|
Item 1.
|
Condensed Financial Statements
|
American Bio Medica Corporation
Condensed Balance Sheets
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
138,000
|
|
|
$
|
156,000
|
|
Accounts receivable, net of allowance for doubtful accounts of $49,000 at June 30, 2017 and December 31, 2016
|
|
|
482,000
|
|
|
|
556,000
|
|
Inventory, net of allowance of $468,000 at June 30, 2017 and $449,000 at December 31, 2016
|
|
|
1,450,000
|
|
|
|
1,582,000
|
|
Prepaid expenses and other current assets
|
|
|
88,000
|
|
|
|
92,000
|
|
Total current assets
|
|
|
2,158,000
|
|
|
|
2,386,000
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
823,000
|
|
|
|
824,000
|
|
Patents, net
|
|
|
102,000
|
|
|
|
93,000
|
|
Other assets
|
|
|
21,000
|
|
|
|
21,000
|
|
Deferred finance costs – line of credit, net
|
|
|
31,000
|
|
|
|
47,000
|
|
Total assets
|
|
$
|
3,135,000
|
|
|
$
|
3,371,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
278,000
|
|
|
$
|
304,000
|
|
Accrued expenses and other current liabilities
|
|
|
263,000
|
|
|
|
276,000
|
|
Wages payable
|
|
|
268,000
|
|
|
|
299,000
|
|
Line of credit
|
|
|
594,000
|
|
|
|
639,000
|
|
Current portion of long-term debt
|
|
|
87,000
|
|
|
|
75,000
|
|
Total current liabilities
|
|
|
1,490,000
|
|
|
|
1,593,000
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion and deferred finance costs
|
|
|
725,000
|
|
|
|
753,000
|
|
Other long-term liabilities
|
|
|
25,000
|
|
|
|
0
|
|
Total liabilities
|
|
|
2,240,000
|
|
|
|
2,346,000
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at June 30, 2017 and December 31, 2016
|
|
|
0
|
|
|
|
0
|
|
Common stock; par value $.01 per share; 50,000,000 shares authorized; 29,297,333 issued and outstanding at June 30, 2017 and 28,842,788 issued and outstanding at December 31, 2016
|
|
|
293,000
|
|
|
|
288,000
|
|
Additional paid-in capital
|
|
|
21,105,000
|
|
|
|
21,037,000
|
|
Accumulated deficit
|
|
|
(20,503,000
|
)
|
|
|
(20,300,000
|
)
|
Total stockholders’ equity
|
|
|
895,000
|
|
|
|
1,025,000
|
|
Total liabilities and stockholders’ equity
|
|
$
|
3,135,000
|
|
|
$
|
3,371,000
|
|
The accompanying notes are an integral
part of the condensed financial statements
American Bio Medica Corporation
Condensed
Statements of Operations
(Unaudited)
|
|
For The Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,621,000
|
|
|
$
|
2,975,000
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,491,000
|
|
|
|
1,636,000
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,130,000
|
|
|
|
1,339,000
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
68,000
|
|
|
|
109,000
|
|
Selling and marketing
|
|
|
372,000
|
|
|
|
551,000
|
|
General and administrative
|
|
|
778,000
|
|
|
|
738,000
|
|
|
|
|
1,218,000
|
|
|
|
1,398,000
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(88,000
|
)
|
|
|
(59,000
|
)
|
|
|
|
|
|
|
|
|
|
Other income / (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(134,000
|
)
|
|
|
(138,000
|
)
|
Other income, net
|
|
|
20,000
|
|
|
|
155,000
|
|
|
|
|
(114,000
|
)
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
Net loss before tax
|
|
|
(202,000
|
)
|
|
|
(42,000
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(203,000
|
)
|
|
$
|
(43,000
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding – basic & diluted
|
|
|
29,043,692
|
|
|
|
26,940,917
|
|
The
accompanying notes are an integral part of the condensed financial statements
American Bio Medica Corporation
Condensed
Statements of Operations
(Unaudited)
|
|
For The Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,306,000
|
|
|
$
|
1,505,000
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
741,000
|
|
|
|
796,000
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
565,000
|
|
|
|
709,000
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
22,000
|
|
|
|
55,000
|
|
Selling and marketing
|
|
|
176,000
|
|
|
|
282,000
|
|
General and administrative
|
|
|
388,000
|
|
|
|
351,000
|
|
|
|
|
586,000
|
|
|
|
688,000
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) / income
|
|
|
(21,000
|
)
|
|
|
21,000
|
|
|
|
|
|
|
|
|
|
|
Other income / (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(69,000
|
)
|
|
|
(71,000
|
)
|
Other income, net
|
|
|
20,000
|
|
|
|
6,000
|
|
|
|
|
(49,000
|
)
|
|
|
(65,000
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before tax
|
|
|
(70,000
|
)
|
|
|
(44,000
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(1,000
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(71,000
|
)
|
|
$
|
(44,000
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding – basic & diluted
|
|
|
29,242,388
|
|
|
|
27,271,408
|
|
The accompanying notes are an integral part of the condensed financial statements
American Bio Medica Corporation
Condensed
Statements of Cash Flows
(Unaudited)
|
|
For The Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(203,000
|
)
|
|
$
|
(43,000
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
43,000
|
|
|
|
46,000
|
|
Amortization of debt issuance costs
|
|
|
63,000
|
|
|
|
59,000
|
|
Provision for slow moving and obsolete inventory
|
|
|
19,000
|
|
|
|
42,000
|
|
Share-based payment expense
|
|
|
23,000
|
|
|
|
36,000
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
74,000
|
|
|
|
(48,000
|
)
|
Inventory
|
|
|
113,000
|
|
|
|
93,000
|
|
Prepaid expenses and other current assets
|
|
|
54,000
|
|
|
|
19,000
|
|
Accounts payable
|
|
|
(26,000
|
)
|
|
|
3,000
|
|
Accrued expenses and other current liabilities
|
|
|
(13,000
|
)
|
|
|
(6,000
|
)
|
Wages payable
|
|
|
(31,000
|
)
|
|
|
(16,000
|
)
|
Net cash provided by operating activities
|
|
|
116,000
|
|
|
|
185,000
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Patent application costs
|
|
|
(13,000
|
)
|
|
|
(6,000
|
)
|
Purchase of property, plant & equipment
|
|
|
(38,000
|
)
|
|
|
0
|
|
Net cash used in investing activities
|
|
|
(51,000
|
)
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds (payments) on debt financing
|
|
|
(38,000
|
)
|
|
|
(75,000
|
)
|
Proceeds from lines of credit
|
|
|
2,835,000
|
|
|
|
3,095,000
|
|
Payments on lines of credit
|
|
|
(2,880,000
|
)
|
|
|
(3,179,000
|
)
|
Net cash (used in) financing activities
|
|
|
(83,000
|
)
|
|
|
(159,000
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease in) / increase in cash and cash equivalents
|
|
|
(18,000
|
)
|
|
|
20,000
|
|
Cash and cash equivalents - beginning of period
|
|
|
156,000
|
|
|
|
158,000
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of period
|
|
$
|
138,000
|
|
|
$
|
178,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during period for interest
|
|
$
|
71,000
|
|
|
$
|
79,000
|
|
Cash paid during period for taxes
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Consulting expense prepaid with restricted stock
|
|
$
|
50,000
|
|
|
$
|
49,000
|
|
Debt issuance cost paid with restricted stock
|
|
$
|
0
|
|
|
$
|
96,000
|
|
The accompanying notes are an integral part of the condensed financial statements
Notes to condensed financial statements (unaudited)
June 30, 2017
Note A - Basis of Reporting
The accompanying unaudited
interim condensed financial statements of American Bio Medica Corporation (the “Company”) have been prepared in accordance
with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information
and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, these unaudited interim condensed financial
statements do not include all information and footnotes required by U.S. GAAP for complete financial statement presentation. These
unaudited interim condensed financial statements should be read in conjunction with audited financial statements and related notes
contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management,
the interim condensed financial statements include all normal, recurring adjustments which are considered necessary for a fair
presentation of the financial position of the Company at June 30, 2017, the results of operations for the three
and six month periods ended June 30, 2017 and June 30, 2016 and, cash flows for the six month periods ended June 30, 2017 and June
30, 2016.
Operating results for
the three and six months ended June 30, 2017 are not necessarily indicative of results that may be expected for the year ending
December 31, 2017. Amounts at December 31, 2016 are derived from audited financial statements included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2016.
During the six months
ended June 30, 2017, 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, 2016.
The preparation of
these interim condensed 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 estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations,
contingencies and litigation. The Company bases 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
condensed 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 independent registered public accounting
firm’s report on the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2016, contained an explanatory paragraph regarding the Company’s ability to continue as a going concern. As of the date
of this report, our current cash balances, together with cash generated from future operations and amounts available under our
credit facilities may not be sufficient to fund operations through August 2018. On May 1, 2017, we extended our line of credit.
The new expiration date of our line of credit is June 29, 2020. The maximum availability on our line of credit remains to be $1,500,000.
However, the amount available under our line of credit is based upon our accounts receivable and inventory. As of June 30, 2017,
based on our availability calculation, there were no additional amounts available under our line of credit because we draw any
balance available on a daily basis. If sales levels decline further, we will have reduced availability on our line of credit due
to decreased accounts receivable balances. In addition, we would expect our inventory levels to decrease if sales levels decline
further, and this also will result in reduced availability on our line of credit. If availability under our line of credit is not
sufficient to satisfy our working capital and capital expenditure requirements, we will be required to obtain additional credit
facilities or sell additional equity securities, or delay capital expenditures. There is no assurance that such financing will
be available or that we will be able to complete financing on satisfactory terms, if at all.
Recently Adopted
Accounting Standards
ASU 2015-11, “Simplifying
the Measurement of Inventory”. ASU 2015-11 was issued
in July 2015. ASU 2015-11 applies to inventory measured using the
first-in, first-out (“FIFO”) or average cost methods. Under the updated guidance, an entity should measure inventory
that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted ASU 2015-11 in the
quarter ended March 31, 2017, and it did not have a material impact on our financial position or results of operations.
ASU 2016-09, “Improvements
to Employee Share-Based Payment Accounting”.
ASU 2016-09 was issued in March 2016 and it simplifies several aspects of
accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as
either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual reporting
periods beginning after December 15, 2016, including interim periods. Early adoption is permitted. An entity that elects early
adoption of the amendment under ASU 2016-09 must adopt all aspects of the amendment in the same period. The Company adopted ASU
2016-09 in the quarter ended March 31, 2017 and it did not have a material effect on our financial position or results of operations.
ASU 2015-17, “Income
Taxes”.
ASU 2015-17 was issued in December 2015 and addresses simplification of the presentation of deferred income taxes.
The amendments in ASU 2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a classified statement
of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position.
The current requirement is that deferred tax liabilities and assets, net of a tax-paying component of an entity be offset and presented
as two amounts; one current and one long-term. ASU 2015-17 is effective for financial statements issued for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. Early adoption was permitted. The Company adopted ASU
2015-17 in the quarter ended March 31, 2017 and it did not have a material impact on our financial position or results of operations.
Accounting Standards
Issued; Not Yet Adopted
ASU 2017-09, “Compensation
– Stock Compensation (Topic 718)”.
ASU 2017-09 was issued in May 2017. The amendment in ASU 2017-09 provide guidance
about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.
More specifically, that an entity should account for the effects of modification unless all the following are met: 1) the fair
value, calculated or intrinsic value of the modified award is the same fair value, calculated or intrinsic value of the original
award immediately before the original award is modified, 2) the vesting conditions of the modified award are the same as the vesting
conditions of the original award immediately before the original award is modified and 3) the classification of the modified award
as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the
original grant is modified. The current disclosure requirements in Topic 718 apply regardless of whether accounting modification
is applied. ASU 2017-09 is effective for annual periods and interim periods within those annual periods, beginning after December
15, 2017. Early adoption is permitted. The Company is in the process of evaluating the impact of ASU 2017-09.
ASU 2017-07, “Compensation
- Retirement Benefits”
. ASU 2017-07 was issued in March 2017. The amendments in ASU 2017-07 require an employer to report
the service cost component of pension and postretirement benefits in the same line item or items as other compensation costs. The
other components of net benefit cost are required to be presented in the income statement separately from the service cost component
and outside of a subtotal of income from operations. In addition, only the service cost component will be eligible for capitalization
as applicable following labor. ASU 2017-07 is effective for interim and annual periods beginning after December 15, 2017. Early
adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available
for issuance. The Company is in the process of evaluating the impact of ASU 2017-07.
ASU 2017-04, “Intangibles
– Goodwill and Other (Topic 350)”.
ASU 2017-04 was issued in January 2017. The amendments in ASU 2017-04 indicate
that an entity will no longer perform a hypothetical purchase price allocation to measure impairment, eliminating step 2 of the
goodwill impairment test. Instead, impairment will be measured using the difference of the carrying amount to the fair value of
the reporting unit. The ASU is effective prospectively for annual and interim periods in fiscal years beginning after December
15, 2019, but early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company
is in the process of evaluating the impact of ASU 2017-04.
ASU 2017-01, “Business
Combinations (Topic 805)”
. ASU 2017-01 was issued in January 2017. The amendments in ASU 2017-01 clarify the definition
of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted
for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including
acquisitions, disposals, goodwill, and consolidation. The guidance is effective for interim and annual periods beginning after
December 15, 2017 and should be applied prospectively on or after the effective date. The Company is in the process of evaluating
the impact of ASU 2017-01.
ASU 2016-02, “Leases”.
ASU 2016-02 was issued in February 2016 and it requires a lessee to recognize a lease liability and a right-of-use asset on its
balance sheet for all leases, including operating leases, with a term greater than 12 months. Lease classification will determine
whether a lease is reported as a financing transaction in the income statement and statement of cash flows. ASU 2016-02 does not
substantially change lessor accounting, but it does make certain changes related to leases for which collectability of the lease
payments is uncertain or there are significant variable payments. Additionally, ASU 2016-02 makes several other targeted amendments
including a) revising the definition of lease payments to include fixed payments by the lessee to cover lessor costs related to
ownership of the underlying asset such as for property taxes or insurance; b) narrowing the definition of initial direct costs
which an entity is permitted to capitalize to include only those incremental costs of a lease that would not have been incurred
if the lease had not been obtained; c) requiring seller-lessees in a sale-leaseback transaction to recognize the entire gain from
the sale of the underlying asset at the time of sale rather than over the leaseback term; and d) expanding disclosures to provide
quantitative and qualitative information about lease transactions. ASU 2016-02 is effective for all annual and interim periods
beginning January 1, 2019, and is required to be applied retrospectively to the earliest period presented at the date of initial
application, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2016-02.
ASU 2014-09, “Revenue
from Contracts with Customers
”. ASU 2014-09 was issued in May 2014 and it provides guidance for revenue recognition.
The core principle of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
In doing so, companies will need to use more judgment and make more estimates than under current guidance. Examples of the use
of judgments and estimates may include identifying performance obligations in the contract, estimating the amount of variable consideration
to include in the transaction price and allocating the transaction price to each separate performance obligation. The update also
requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. ASU 2014-09 provides for two transition methods to the new guidance:
a retrospective approach and a modified retrospective approach. In August 2015, ASU 2015-14, “Revenue from Contracts with
Customers: Deferral of the Effective Date” was issued as a revision to ASU 2014-09. ASU 2015-14 revised the effective date
to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but not
prior to periods beginning after December 15, 2016 (i.e. the original adoption date per ASU No. 2014-09). The Company is currently
evaluating the transition methods and the impact of adopting this ASU.
There are no other
accounting pronouncements issues during the six months ended June 30, 2017 that are expected to have or that could have a significant
impact on our financial position or results of operations.
Reclassifications
Certain items have
been reclassified from the prior year to conform to the current year presentation.
Note B – Inventory
Inventory is comprised of the following:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
1,043,000
|
|
|
$
|
1,028,000
|
|
Work In Process
|
|
|
393,000
|
|
|
|
385,000
|
|
Finished Goods
|
|
|
482,000
|
|
|
|
618,000
|
|
Allowance for slow moving and obsolete inventory
|
|
|
(468,000
|
)
|
|
|
(449,000
|
)
|
|
|
$
|
1,450,000
|
|
|
$
|
1,582,000
|
|
Note C – Net Loss Per Common Share
Basic net loss per
common share is calculated by dividing the net loss by the weighted average number of outstanding common shares during the period.
Diluted net loss per common share includes the weighted average dilutive effect of stock options and warrants. Potential common
shares outstanding as of June 30, 2017 and 2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
2,060,000
|
|
|
|
2,385,000
|
|
Options
|
|
|
2,147,000
|
|
|
|
2,187,000
|
|
|
|
|
4,207,000
|
|
|
|
4,572,000
|
|
The number of securities
not included in the diluted net loss per share for the three and six months ended June 30, 2017 was 4,207,000, as their effect
would have been anti-dilutive due to the net loss in each period.
The number of securities
not included in the diluted net loss per share for the three and six months ended June 30, 2016 was 4,572,000, as their effect
would have been anti-dilutive due to the net loss in each period.
Note D – Litigation/Legal Matters
In February 2017, the
Company filed a complaint in the Supreme Court of the State of New York in Columbia County against Premier Biotech Inc., Premier
Biotech Labs, LLC and its principals, including its President Todd Bailey, and Peckham Vocational Industries, Inc. (together the
“Defendants”). Mr. Bailey formerly served as the Company’s Vice President of Sales and Marketing, and as a sales
consultant until December 23, 2016. The complaint seeks preliminary and permanent injunctions and a temporary restraining order
against Todd Bailey (for his benefit or the benefit of another party or entity) related to the solicitation of Company customers
as well as damages related to any profits and revenues that would result from actions taken by the Defendants related to Company
customers. In March 2017, the complaint was moved to the federal court in the Northern District of New York. In April 2017, the
Defendants filed a motion to dismiss, to which the Company responded on April 21, 2017. As of the date of this report, the Company
is awaiting the courts rulings on the parties’ motions.
In addition, from time
to time, the Company may be named in legal proceedings in connection with matters that arise during the normal course of business.
While the ultimate outcome of any such litigation cannot be predicted, if we are unsuccessful in defending any such litigation,
the resulting financial losses could have an adverse effect on the financial position, results of operations and cash flows of
the Company. We are aware of no significant litigation loss contingencies for which management believes it is both probable that
a liability has been incurred and that the amount of the loss can be reasonably estimated.
Note E – Line of Credit and Debt
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Loan and Security Agreement with Cherokee Financial, LLC: 5 year note at an annual interest rate of 8% plus a 1% annual oversight fee, interest only and oversight fee paid quarterly with first payment being made on May 15, 2015, annual principal reduction payment of $75,000 due each year beginning on February 15, 2016, with a final balloon payment being due on February 15, 2020. Loan is collateralized by a first security interest in building, land and property.
|
|
$
|
1,050,000
|
|
|
$
|
1,125,000
|
|
Crestmark Line of Credit: Line of credit (with a current termination date of June 22, 2020) with interest payable at a variable rate based on WSJ Prime plus 2% with a floor or 5.25%; loan fee of 0.5% annually & monthly maintenance fee of 0.3% on actual loan balance from prior month. Early termination fee of 2% if terminated in year 2 or after (and prior to natural expiration). Loan is collateralized by first security interest in receivables and inventory.
|
|
|
594,000
|
|
|
|
639,000
|
|
Crestmark Equipment Term Loan: 38 month equipment loan related to the purchase of manufacturing equipment, at an interest rate of WSJ Prime Rate plus 3%; or 7.25% as of the date of this report.
|
|
|
37,000
|
|
|
|
0
|
|
|
|
|
1,681,000
|
|
|
|
1,764,000
|
|
Less debt discount & issuance costs (Cherokee Financial, LLC Loan)
|
|
|
(250,000
|
)
|
|
|
(297,000
|
)
|
Total debt, net
|
|
|
1,431,000
|
|
|
|
1,467,000
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
|
681,000
|
|
|
|
714,000
|
|
Long-term portion, net of current portion
|
|
$
|
750,000
|
|
|
$
|
753,000
|
|
LOAN AND SECURITY AGREEMENT WITH
CHEROKEE FINANCIAL, LLC
On March 26, 2015,
the Company entered into a LSA with Cherokee Financial, LLC (the “Cherokee LSA”). The purpose of the Cherokee LSA was
to refinance, at a better interest rate, the Company’s Series A Debentures and Cantone Asset Management Bridge Loan (both
of which matured on February 1, 2015), as well as the Company’s Mortgage Consolidation Loan with First Niagara Bank (“First
Niagara”). The loan is collateralized by a first security interest in real estate and machinery and equipment. Under the
Cherokee LSA, the Company was provided the sum of $1,200,000 in the form of a 5-year Note at an annual interest rate of 8%. The
Company is making interest only payments quarterly on the Cherokee Note, with the first interest payment paid on May 15, 2015.
The Company is also required to make an annual principal reduction payment of $75,000 on each anniversary of the date of the closing;
with the first principal reduction payment being made on February 15, 2016 and the most recent principal reduction payment being
made on February 16, 2017. A final balloon payment is due on March 26, 2020. In addition to the 8% interest, the Company pays Cherokee
Financial, LLC (“Cherokee”) a 1% annual fee for oversight and administration of the loan. This oversight fee is paid
in cash and is paid contemporaneously with the quarterly interest payments. The Company can pay off the Cherokee Note at anytime
with no penalty; except that a 1% administration fee would be required to be paid to Cherokee to close out all participations.
The Company issued
1.8 million restricted shares of the Company’s common stock to Cherokee for payment of fees. In addition, because the loan
was not repaid in full as of March 19, 2016, the Company issued another 600,000 restricted shares of common stock to Cherokee in
March 2016.
As placement agent
for the transaction, Cantone Research, Inc. (“CRI”) received a 5% cash fee on the $1.2 million, or $60,000, and 200,000
restricted shares of the Company’s common stock. In addition, because the loan was not repaid in full as of March 19, 2016,
the Company issued another 196,000 restricted shares of common stock to CRI in March 2016.
The Company received
net proceeds of $80,000 after $1,015,000 of debt payments, $60,000 in placement agent fees, $19,000 in legal fees, $19,000 in expenses,
$3,000 in state filing fees and $4,000 in interest expense (for 8% interest on $511,000 in new participations received from February
24, 2015 through March 25, 2015). With the adoption of ASU No. 2015-03 in the First Quarter 2016, these transaction costs (with
the exception of the interest expense) are now being deducted from the balance on the Cherokee LSA and are being amortized over
the term of the debt.
From these net proceeds,
in April 2015, the Company also paid $15,000 in interest expense related to 15% interest on $689,000 in Series A Debentures and
CAM Bridge Loan for the period of February 1, 2015 through March 25, 2015.
The Company recognized
$84,000 in interest expense related to the Cherokee LSA in the six months ended June 30, 2017 (of which $47,000 is debt issuance
cost amortization recorded as interest expense as a result of the adoption of new accounting standards in the first quarter of
2016, and $91,000 in interest expense related to the Cherokee LSA in the six months ended June 30, 2016 (of which $43,000 is debt
issuance cost amortization recorded as interest expense). The Company recognized $44,000 in interest expense related to the Cherokee
LSA in the three months ended June 30, 2017 (of which $23,000 is debt issuance cost amortization recorded as interest expense),
and $47,000 in interest expense related to the Cherokee LSA in the three months ended June 30, 2016 (of which $23,000 is debt issuance
cost amortization recorded as interest expense). The Company had $11,000 in accrued interest expense at June 30, 2017.
As of June 30, 2017,
the balance on the Cherokee LSA is $1,050,000, however the discounted balance is $800,000. As of December 31, 2016, the balance
on the Cherokee LSA was $1,125,000, however the discounted balance, net of debt discount and debt issuance costs was $828,000.
LINE OF CREDIT WITH CRESTMARK BANK
(“CRESTMARK”)
On June 29, 2015 (the
“Closing Date”), the Company entered into a three-year Loan and Security Agreement (“LSA”) with Crestmark,
a new Senior Lender, to refinance the Company’s Line of Credit with Imperium Commercial Finance, LLC (“Imperium”).
The Crestmark Line of Credit is used for working capital and general corporate purposes. On May 1, 2017, the Company entered into
term loan with Crestmark in the amount of $38,000 related to the purchase of manufacturing equipment. The Company executed an amendment
to its LSA with Crestmark and to its Promissory Note with Crestmark. The amendments addressed the inclusion of the term loan into
the Crestmark LSA and an extension of the Company’s line of credit with Crestmark. Apart from the extension of the LSA, no
terms of the line of credit were changed in the amendment. The interest rate on the term loan is the WSJ Prime Rate plus 3%; or
7.25% as of the date of this report. The termination date of the Crestmark line of credit was changed from June 22, 2018 to June
22, 2020 under the amendments.
Under the LSA, Crestmark
is providing the Company with a Line of Credit of up to $1,500,000 (“Maximum Amount”) with a minimum loan balance requirement
of $500,000. The Line of Credit is secured by a first security interest in the Company’s inventory, and receivables and security
interest in all other assets of the Company (in accordance with permitted prior encumbrances).
The Maximum Amount
is subject to an Advance Formula comprised of: 1) 90% of Eligible Accounts Receivables (excluding, receivables remaining unpaid
for more than 90 days from the date of invoice and sales made to entities outside of the United States), and 2) up to 40% of eligible
inventory plus up to 10% of Eligible Generic Packaging Components not to exceed the lesser of $350,000 (“Inventory Sub-Cap
Limit”), or 100% of the Eligible Accounts Receivable.
So long as any obligations
are due to Crestmark, the Company must comply with a minimum Tangible Net Worth (“TNW”) Covenant. Under the LSA, as
amended, the Company must maintain a TNW of at least $650,000. Additionally, if a quarterly net income is reported, the TNW covenant
will increase by 50% of the reported net income. If a quarterly net loss is reported, the TNW covenant will remain the same as
the prior quarter’s covenant amount. TNW is defined as: Total Assets less Total Liabilities less the sum of (i) the aggregate
amount of non-trade accounts receivables, including accounts receivables from affiliated or related persons, (ii) prepaid expenses,
(iii) deposits, (iv) net lease hold improvements, (v) goodwill and (vi) any other asset that would be treated as an intangible
asset under GAAP; plus Subordinated Debt. Subordinated Debt means any and all indebtedness presently or in the future incurred
by the Company to any creditor of the Company entering into a written subordination agreement with Crestmark. The Company is in
compliance with this covenant at June 30, 2017.
If the Company terminates
the LSA prior to June 22, 2020, an early exit fee of 2% of the Maximum Amount (plus any additional amounts owed to Crestmark at
the time of termination) would be due.
In the event of a default
of the LSA, which includes but is not limited to, failure of the Company to make any payment when due and non-compliance with the
TNW covenant, Crestmark is permitted to charge an Extra Rate. The Extra Rate is the Company’s then current interest rate
plus 12.75% per annum.
Under the LSA, interest
on the Crestmark Line of Credit is at a variable rate based on the Wall Street Journal Prime Rate plus 2% with a floor of 5.25%.
The WSJ prime rate was increased another .25% effective June 15, 2017, so as of the date of this report, the interest only rate
on the Crestmark Line of Credit is 6.25%. In addition to the interest rate, on the Closing Date and on each one-year anniversary
date thereafter, the Company will pay Crestmark a Loan Fee of 0.50%, or $7,500, and a Monthly Maintenance Fee of 0.30% of the actual
average monthly loan balance from the prior month will be paid to Crestmark. As of the date of this report, the interest rate in
effect is 10.93% (with all fees; including the weighted annual fee, which is charged on the closing date anniversary and is $7,500
regardless of our balance on the line of credit).
In addition to the
Loan Fee paid to Crestmark on the Closing Date, the Company had to pay a success fee (i.e. early termination fee) to Imperium in
the amount of $50,000 on the Closing Date, and a Broker’s Fee of 5%, or $75,000, to Landmark Pegasus Inc. Prior to the Closing,
the Company paid $12,000 in due diligence fees to Crestmark. The Company also incurred $3,000 of its own legal costs related to
the Crestmark Line of Credit. With the exception of the early term fee ($50,000) paid to Imperium (which was fully expensed in
the year ended December 31, 2015), these expenses are all being amortized over the initial term of the Crestmark Line of Credit,
or three years. The Company recognized $16,000 of this expense in the six months ended June 30, 2017 and June 30, 2016. The Company
recognized $8,000 of this expense in the three months ended June 30, 2017 and June 30, 2016.
The Company recognized
$50,000 of interest expense in the six months ended June 30, 2017 (of which $16,000 is debt issuance cost amortization recorded
as interest expense as a result of the adoption of new accounting standards) and $47,000 in interest expense in the six months
ended June 30, 2016 (of which $16,000 is debt issuance cost amortization recorded as interest expense). The Company recognized
$24,000 of interest expense in the three months ended June 30, 2017 (of which $8,000 is debt issuance cost amortization recorded
as interest expense) and $23,000in interest expense in the three months ended June 30, 2016 (of which $8,000 is debt issuance cost
amortization recorded as interest expense.
Given the nature of
the administration of the Crestmark Line of Credit, at June 30, 2017, the Company had $0 in accrued interest expense related to
the Crestmark Line of Credit, and there is $0 in additional availability under the Crestmark Line of Credit.
As of June
30, 2017, the balance on the Crestmark Line of Credit was $594,000, and as of December 31, 2016, the balance on the Crestmark Line
of Credit was $639,000.
EQUIPMENT LOAN WITH CRESTMARK
On May 1,
2017, the Company entered into term loan with Crestmark in the amount of $38,000 related to the purchase of manufacturing equipment.
The equipment loan is collateralized by a first security interest in a specific piece of manufacturing equipment. The Company executed
an amendment to its LSA with Crestmark and to its Promissory Note with Crestmark. The amendments addressed the inclusion of the
term loan into the LSA and an extension of the Company’s line of credit with Crestmark. No terms of the line of credit were
changed in the amendment. The interest rate on the term loan is the WSJ Prime Rate plus 3%; or 7.25% as of the date of this report.
The termination date of the Crestmark line of credit was changed from June 22, 2018 to June 22, 2020 under the amendments. The
balance on the equipment loan was $37,000 as of June 30, 2017.
NOTE F – Stock Options and Warrants
The Company currently
has two non-statutory stock option plans, the Fiscal 2001 Non-statutory Stock Option Plan (the “2001 Plan”) and the
2013 Equity Compensation Plan (the “2013 Plan”). Both plans have been adopted by our Board of Directors and approved
by our shareholders. Both the 2001 Plan and the 2013 Plan have options available for future issuance. Any common shares issued
as a result of the exercise of stock options would be new common shares issued from our authorized issued shares.
During the three months
ended June 30, 2017, the Company issued options to purchase 20,000 shares of stock to each of its two non-employee board members
as an annual stock option grant (for a total of 40,000 options) under the 2001 Plan. During the three months ended June 30, 2016,
the Company issued options to purchase 20,000 shares of common stock to each of its four non-employee board members as an annual
stock option grant (for a total of 80,000 options) under the 2001 Plan.
Stock option
activity for the six months ended June 30, 2017 and June 30, 2016 is summarized as follows (the figures contained within the tables
below have been rounded to the nearest thousand):
|
|
Six months ended June 30, 2017
|
|
|
Six months ended June 30, 2016
|
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate
Intrinsic Value as of June 30, 2017
|
|
|
Shares
|
|
|
Weighted Average Exercise
Price
|
|
|
Aggregate Intrinsic Value as of June 30,
2016
|
|
Options outstanding at beginning of period
|
|
|
2,107,000
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
1,435,000
|
|
|
$
|
0.14
|
|
|
|
|
|
Granted
|
|
|
40,000
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
830,000
|
|
|
$
|
0.11
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
NA
|
|
|
|
|
|
|
|
0
|
|
|
|
NA
|
|
|
|
|
|
Cancelled/expired
|
|
|
0
|
|
|
|
NA
|
|
|
|
|
|
|
|
(78,000
|
)
|
|
$
|
0.18
|
|
|
|
|
|
Options outstanding at end of period
|
|
|
2,147,000
|
|
|
$
|
0.13
|
|
|
$
|
15,000
|
|
|
|
2,187,000
|
|
|
$
|
0.13
|
|
|
$
|
16,000
|
|
Options exercisable at end of period
|
|
|
1,647,000
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
1,189,000
|
|
|
$
|
0.14
|
|
|
|
|
|
The following table
summarizes weighted-average assumptions using the Black-Scholes option-pricing model used on the date of the grants issued during
the six months ended June 30, 2017 and June 30, 2016:
|
|
Six months ended
|
|
|
2017
|
|
2016
|
Volatility
|
|
81%
|
|
62% - 66%
|
Expected term (years)
|
|
10 years
|
|
10 years
|
Risk-free interest rate
|
|
2.16%
|
|
1.57% - 1.94%
|
Dividend yield
|
|
0%
|
|
0%
|
The Company recognized
$23,000 in share based payment expense in the six months ended June 30, 2017 and $36,000 in share based payment expense in the
six months ended June 30, 2016. The Company recognized $11,000 in share based payment expense in the three months ended June 30,
2017 and $17,000 in share based payment expense in the three months ended June 30, 2016. As of June 30, 2017, there was approximately
$26,000 of total unrecognized compensation cost related to non-vested stock options, which vest over time. The cost is expected
to be recognized over a period ranging from 6-11 months.
Warrants
Warrant activity for
the six months ended June 30, 2017 and June 30, 2016 is summarized as follows:
|
|
Six months ended June 30, 2017
|
|
|
Six months ended June 30, 2016
|
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate
Intrinsic Value as of June 30, 2017
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate Intrinsic Value as of June 30, 2016
|
|
Warrants outstanding at beginning of period
|
|
|
2,060,000
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
2,385,000
|
|
|
$
|
0.17
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
NA
|
|
|
|
|
|
|
|
0
|
|
|
|
NA
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
NA
|
|
|
|
|
|
|
|
0
|
|
|
|
NA
|
|
|
|
|
|
Cancelled/expired
|
|
|
0
|
|
|
|
NA
|
|
|
|
|
|
|
|
0
|
|
|
|
NA
|
|
|
|
|
|
Warrants outstanding at end of period
|
|
|
2,060,000
|
|
|
$
|
0.18
|
|
|
None
|
|
|
|
2,385,000
|
|
|
$
|
0.17
|
|
|
$
|
0
|
|
Warrants exercisable at end of period
|
|
|
2,060,000
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
2,385,000
|
|
|
$
|
0.17
|
|
|
|
|
|
In the six months ended
June 30, 2017 and June 30, 2016, the Company recognized $0 in debt issuance and deferred finance costs related to the issuance
of the above warrants outstanding. In the three months ended June 30, 2017 and June 30, 2016, the Company recognized $0 in debt
issuance and deferred finance costs related to the issuance of the above warrants. As of June 30, 2017, there was $0 of total unrecognized
expense.
NOTE G – SUBSEQUENT EVENT
On July 10, 2017, the
Company was notified that it was not awarded a contract with a state agency for which it has held a contract in excess of 10 years.
The contract in question is included in the February 2016 complaint that the Company filed in the Supreme Court of the State of
New York in Columbia County against Premier Biotech Inc., Premier Biotech Labs, LLC (“together “Premier Biotech”)
and its principals, including its President Todd Bailey, and Peckham Vocational Industries, Inc (“Peckham”). (together
the “Defendants”). The complaint seeks preliminary and permanent injunctions and a temporary restraining order against
the Defendants (for their benefit or the benefit of another party or entity) related to the solicitation of Company customers (specifically
related to this customer and others) as well as damages related to any profits and revenues that would result from actions taken
by the Defendants related to Company customers (specifically related to this customer and others). The Company believes that the
Defendants actions related to this customer and a RFP that was issued by the state agency resulted in the loss of the contract
award to the Company and the award of the contract to Peckham and Premier Biotech. This contract historically accounted for 10-15%
of the Company’s annual revenue. The Company will continue to hold its current contract with the agency through September
30, 2017. The Company did protest the award of the contract to Peckham and Premier Biotech, and the state agency advised the Company
on July 26, 2017 that they denied the Company’s protest of the award. The Company is currently reviewing whether further
actions can be taken related to this account.
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Item 2.
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Management’s Discussion and Analysis of Financial
Condition and Results of Operations
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General
The following discussion
and analysis provides information, which we believe is relevant to an assessment and understanding of our financial condition and
results of operations. The discussion should be read in conjunction with the Interim Condensed Financial Statements contained herein
and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Certain statements contained in this Quarterly
Report on Form 10-Q, including, without limitation, statements containing the words “believes”, “anticipates”,
“estimates”, “expects”, “intends”, “projects”, and words of similar import, are
forward-looking as that term is defined by the Private Securities Litigation Reform Act of 1995 (“1995 Act”), and in
releases issued by the United State Securities and Exchange Commission (the “Commission”). These statements are being
made pursuant to the provisions of the 1995 Act and with the intention of obtaining the benefits of the “Safe Harbor”
provisions of the 1995 Act. We caution that any forward-looking statements made herein are not guarantees of future performance
and that actual results may differ materially from those in such forward-looking statements as a result of various factors, including,
but not limited to, any risks detailed herein, in our “Risk Factors” section of our Form 10-K for the year ended December
31, 2016, in our most recent reports on Form 10-Q and Form 8-K and from time to time in our other filings with the Commission,
and any amendments thereto. Any forward-looking statement speaks only as of the date on which such statement is made, and we are
not undertaking any obligation to publicly update any forward-looking statements. Readers should not place undue reliance on these
forward-looking statements.
Overview/Plan of
Operations
Our ability to maintain
and/or increase sales continues to be impacted by a very cost-competitive market currently dominated by products made outside of
the United States. Evidenced by the fact that sales in the six months ended June 30, 2017 decreased again when compared to the
same period last year.
During the six months
ended June 30, 2017, we recorded an operating loss of $88,000. This compares to an operating loss of $59,000 in the same period
last year. Decreased operating expenses were the primary cause of the increase in operating loss (relative to sales). Net loss
in the six months ended June 30, 2017 was $203,000, compared to a net loss of $43,000 in the same period last year. This is primarily
due to other income of $155,000 (primarily related to a tech transfer with a contract manufacturing customer) in the six months
ended June 30, 2016 that did not reoccur in the six months ended June 30, 2017.
We had cash provided
by operating activities of $116,000 in the six months ended June 30, 2017. This compares to cash provided by operating activities
of $185,000 in the six months ended June 30, 2016.
We continuously examine
all expenses in efforts to achieve profitability (when/if sales levels improve) or to minimize losses going forward (if sales continue
to decline). Over the course of the last two fiscal years (Fiscal 2016 and Fiscal 2015), we refinanced substantially all of our
existing debt at lower interest rates, manufactured our products in a partially consolidated operating environment, and maintained
a salary and commission deferral program; all as part of our efforts to decrease expenses and improve cash flow.
The salary and commission
deferral program previously referenced continued throughout the six months ended June 30, 2017. The deferral program currently
consists of a 20% salary deferral for our executive officer and our non-executive VP Operations. As of June 30, 2017, we had total
deferred compensation owed of $235,000. Over the course of the program, we repaid portions of the deferred compensation (with $16,000
in payments in the six months ended June 30, 2017 and $42,000 in payments in the six months ended June 30, 2016.). As cash flow
from operations allows, we intend to continue to make paybacks, however the deferral program is continuing and we expect it will
continue for up to another 12 months.
We continue to believe
that new products and our ability to sell those products in new markets will be a future growth driver. We are still in the process
of applying to the U.S. Food and Drug Administration for a marketing clearance to sell an all-inclusive, urine based, drug-testing
cup to customers requiring a CLIA waived product. The process has taken longer than anticipated but we are hopeful that will we
receive the clearance in the near future. Although our primary markets continue to be extremely price-competitive we remain hopeful
that when/if marketing clearance is received by the FDA for our all-inclusive drug testing cup, we will be able to garner new sales
in clinical markets (such as pain management and drug treatment) because although price is always a factor, quality and accuracy
are equally important in these clinical markets.
New assays and product
platform developments are also in our future research and development plans. We remain focused on selling our point of collection
drugs of abuse tests, and growing our business through direct sales and select distributors.
Over the course of
the last 12 months, we have reorganized and restructured our sales and marketing department. In addition, we are bringing on new
products and service offerings to diversify our revenue stream. These new products and services (through relationships with third
parties) include products for the detection of alcohol, alternative sample options for drug testing (such as lab based oral fluid
testing and hair testing) as well as toxicology management services. In addition, we are now offering customers lower-cost alternatives
for onsite drug testing. And finally, we are reviewing our contract manufacturing operations in efforts to capitalize on offerings
in that area. We have not derived any significant revenue from these new additions; however, the majority of the relationships
were only finalized in March/April 2017.
In September 2016,
our contract manufacturing sales began to decrease on an annual basis due to a manufacturing shift with one of our contract customers.
More specifically, as a result of a tech transfer with the customer, they are now their own primary supplier with the Company moving
into a position of back up or secondary supplier. Although contract manufacturing is not considered a material portion of our net
sales, given this expected change, we are making efforts to identify and secure new contract work and possible diversification
alternatives. In connection with the tech transfer, we received a $300,000 tech transfer fee from this customer. We recognized
$150,000 related to this tech transfer fee as other income in the six months ended June 30, 2016.
Our continued existence
is dependent upon several factors, including our ability to: 1) raise revenue levels even though we have suffered the loss of a
material contract that will impact sales starting October 1, 2017, 2) control costs to generate positive cash flows, 3) maintain
our current credit facilities or refinance our current credit facilities if necessary, and 4) if needed, our ability to obtain
working capital by selling additional shares of our common stock.
Results of operations
for the six months ended June 30, 2017
compared to the six
months ended June 30, 2016
NET SALES:
Net
sales for the six months ended June 30, 2017 decreased 11.9% when compared to net sales in the six months ended June 30, 2016.
The decrease in sales is primarily a result of the anticipated decrease in contract manufacturing sales in the six months ended
June 30, 2017 when compared to the six months ended June 30, 2016. More specifically, contract manufacturing sales declined by
approximately $116,000. The remaining $238,000 in decreased sales resulted primarily from a decrease in government sales (most
of which is due to the loss of an account in the fourth quarter of the year ended December 31, 2016). These declines were partially
offset by an increase in national accounts and international sales to Latin and South America.
GROSS PROFIT:
Gross
profit in the six months ended June 30, 2017 decreased to 43.1% of net sales compared to 45.0% of net sales in the six months ended
June 30, 2016. While we are still maintaining manufacturing efficiencies, there were certain periods within the six months ended
June 30, 2017 that we produced less testing strips due to the product sales mix.
OPERATING EXPENSES:
Operating expenses decreased 12.7% in the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Expenses
in research and development and selling and marketing decreased while general and administrative expense increased. More specifically:
Research and development
(“R&D”)
R&D expense decreased 37.6% when
comparing the six months ended June 30, 2017 with the same period last year. Decreased FDA compliance costs associated with the
timing of actions taken related to our FDA marketing clearance application) were partially offset by an increase in supplies and
materials. Our R&D department will continue to focus their efforts on the enhancement of current products, the development
of new testing assays, new product platforms and the evaluation of contract manufacturing opportunities.
Selling
and marketing
Selling and marketing
expense in the six months ended June 30, 2017 decreased 32.5% when compared to the same period last year. One of the primary reasons
for the decline in expenses is related to decreased commission expense. In the latter part of December 2016, we terminated our
relationship with a sales consultant due to competitive issues that arose during our relationship; we subsequently filed a complaint
against this consultant in the early part of 2017 (See Note D – Litigation/Legal Matters). In addition to the decline in
commissions, sales salaries and benefits, customer relations expense, postage and marketing consulting expenses decreased. These
declines were minimally offset by an increase in costs associated with trade show attendance. Our direct sales force will continue
to focus their efforts in our target markets, which include, but are not limited to, Workplace, Government, and Clinical (i.e.
pain management and drug treatment) and in the forensic and international markets for our oral fluid product. Our sales force has
also started to promote new products and service offerings to diversify our revenue stream. These new products and services (through
relationships with third parties) include products for the detection of alcohol, alternative sample options for drug testing (such
as lab based oral fluid testing and hair testing) as well as toxicology management services, and lower-cost alternatives for onsite
drug testing.
General and administrative
(“G&A”)
G&A expense increased 5.3% in the
six months ended June 30, 2017 when compared to the same period last year. Increases in legal fees (due to the initiation of litigation
in the early part of 2017; see Note D – Litigation/Legal Matters), and accounting fees were partially offset by reduced expenses
related to investor relations (due to decreased travel), shipping supplies, telephone and non-cash compensation (I.e. share based
payment expense; due to less options outstanding subject to amortization) Share based payment expense was $22,000 in the six months
ended June 30, 2017 compared to $36,000 in the six months ended June 30, 2016.
Results of operations
for the three months ended June 30, 2017
compared to the three
months ended June 30, 2016
NET SALES:
Net
sales for the three months ended June 30, 2017 declined 13.2% when compared to the three months ended June 30, 2016. The decrease
in sales results from a decrease in government sales (most of which is due to the loss of an account in the fourth quarter of 2016),
and the anticipated decline in contract manufacturing sales. Sales in Latin America and South America increased, however sales
to other parts of the world decreased (resulting in decreased international sales overall). These declines were offset by an increase
in national account sales.
GROSS PROFIT:
Gross
profit decreased to 43.3% of net sales in the three months ended June 30, 2017 compared to gross profit of 47.1% of net sales in
the three months ended June 30, 2016. While we are still maintaining manufacturing efficiencies, there were certain periods within
the three months ended June 30, 2017 that we produced less testing strips due to the product sales mix.
OPERATING EXPENSES:
Operating expenses decreased 14.8% in the three months ended June 30, 2017, compared to the three months ended June 30, 2016. Expenses
in research and development and selling and marketing decreased while general and administrative expense increased. More specifically:
Research and development
(“R&D”)
R&D expense decreased 60.0% when
comparing the three months ended June 30, 2017 with the three months ended June 30, 2016. Decreased FDA compliance costs associated
with the timing of actions taken related to our FDA marketing clearance application) were partially offset by an increase in supplies
and materials. Our R&D department will continue to focus their efforts on the enhancement of current products, the development
of new testing assays, new product platforms and the evaluation of contract manufacturing opportunities.
Selling
and marketing
Selling and marketing
expense in the three months ended June 30, 2017 decreased 37.6% when compared to the three months ended June 30, 2016. One of the
primary reasons for the decline in expenses is related to decreased commission expense. In the latter part of December 2016, we
terminated our relationship with a sales consultant due to competitive issues that arose during our relationship; we subsequently
filed a complaint against this consultant in the early part of 2017 (See Note D – Litigation/Legal Matters). In addition
to the decline in commissions, sales salaries and benefits, customer relations expense, and marketing consulting expenses decreased.
These declines were minimally offset by an increase in costs associated with trade show attendance. Our direct sales force will
continue to focus their efforts in our target markets, which include, but are not limited to, Workplace, Government, and Clinical
(i.e. pain management and drug treatment) and in the forensic and international markets for our oral fluid product. Our sales force
has also started to promote new products and service offerings to diversify our revenue stream. These new products and services
(through relationships with third parties) include products for the detection of alcohol, alternative sample options for drug testing
(such as lab based oral fluid testing and hair testing) as well as toxicology management services, and lower-cost alternatives
for onsite drug testing.
General and administrative
(“G&A”)
G&A expense increased 10.5% in
the three months ended June 30, 2017 when compared to G&A expense in the three months ended June 30, 2016. Increases in legal
fees (due to the initiation of litigation in the early part of 2017; see Note D – Litigation/Legal Matters), accounting fees
and outside service fees (due to the timing of our ISO audit in 2017 versus 2016) were partially offset by reduced expenses related
to telephone and non-cash compensation (i.e. share based payment expense; due to less options outstanding subject to amortization)
Share based payment expense was $11,000 in the three months ended June 30, 2017 compared to $17,000 in the three months ended June
30, 2016.
Liquidity and Capital Resources as of
June 30, 2017
Our cash requirements
depend on numerous factors, including but not limited to manufacturing costs (such as raw materials, equipment, etc.), selling
and marketing initiatives, product development activities, regulatory costs and effective management of inventory levels and production
levels in response to sales forecasts. We expect to devote capital resources to continue selling and marketing initiatives and
product development/research and development activities. We are examining other growth opportunities including strategic alliances.
Given our current and historical cash position, we expect such activities would need to be funded from the issuance of additional
equity or additional credit borrowings, subject to market and other conditions. Our financial statements for the year ended December
31, 2016 were prepared assuming we will continue as a going concern.
Our current cash balances,
together with cash generated from future operations and amounts available under our credit facilities may not be sufficient to
fund operations through August 2018. Our current line of credit expires on June 22, 2020 and has a maximum availability of $1,500,000.
However, the amount available under our line of credit is based upon the balance of our accounts receivable and inventory. As of
June 30, 2017, based on our availability calculation, there were no additional amounts available under our line of credit because
we draw any balance available on a daily basis. If sales levels decline further, we will have reduced availability on our line
of credit due to decreased accounts receivable balances. In addition, we would expect our inventory levels to decrease if sales
levels decline further, which would result in further reduced availability on our line of credit. If availability under our line
of credit is not sufficient to satisfy our working capital and capital expenditure requirements, we will be required to obtain
additional credit facilities or sell additional equity securities, or delay capital expenditures. There is no assurance that such
financing will be available or that we will be able to complete financing on satisfactory terms, if at all.
As of June 30, 2017,
we had the following debt/credit facilities:
Facility
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Debtor
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Balance as of June 30, 2017
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Loan and Security Agreement
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Cherokee Financial, LLC
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$
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1,050,000
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Revolving Line of Credit
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Crestmark Bank
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$
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594,000
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Capital Equipment Loan
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Crestmark Bank
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$
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37,000
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Working Capital
Our working capital
was $668,000 at June 30, 2017; this is a decrease of $125,000 when compared to working capital of $793,000 at December 31, 2016.
This decrease in working capital is primarily the result of decreased sales. We have historically satisfied working capital requirements
through cash from operations and debt.
Dividends
We have never paid
any dividends on our common shares and anticipate that all future earnings, if any, will be retained for use in our business, and
therefore, we do not anticipate paying any cash dividends.
Cash Flow, Outlook/Risk
We do not expect significant
increases in expenses during the year ending December 31, 2017 and as evidenced by our operating expenses for the year ended December
31, 2016 (“Fiscal 2016”), we have taken steps (and will continue to take steps) to ensure that operating expenses and
manufacturing costs remain in line with sales levels. In 2017, we will continue to focus our efforts on improving sales. Such steps
include, but are not limited to, obtaining a marketing clearance from FDA for one of our all-inclusive drug testing cups (allowing
us to further penetrate Clinical markets such as pain management and drug treatment), and entering into strategic relationships
with third parties to offer additional products and services to our customers. This includes products for the detection of alcohol,
alternative sample options for drug testing (such as lab based oral fluid testing and hair testing) as well as toxicology management
services, and lower-cost alternatives for onsite drug testing. We are hopeful that these additional product and service offerings
could have a positive impact on sales in the future. In the six months ended June 30, 2017, we continued to utilize cash resources
to complete our FDA marketing application process and to take other steps that would result in increased sales. We do not believe
expenditures related to our marketing clearance will continue throughout the year ending December 31, 2017.
None of these efforts
related to sales, or any other efforts being taken related to other operational activities, resulted in a substantial increase
in cash requirements in the six months ended June 30, 2017. In the second quarter of the year ended December 31, 2016, we received
our final payment of $150,000 related to a tech transfer with one of our contract-manufacturing customers. The upcoming loss of
a state agency contract starting October 1, 2017 is expected to have a material impact on our sales. If we are unable to recoup
this loss (which has historically been 10-15% of our annual sales), it is possible that our current line of credit (and advance
rates) would not be adequate for our cash requirements in the year ending December 31, 2017, especially if expense levels do not
decline in line with the sales decline. In addition, extraordinary events could occur that would result in unexpected, increased
expenditures.
If events and circumstances
occur such that 1) we do not meet our current operating plans to increase sales, 2) we are unable to raise sufficient additional
equity or debt financing, or 3) our credit facilities are insufficient or not available, we may be required to further reduce expenses
or take other steps which could have a material adverse effect on our future performance.
Our ability to repay
our current debt will depend primarily upon our future operating performance, which may be affected by the loss of a material contract
in October 2017, general economic, financial, competitive, regulatory, business and other factors beyond our control, including
those discussed herein. In addition, we cannot assure you that future borrowings or equity financing will be available for the
payment of any indebtedness we may have.
Our failure to comply
with the covenant under our revolving credit facility could result in an event of default, which, if not cured or waived, could
result in the Company being required to pay higher costs associated with the indebtedness. If we are forced to refinance our debt
on less favorable terms, our results of operations and financial condition could be adversely affected by increased costs and rates.
We may also be forced to pursue one or more alternative strategies, such as restructuring, selling assets, reducing or delaying
capital expenditures or seeking additional equity capital. There can be no assurances that any of these strategies could be implemented
on satisfactory terms, if at all.