued FAS No. 156 "Accounting for Servicing of Financial Assets--an amendment of FASB Statement No. 140". This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement: 1. Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations: a. A transfer of the servicer's financial assets that meets the requirements for sale accounting b. A transfer of the servicer's financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities c. An acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. 2. Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. 3. Permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities: a. Amortization method--Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date. 7 b. Fair value measurement method--Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. 4. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. 5. Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. This Statement is effective as of the beginning of the Company's first fiscal year that begins after September 15, 2006. The Company does not believe that the adoption of FAS No. 156 will have a significant effect on its financial statements. Note B - Net Income Per Common Share Basic net income or loss per share is calculated by dividing the net income or loss by the weighted average number of outstanding common shares during the period. Diluted net income or loss per share includes the weighted average dilutive effect of stock options and warrants. Potential common shares outstanding as of March 31, 2006 and 2005: March 31, March 31, 2006 2005 ---- ---- Warrants 2,223,420 2,243,420 Options 4,118,080 4,217,830 For the three months ended March 31, 2006 the number of securities not included in the diluted EPS, because the effect would have been anti-dilutive, were 4,624,500. For the three months March 31, 2005 the number of securities not included in the diluted EPS, because the effect would have been anti-dilutive, were 3,024,250. ABMC adopted FAS 123(R) (see "New Accounting Standards" above) effective January 1, 2006. FAS 123(R) requires compensation expense to be recognized for all share-based payments made to employees based on the fair value of the award at the date of grant, eliminating the intrinsic value alternative allowed by FAS No. 123. The following pro forma information, is presented for 2005, giving effect to fair value of the options on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%, volatility of 76% for 2005, risk free interest rates ranging from 4.63% to 4.91% for 2005, and an expected life of 10 years for both 2005. The pro-forma net income represents three months amortization of expense associated with the option grants. There were no share-based payments made to employees during the first quarter of 2006. 8 Three months ended Three months ended March 31, March 31, 2006 2005 ------------ ----------- Net Income/(loss): As reported $ 11,000 $ 74,000 Pro forma $ 11,000 $ (195,000) Basic income/(loss) per share As reported $ .00 $ .00 Pro forma $ .00 $ (.01) Diluted income/(loss) per share As reported $ .00 $ .00 Pro forma $ .00 $ (.01) During the first quarter of 2005 stockholders' equity changed as a result of the exercise of 2,500 warrants. Common stock changed by $25 and Additional paid in capital changed by $2,600 as a result of this exercise. Note C - Litigation The Company has been named in legal proceedings in connection with matters that arose during the normal course of its business, and that in the Company's opinion are not material. While the ultimate result of any litigation cannot be determined in advance, it is management's opinion based upon consultation with counsel, that it has adequately provided for losses that may be incurred related to these claims. If the Company is unsuccessful in defending any or all of these claims, resulting financial losses could have an adverse effect on the financial position, results of operations and cash flows of the Company. Note D - Reclassifications Certain items have been reclassified to conform to the current presentation. Note E - Line of Credit The Company has available a line of credit with First Niagara Financial Group, Inc. ("FNFG") and has a maximum available line of $350,000, not to exceed 70% of accounts receivable less than 60 days. The interest rate is .25% above the FNFG prime rate and the Company is required to pay the principal down to $0 for a 30 consecutive day period in each 12 month period during which the line is available. The Company obtained an additional line of credit from FNFG for $75,000 during the first quarter of 2006. The line of credit is to be used exclusively for payments on a sublicense agreement entered into during the first quarter of 2006. The interest rate is .50% above the FNFG prime rate and principal may be repaid at any time and borrowed again as needed. There is no requirement for repayment of all principal annually on this line of credit. The Company intends to repay the funds drawn down on this line within one year to allow borrowing of additional amounts related to future payments due under the sublicense agreement. Note F -Sublicense Agreement On February 28, 2006, the Company entered into a non-exclusive Sublicense Agreement (the "Agreement") related to certain patents to allow the Company to expand its contract manufacturing operations. Under this Agreement, the Company is committed to pay a non-refundable fee of $175,000 over the course of 2 years. The Company would also be required to pay royalties for products the Company manufactures that fall within the scope of these patents. The Company does not currently manufacture any products that fall within the scope of these patents, and therefore, no royalty payments are currently required. 9 Note G - Integrated Bio Technology Agreement On March 29, 2006, the Company entered into a royalty agreement with Integrated Bio Technology Corporation ("IBC"). IBC is the owner of the RSV test and previously purchased the tests from the Company, via a contract manufacturing agreement, for resale to its distributor. At December 31, 2005 IBC had outstanding amounts due to ABMC totaling approximately $119,000. To address this outstanding balance, and to streamline the delivery of product to IBC's distributor, the Company agreed to work directly with IBC's distributor to receive orders, manufacture product and execute all invoicing and collection directly from the distributor. Effective January 1, 2006, the Company will pay a royalty equal to 20% of total sales to IBC. The Company will pay only 25% of royalties earned during the first two years, with the remaining 75% applied to amounts currently owed to ABMC by IBC. If the entire amount receivable from IBC is not earned through royalties during the first two years of the term of the royalty Agreement, all payments to IBC will cease until the full amount owed to the Company is satisfied. During the first quarter of 2006 ABMC manufactured and sold approximately $330,000 of the RSV tests to IBC's distributor. The royalties earned on these sales were approximately $66,000. ABMC reduced the amounts owed from IBC by $50,000, from $119,000 to $69,000 and made payments to IBC totaling approximately $16,000. Item 2. Management's Discussion and Analysis or Plan of Operation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 The following discussion of the Company's financial condition and the results of operations should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this document. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that in addition to the description of historical facts contained herein, this report contains certain forward-looking statements that involve risks and uncertainties as detailed herein and from time to time in the Company's other filings with the Securities and Exchange Commission and elsewhere. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. These factors include, among others: (a) the Company's fluctuations in sales and operating results; (b) risks associated with international business; (c) regulatory, competitive and contractual risks; (d) product development risks; and (e) the ability to achieve strategic initiatives, including but not limited to the ability to achieve sales growth across the business segments through a combination of enhanced sales force, new products, and customer service. Critical accounting policies During the three months ended March 31, 2006, except for the adoption of FAS 123(R), there were no significant changes to the Company's critical accounting policies, which are included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2005. Results of operations for the three months ended March 31, 2006 as compared to the three months ended March 31, 2005 Net sales were $3,423,000 for the three months ended March 31, 2006 as compared to $3,122,000 for the three months ended March 31, 2005, an increase of $301,000 or 9.6%. Direct sales accounted for 64.9% or $2,220,000 of sales for the first quarter compared to $2,242,000 or 71.8% a year ago. Inside sales and international sales contributed approximately $633,000 or 18.5% of the net sales for the first three months of 2006, compared to $584,000 or 18.7% of the net sales for the same period in 2005. The increase in sales in the first quarter of 2006 came primarily from contract manufacturing. Specifically, the Company's contract to manufacture a test for the detection of Respiratory Syncytial Virus ("RSV"), a juvenile respiratory disease, generated sales of $330,000 in the first quarter of 2006 as compared to $45,000 for the same period in 2005. RSV is a seasonal product with most sales occurring between October and April. Due to this seasonality, we do not expect additional increases in RSV sales until the fourth quarter of 2006. 10 During the three months ended March 31, 2006, the Company continued its extensive program to market and distribute its primary product lines, the Rapid Drug Screen(R) and Rapid One(R), together with its OralStat(R) oral fluid test and its other urine based tests, the RDS(R) InCup(R), Rapid TEC(R), and its newly introduced cassette product Rapid TOX(TM). The Company also continued marketing its Rapid Reader(TM), the first all inclusive drug screen interpretation and data management system cleared by the Food and Drug Administration ("FDA"). In the first quarter of 2006, the Company filed three 510(k) marketing applications with the FDA. One related to a drug screen for Buprenorphine, one for the Company's Rapid TOX cassette product and one related to a new detection level for the Company's drug screen for cocaine. The Company has not received decisions from the FDA on these applications as of the date of this report. The Company continued its contract manufacturing operations for unaffiliated third parties during the first quarter of 2006. Development continued on the production of a point of collection test for HIV, which is currently being evaluated by the FDA. The Company is also evaluating several other requests for contract manufacturing including another HIV test, incorporation of the Company's drugs of abuse tests into another test manufactured by an unrelated third party that is used in hospitals, emergency rooms and clinics and development of variations of the Company's current oral fluid product to meet specific market demands in Europe. Cost of goods sold for the three months ended March 31, 2006 was $1,781,000 or 52.0% of net sales as compared to $1,479,000 or 47.4% of net sales for the three months ended March 31, 2005. The increase in cost of goods sold is due to increases in the cost of labor in manufacturing, stemming from the greater diversity and complexity of new products along with increases in the cost of raw materials manufactured from petroleum by-products. Gross profit margin fell 4.6% year over year. Increased price pressure in the marketplace has limited the Company's ability to recover cost increases while maintaining market share. The Company continues to evaluate all aspects of our manufacturing and assembly processes to identify any areas of cost savings to improve gross margins. Operating expenses increased $38,000, or 2.4% to $1,610,000 in first three months of 2006 as compared to $1,572,000 in the same period in 2005. Research and development expense was $154,000, a decrease of $5,000 from $159,000 in the first quarter of 2005. This is attributable to savings in salaries and wages and consulting fees offset by increases in compliance costs and depreciation. Selling and marketing expense increased $27,000, or 3.6% to $784,000 for the first quarter of 2006 compared to $757,000 in the same period a year ago. The increase is attributable to salaries and wages and support costs such as travel, as well as postage expense, previously reported as general and administrative expense. As a result of new reporting adopted in 2006, the postage expense is now reported as part of selling and marketing to allow for better management of the expense and more accurate reporting of sales division costs. This reporting was not available in 2005. General and administrative expenses increased by $16,000 or 2.4%, from $656,000 to $672,000 in the first three months of 2006. This is primarily due to increases in insurance and investor relations offset by the aforementioned reclassification of postage expense to selling and marketing. 11 Research and development Research and development expenses for the three months ended March 31, 2006 were $154,000 or 4.5% of net sales compared to $159,000 or 5.1% of net sales for the three months ended March 31, 2005. Savings in salaries and wages and consulting fees were offset by increases in FDA compliance costs and depreciation stemming from improvements to the R&D facility in New Jersey. Management continues its R&D strategy to: focus on new product development to meet the changing needs of the point of collection drug of abuse testing market; develop components for an HIV test for a third party currently being evaluated by the FDA; and develop new uses of immunoassay lateral flow technology. Selling and marketing expense Selling and marketing expense was $784,000 or 22.9% of net sales in the first three months of 2006. This represents an increase of $27,000, from $757,000 or 24.2% of net sales in the same three months in 2005. This increase is primarily attributable to $66,000 of postage expense. As mentioned above this expense represents postage in excess of amounts received from customers for shipping and handling and was previously reported as general and administrative expense in 2005. During 2006 the Company adopted reporting of this expense in more detail to evaluate its impact on the business and specifically on each of the sales divisions. This reporting was not available in 2005. The postage increase and increases in salaries and wages, (resulting from three additional inside sales representatives), marketing consulting fees and travel expenses, were offset by decreases in spending for commissions, advertising and samples, sales meeting expenses, sales literature, and national trade shows. General and administrative expense General and administrative (G&A) expense was $16,000 higher in the first three months of 2006 than the same period in 2005. Total G&A expense for the three months ended March 31, 2006 was $672,000 or 19.6% of net sales compared to $656,000 or 21.0% of net sales in the first three months of 2005. Lowering general and administrative expense was a reclassification of $66,000 of postage expense for customer orders in excess of amounts received from customers for shipping and handling to selling and marketing expense. In addition the Company reduced spending in taxes, utilities, accounting fees and insurance in the first quarter. Offsetting this reclassification and savings were increases in investor relations expense, patents and licensing fees, supplies, and salaries and wages attributable to additional personnel to address increased regulatory reporting requirements. LIQUIDITY AND CAPITAL RESOURCES AS OF MARCH 31, 2006 The Company's cash requirements depend on numerous factors, including product development activities, ability to penetrate the direct sales market, 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 its product development, expand manufacturing capacity, and support its 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 believes that its current cash balances, and cash generated from future operations will be sufficient to fund operations for the next twelve months. If cash generated from operations is insufficient to satisfy the Company's working capital and capital expenditure requirements, the Company may 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. 12 Management believes that the amount of research and development, selling and marketing and general and administrative costs may increase as the Company continues its investment in long term growth and creates the necessary infrastructure to: achieve its worldwide drug test marketing and sales goals, continue its penetration of the direct sales market, support research and development projects and leverage new product initiatives. However, management has implemented programs to control the rate of increase of these costs to be consistent with the expected sales growth rate of the Company. The Company has working capital of $4,742,000 at March 31, 2006 compared to working capital of $4,636,000 at December 31, 2005. The Company has historically satisfied its net working capital requirements, if needed, through cash generated by proceeds from private placements of equity securities with institutional investors. 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. Net cash used in operating activities was $258,000 for the three months ended March 31, 2006 compared to net cash used in operating activities of $607,000 for the three months ended March 31, 2005. The net cash used in operating activities for the three months ended March 31, 2006 resulted primarily from; increases in accounts receivable resulting from the increase in sales in the first quarter; increases in prepaid expenses resulting from payments on insurance policies; reductions in accounts payable; offset by net income and decreases in inventory. Reductions in accounts payable pertain to first quarter payments for purchases of inventory in the fourth quarter of 2005. Inventory reductions are the result of sales and focused efforts to control the levels of inventory. Net cash used in investing activities was $6,000 for the three months ended March 31, 2006 compared to net cash used in investing activities of $59,000 for the three months ended March 31, 2005. The net cash used in both years was for investment in property plant and equipment. The cash used in 2005 was specifically for costs associated with the completion of the Company's HIV room and equipment purchases in the Company's New Jersey facility and additional equipment purchases for new hires. Net cash provided by financing activities was $344,000 for the three months ended March 31, 2006 consisting of proceeds from the Company's lines of credit. Net cash provided in the first three months of 2005 were from the exercise of warrants and proceeds of $25,000 from a Columbia County Economic Development Grant offset by payments on mortgage and notes payable. The Company has available two lines of credit with First Niagara Financial Group, Inc. ("FNFG"). The first line has a maximum available line of $350,000, not to exceed 70% of accounts receivable less than 60 days for general operating use. The interest rate is .25% above the FNFG prime rate and the Company is required to pay the principal down to $0 for a 30 consecutive day period in each 12-month period during which the line is available. The amount outstanding on this line of credit was $284,000 at March 31, 2006 and $0 at March 31, 2005. The second line of credit was obtained during the first quarter of 2006 for the limited purpose of paying amounts associated with a sublicense agreement executed during the first quarter. This line is for a maximum of $75,000 with an interest rate of .50% above the FNFG prime rate and the Company is not required to pay the principal down to $0 during each twelve month period. The amount outstanding on this line of credit at March 31, 2006 was $75,000. At March 31, 2006, the Company had cash and cash equivalents of $526,000. The Company's primary short-term capital and working capital needs relate to continued support of its research and development programs, opening new distribution opportunities, focusing sales efforts on segments of the drugs of abuse testing market that will yield high volume sales, increasing its manufacturing and production capabilities, establishing adequate inventory levels to support expected sales and instituting controls necessary to comply with financial disclosure controls as necessitated by new regulatory requirements. 13 ITEM 3. CONTROLS AND PROCEDURES As of the end of the period covered by this report, American Bio Medica Corporation carried out an evaluation, under the supervision and with the participation of the Chief Financial Officer and the Chief Executive Officer, to evaluate the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")). Based on that evaluation, the Chief Financial Officer and the Chief Executive Officer have concluded that American Bio Medica Corporation's disclosure controls and procedures as of the date of this report are effective for recording, processing, summarizing, and reporting information that is required to be disclosed in their reports under the Exchange Act, as amended, within the time periods specified in the Securities and Exchange Commission's rules and forms. Based upon an evaluation performed during the first quarter of 2006, the Chief Financial Officer and the Chief Executive Officer concluded that there was a material deficiency in internal control over financial reporting during the quarter ending September 30, 2005. Specifically, typographical errors in the quantity of inventory reported to Company headquarters by the Company's New Jersey manufacturing facility for the quarter ending September 30, 2005 were discovered by the CFO on January 30, 2006. The CFO discussed this matter with the Audit Committee and the Company's independent accountants. To remediate this deficiency, as of the date of this report, the Company has (1) reviewed all procedures for the compilation and reporting of inventory information with the individuals responsible for reporting inventory in the New Jersey manufacturing facility; (2) required financial compilation and reporting in the New Jersey office to be reviewed by the New Jersey manufacturing facility operations manager prior to transmittal to the Company's headquarters; and (3) employed analytical procedures for the CFO and Controller to review changes in quantities or value of inventory in excess of 25% for reasonableness. The Company continues to evaluate additional measures that may be necessary to remediate this deficiency. Except as set forth above, there were no changes in American Bio Medica Corporation's internal controls over financial reporting during the fourth quarter that have materially affected, or are reasonably likely to materially affect, American Bio Medica Corporation's internal control over financial reporting. PART II OTHER INFORMATION Item 1. Legal Proceedings: See "Note C - Litigation" in the Notes to Financial Statements included in this report for a description of pending legal proceedings in which the Company is a party. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities None. 14 Item 4. Submission of Matters to a Vote of Security-Holders None. Item 5. Other Information None. Item 6. Exhibits 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. 15 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/Keith E. Palmer -------------------------------------- EVP of Finance, Chief Financial Officer and Treasurer (Principal Accounting Officer and duly authorized Officer) Dated: December 1, 2006 16