I
tem 1. Condensed Financial
Statements
American Bio Medica Corporation
Condensed Balance Sheets
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|
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ASSETS
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Current
assets
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Cash and cash
equivalents
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$
99,000
|
$
113,000
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|
Accounts
receivable, net of allowance for doubtful accounts of $36,000 at
June 30, 2019 and $36,000 at December 31, 2018
|
393,000
|
452,000
|
|
Inventory, net of
allowance of $280,000 at June 30, 2019 and $268,000 at December 31,
2018
|
825,000
|
1,019,000
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|
Prepaid expenses
and other current assets
|
1,000
|
29,000
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Right of use asset
– operating leases
|
19,000
|
0
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|
Total current
assets
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1,337,000
|
1,613,000
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Property, plant and
equipment, net
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681,000
|
718,000
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Patents,
net
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119,000
|
123,000
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Right of use asset
– operating leases
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7,000
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0
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Other
assets
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21,000
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21,000
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Total
assets
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$
2,165,000
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$
2,475,000
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities
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Accounts
payable
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$
555,000
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$
359,000
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Accrued expenses
and other current liabilities
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443,000
|
449,000
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Right of use
liability – operating leases
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19,000
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0
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Wages
payable
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141,000
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278,000
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Line of
credit
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378,000
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502,000
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Current portion of
long-term debt, net of deferred finance costs
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1,040,000
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237,000
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Total current
liabilities
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2,576,000
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1,825,000
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Long-term
debt/other liabilities, net of current portion and deferred finance
costs
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1,000
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796,000
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Right of use
liability – operating leases
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7,000
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0
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Total
liabilities
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2,584,000
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2,621,000
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COMMITMENTS AND
CONTINGENCIES
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Stockholders'
equity:
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Preferred stock;
par value $.01 per share; 5,000,000 shares authorized, none issued
and outstanding at June 30, 2019 and December 31, 2018
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0
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0
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Common stock; par
value $.01 per share; 50,000,000 shares authorized; 32,545,776
issued and outstanding at June 30, 2019 and 32,279,368 issued and
outstanding as of December 31, 2018
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325,000
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323,000
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Additional paid-in
capital
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21,425,000
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21,404,000
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Accumulated
deficit
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(22,169,000
)
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(21,873,000
)
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Total
stockholders’ equity
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(419,000
)
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(146,000
)
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Total liabilities
and stockholders’ equity
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$
2,165,000
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$
2,475,000
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The accompanying notes are an integral part of the condensed
financial statements
American Bio Medica Corporation
Condensed Statements of Operations
(Unaudited)
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Net
sales
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$
1,880,000
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$
2,110,000
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Cost of goods
sold
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1,269,000
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1,301,000
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Gross
profit
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611,000
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809,000
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Operating
expenses:
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Research and
development
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39,000
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44,000
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Selling and
marketing
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219,000
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310,000
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General and
administrative
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682,000
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736,000
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940,000
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1,090,000
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Operating
loss
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(329,000
)
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(281,000
)
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Other income /
(expense):
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Interest
expense
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(134,000
)
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(146,000
)
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Other income,
net
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169,000
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15,000
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Interest
income
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0
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1,000
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35,000
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(130,000
)
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Net
loss before tax
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(294,000
)
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(411,000
)
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Income tax
expense
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(2,000
)
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(2,000
)
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Net
loss
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$
(296,000
)
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$
(413,000
)
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Basic
and diluted loss per common share
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$
(0.01
)
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$
(0.01
)
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Weighted average
number of shares outstanding – basic &
diluted
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32,445,244
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29,879,754
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The accompanying notes are an integral part of the condensed
financial statements
American Bio Medica Corporation
Condensed Statements of Operations
(Unaudited)
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For The Three Months Ended
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Net
sales
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$
958,000
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$
1,069,000
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Cost of goods
sold
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652,000
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632,000
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Gross
profit
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306,000
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437,000
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Operating
expenses:
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Research and
development
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20,000
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19,000
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Selling and
marketing
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107,000
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148,000
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General and
administrative
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334,000
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344,000
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461,000
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511,000
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Operating
loss
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(155,000
)
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(74,000
)
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Other income /
(expense):
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Interest
expense
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(67,000
)
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(76,000
)
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Other income,
net
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168,000
|
4,000
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Interest
income
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0
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1,000
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101,000
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(71,000
)
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Net
loss before tax
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(54,000
)
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(145,000
)
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Income tax
expense
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(2,000
)
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(2,000
)
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Net
loss
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$
(56,000
)
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$
(147,000
)
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Basic
and diluted loss per common share
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$
(0.00
)
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$
(0.00
)
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Weighted average
number of shares outstanding – basic &
diluted
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32,521,675
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29,936,111
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The accompanying notes are an integral part of the condensed
financial statements
American Bio Medica Corporation
Condensed Statements of Cash Flows
(Unaudited)
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Cash flows from operating activities:
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Net
loss
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$
(296,000
)
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$
(413,000
)
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Adjustments
to reconcile net loss to net cash provided by / (used in) operating
activities:
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Depreciation
and amortization
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42,000
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42,000
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Amortization
of debt issuance costs
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55,000
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70,000
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Allowance
for doubtful accounts
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0
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4,000
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Provision
for slow moving and obsolete inventory
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42,000
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41,000
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Share-based
payment expense
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3,000
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7,000
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Director
fee paid with restricted stock
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5,000
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3,000
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Changes
in:
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Accounts
receivable
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59,000
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(168,000
)
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Inventory
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153,000
|
171,000
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Prepaid
expenses and other current assets
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28,000
|
64,000
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Accounts
payable
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196,000
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(25,000
)
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Accrued
expenses and other current liabilities
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(6,000
)
|
48,000
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Wages
payable
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(137,000
)
|
(7,000
)
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Net
cash provided by / (used in) operating activities
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144,000
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(166,000
)
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Cash flows from investing activities:
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Patent
application costs
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0
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(13,000
)
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Net
cash used in investing activities
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0
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(13,000
)
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Cash flows from financing activities:
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Proceeds
from debt financing
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48,000
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150,000
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Payments
on debt financing
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(81,000
)
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(81,000
)
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Proceeds
from lines of credit
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1,902,000
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2,235,000
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Payments
on lines of credit
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(2,027,000
)
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(2,085,000
)
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Net
cash (used in) / provided by financing activities
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(158,000
)
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220,000
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Net change in cash and cash equivalents
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(14,000
)
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40,000
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Cash
and cash equivalents - beginning of period
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113,000
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36,000
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Cash and cash equivalents - end of period
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$
99,000
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$
76,000
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Supplemental disclosures of cash flow information
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Non-cash
transactions:
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Consulting expense prepaid with
restricted stock
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$
0
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$
42,000
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Debt issuance cost paid with
restricted stock
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$
14,000
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$
18,000
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Director fee
paid with restricted stock
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$
5,000
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$
3,000
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Patent
application costs
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$
0
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$
13,000
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Cash paid
during period for interest
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$
79,000
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$
76,000
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Cash paid
during period for taxes
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$
2,000
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$
2,000
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The accompanying notes are an integral part of the condensed
financial statements
Notes
to condensed financial statements (unaudited)
June 30, 2019
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, 2018. 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, 2019, and the
results of operations for the three and six month periods ended
June 30, 2019 and June 30, 2018 and cash flows for the six month
periods ended June 30, 2019 and June 30, 2018.
Operating results
for the six months ended June 30, 2019 are not necessarily
indicative of results that may be expected for the year ending
December 31, 2019. Amounts at December 31, 2018 are derived from
audited financial statements included in the Company’s Annual
Report on Form 10-K for the year ended December 31,
2018.
During the six months ended June 30, 2019, with the exception of
the adoption of ASU 2016-02, “Leases”, 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, 2018.
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, 2018, contained an explanatory paragraph
regarding the Company’s ability to continue as a going
concern. As of the date of this report, the Company’s current
cash balances, together with cash generated from future operations
and amounts available under the Company’s credit facilities
may not be sufficient to fund operations through August 2020. The
Company’s current line of credit matures on June 29, 2020.
The maximum availability on the Company’s line of credit
remains to be $1,500,000. However, the amount available under the
Company’s line of credit is based upon the Company’s
accounts receivable and inventory. As of June 30, 2019, based on
the Company’s availability calculation, there were no
additional amounts available under the Company’s line of
credit because the Company draws any balance available on a daily
basis. As of the date of this report, our credit facilities with
Cherokee Financial, LLC have expiration dates of less than 12
months. Our total debt at June 30, 2019 with Cherokee Financial,
LLC is $1,100,000. We do not expect cash from operations within the
next 12 months to be sufficient to pay the amounts due under these
credit facilities, which is due in full on February 15, 2020. We
are continuing discussions with Cherokee Financial, LLC regarding a
new facility that would refinance the amounts due under their
current credit facilities
As
discussed in more detail in “Cash Flow, Outlook/Risk”,
if sales levels decline further, the Company will have reduced
availability on its line of credit due to decreased accounts
receivable balances. In addition, the Company would expect its
inventory levels to continue to decrease if sales levels decline
further, and this would also result in reduced availability on the
Company’s line of credit. In addition to this reduced
availability, in June 2018, the Company’s line of credit was
amended to reduce the maximum availability under the inventory
component of the line of credit over the remaining term of the line
of credit; until the availability under the inventory component of
the line of credit is $0. While this will not result in a material
impact to the Company’s availability all at once, it will
ultimately remove availability related to the Company’s
inventory under the line of credit. If availability under the
Company’s line of credit is not sufficient to satisfy its
working capital and capital expenditure requirements, the Company
will be required to obtain additional credit facilities or sell
additional equity securities, or delay capital expenditures, which
could have a material adverse effect on the business. 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.
Recently
Adopted Accounting Standards
The
Company adopted the following accounting standards set forth by the
Financial Accounting Standards Board
(“FASB”):
ASU 2016-02,
“Leases”,
issued in February 2016, 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.
ASU 2018-11, “Leases (Topic
842); Targeted Improvements”
, issued in July 2018,
provides a transition election to not restate comparative periods
for the effects of applying the new standard. This transition
election permits entities to change the date of initial application
to the beginning of the year of adoption and to recognize the
effects of applying the new standard as a cumulative-effect
adjustment to the opening balance of retained earnings. The Company
adopted the standards using the transition election and the
cumulative effect adjustment to the opening balance of retained
earnings did not have a material impact on the Company’s
financial conditions or its results of operations.
ASU 2018-20, “Leases (Topic
842)”
, issued in December 2018, clarifies that lessor
costs paid directly to a third-party by a lessee on behalf of the
lessor, are no longer required to be recognized in the lessor's
financial statements.
ASU 2019-01, Leases (Topic
842)”,
issued in March 2019 includes amendments that
are of a similar nature to the items typically addressed in the
Codification improvements project. However, FASB decided to issue a
separate update for the improvements related to Update 2016-02 to
increase stakeholders’ awareness of the amendments and to
expedite the improvements.
The
Company adopted ASU 2016-02, ASU 2018-11, ASU 2018-20 and ASU
2019-01 in the First Quarter 2019. In reviewing the Company’s
current leases, there were two operating leases that fell within
the scope of the standard, as amended, one for a copier in the
Company’s New York facility and another lease related to the
Company’s New Jersey facility. Starting in the First Quarter
2019, the Company is recognizing a lease liability and a
right-of-use asset on its balance sheet related to both of these
leases.
ASU 2017-11, “Earnings Per
Share, Distinguishing Liabilities from Equity, Derivatives and
Hedging”,
issued in July 2017, changes the
classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When
determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round
feature will no longer preclude equity classification when
assessing whether the instrument is indexed to an entity’s
own stock. The amendments also clarify existing disclosure
requirements for equity-classified instruments. As a result, a
freestanding equity-linked financial instrument (or embedded
conversion option) would not be accounted for as a derivative
liability at fair value as a result of the existence of a down
round feature. For freestanding equity classified financial
instruments, the amendments require entities that present earnings
per share (EPS) in accordance with Topic 260 to recognize the
effect of the down round feature when it is triggered. That effect
is treated as a dividend and as a reduction of income available to
common shareholders in basic EPS. Convertible instruments with
embedded conversion options that have down round features are now
subject to the specialized guidance for contingent beneficial
conversion features (in Subtopic 470-20, Debt—Debt with
Conversion and Other Options), including related EPS guidance (in
Topic 260). ASU 2017-11 is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2018. Early adoption is permitted. The Company adopted ASU 2017-11
in the First Quarter 2019 and the adoption did not have an impact
on its financial position or results of operations.
ASU 2018-07, “Compensation -
Stock Compensation/Improvements to Nonemployee Share-Based Payment
Accounting”,
issued in June 2018, expands the scope of
Topic 718 to include share-based payment transactions for acquiring
goods and services from nonemployees. The requirements of Topic 718
must be applied to nonemployee awards except for certain exemptions
specified in the amendment. ASU 2018-07 is effective for fiscal
years beginning after December 15, 2018, including interim
reporting periods within that fiscal year. Early adoption is
permitted, but no earlier than an entity’s adoption date of
Topic 606. The Company adopted ASU 2018-07 in the First Quarter
2019 and the adoption did not have a material impact, on its
financial position or results of operations considering the limited
occasions where the Company has issued share based awards to
nonemployees for goods or services.
Accounting
Standards Issued; Not Yet Adopted
ASU 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement”
,
issued in August 2018, adds, modifies and removes several
disclosure requirements relative to the three levels of inputs used
to measure fair value in accordance with Topic 820, “Fair
Value Measurement.” ASU 2018-13 is effective for fiscal years
beginning after December 15, 2019, including interim periods within
that fiscal year. Early adoption is permitted. The Company is
evaluating the impact of ASU 2018-13.
Any
other new accounting pronouncements recently issued, but not yet
effective, have been reviewed and determined to be not applicable
or were related to technical amendments or codification. As a
result, the adoption of such new accounting pronouncements, when
effective, is not expected to have a material effect on the
Company’s 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:
|
|
|
|
|
|
|
|
|
Raw
Materials
|
$
743,000
|
$
778,000
|
|
Work In
Process
|
170,000
|
184,000
|
|
Finished
Goods
|
192,000
|
325,000
|
|
Allowance for slow
moving and obsolete inventory
|
(280,000
)
|
(268,000
)
|
|
|
$
825,000
|
$
1,019,000
|
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, 2019 and
2018:
|
|
|
|
|
|
|
|
|
Warrants
|
2,000,000
|
2,000,000
|
|
Options
|
2,302,000
|
2,227,000
|
|
|
4,302,000
|
4,227,000
|
The
number of securities not included in the diluted net loss per share
for the three and six months ended June 30, 2019 was 4,302,000 as
their effect would have been anti-dilutive due to the net loss in
the three and six months ended June 30, 2019. The number of
securities not included in the diluted net loss per share for the
three and six months ended June 30, 2018 was 4,227,000 as their
effect would have been anti-dilutive due to the net loss in the
three and six months ended June 30, 2018.
Note D – Litigation/Legal Matters
ABMC v. Todd Bailey
The
Company has ongoing litigation in the Northern District of New York
against Premier Biotech Inc., and its principal, Todd Bailey
(“Bailey”) (together the “Defendants”) that
was filed in February 2017. 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
damages related to any profits and revenues that results from
action taken by the Defendants related to Company
customers.
In
early 2017, the Company became aware of actions taken by the
Defendants, including but not limited to, action taken specifically
related to a Company contract with a state agency (held by the
Company in excess of 10 years). 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
Vocational Industries, Inc. (a then vendor of the Company) and
Premier Biotech, Inc. in July 2017. This contract historically
accounted for 10-15% of the Company’s annual revenue. 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 continued to hold a contract with the agency through
September 30, 2017.
After
the award of the contract, the Company amended its complaint
against the Defendants to show actual damages caused by the
Defendants and to show proprietary and confidential information
(belonging to the Company) used by the Defendants in their response
to the RFP. This confidential information belonging to the Company
enabled the Defendants to comply with specifications of the RFP and
undercut the Company’s pricing. The Defendants filed a
response to the court opposing the Company’s supplemental
motion and the Company filed reply papers to the Defendants
response on November 2, 2017.
In
January 2018, the court ruled on the motion to dismiss (that was
filed by the Defendants in 2017). The court found that there was
jurisdiction over the Defendants. The court did not rule on the
other motions before them. In February 2018, the Company filed a
motion for reconsideration and for leave to serve a
supplemental/amended complaint. The new filing addressed (among
other things) the Company’s intent to further supplement its
complaint based on additional (subsequent) damage alleged by the
Company on the part of the Defendants. In September 2018, the court
ruled on the motions filed in February 2018. The court granted in
part and denied in part our motions for reconsideration. More
specifically, our motions supplementing claims of the
Bailey’s breach of contract and damages related to the same,
and Bailey’s misappropriation of the Company’s trade
secrets were granted. The Company’s motions related to unjust
enrichment and tortious interference were not granted.
Defendants’ motion to dismiss was once again denied. The
Company filed its supplemental motions as required on October 12,
2018. On November 1, 2018, the Defendants filed their response to
our supplemental motions. In January 2019, an initial conference
was held to discuss the case management plan and exchange mandatory
disclosures. On January 31, 2019, the court referred the case for
participation in the Mandatory Mediation Program.
In
January 2019, Bailey’s complaint previously filed in
Minnesota was transferred as a counter-claim in the Company’s
complaint against Bailey. Bailey is seeking deferred commissions of
$164,000 he alleges are owed to him by the Company. These amounts
were originally deferred under a deferred compensation program
initiated in 2013; a program in which Bailey was one of the
participants. The Company has responded to the Bailey counterclaim
and believes these amounts are not due to Bailey given the actions
indicated in the Company’s litigation. (See Note G-
Subsequent Event).
Note E – Line of Credit and Debt
|
|
|
|
|
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.
|
$
900,000
|
$
975,000
|
|
Crestmark Line of Credit:
3 year line of
credit maturing on June 22, 2020 with interest payable at a
variable rate based on WSJ Prime plus 3% 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 prior to natural expiration. Loan is collateralized
by first security interest in receivables and inventory and the
all-in interest rate as of the date of this report is
13.83%.
|
378,000
|
502,000
|
|
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 8.50% as of the
date of this report.
|
13,000
|
19,000
|
|
2018 Term Loan with Cherokee Financial
LLC:
1 year note at an annual interest rate of 12% paid
quarterly in arrears with first interest payment being made on May
15, 2018 and a balloon payment being due on February 15, 2019. Loan
was refinanced in February 2019.
|
0
|
150,000
|
|
2019 Term Loan with Cherokee Financial,
LLC:
1 year note at an annual fixed interest rate of 18%
paid quarterly in arrears with first interest payment being made on
May 15, 2019 and a balloon payment being due on February 15,
2020.
|
200,000
|
0
|
|
|
1,491,000
|
1,646,000
|
|
Less debt discount
& issuance costs (Cherokee Financial LLC loans)
|
(72,000
)
|
(111,000
)
|
|
Total debt,
net
|
1,419,000
|
1,535,000
|
|
|
|
|
|
Current
portion
|
1,418,000
|
739,000
|
|
Long-term portion,
net of current portion
|
$
1,000
|
$
796,000
|
LOAN AND SECURITY AGREEMENT WITH CHEROKEE FINANCIAL, LLC
(“CHEROKEE”)
On
March 26, 2015, the Company entered into a LSA with Cherokee (the
“Cherokee LSA”). The debt with Cherokee is
collateralized by a first security interest in real estate and
machinery and equipment. The Company received net proceeds of
$80,000 after $1,015,000 of debt payments, and $105,000 in other
expenses and fees. The expenses and fees (with the exception of the
interest expense) are being deducted from the balance on the
Cherokee LSA and are being amortized over the term of the debt (in
accordance with ASU No. 2015-03). Under the Cherokee LSA, the
Company was provided the sum of $1,200,000 in the form of a 5-year
Note at a fixed annual interest rate of 8%. The Company is making
interest only payments quarterly on the Cherokee LSA, 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 15,
2019; partially with proceeds received from a new, larger term loan
with Cherokee (See 2019 Term Loan with Cherokee within this Note
E). A final balloon payment is due on February 15, 2020. In
addition to the 8% interest, the Company pays 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
loan at any time with no penalty; except that a 1% administration
fee would be required to be paid to Cherokee to close out all
participations.
The
Company recognized $83,000 in interest expense related to the
Cherokee LSA in the six months ended June 30, 2019 (of which
$47,000 is debt issuance cost amortization recorded as interest
expense), and, $87,000 in interest expense related to the Cherokee
LSA in the six months ended June 30, 2018 (of which $47,000 is debt
issuance cost amortization recorded as interest expense). The
Company had $9,000 in accrued interest expense at June 30, 2019 and
$13,000 in accrued interest expense at June 30, 2018.
The
Company recognized $42,000 in interest expense related to the
Cherokee LSA in the three months ended June 30, 2019 (of which
$23,000 is debt issuance cost amortization recorded as interest
expense) and, $43,000 in interest expense related to the Cherokee
LSA in the three months ended June 30, 2018 (of which $23,000 is
debt issuance cost amortization recorded as interest
expense).
As of
June 30, 2019, the balance on the Cherokee LSA was $900,000;
however the discounted balance was $837,000. As of December 31,
2018, the balance on the Cherokee LSA was $975,000; however the
discounted balance was $866,000.
LINE OF CREDIT WITH CRESTMARK BANK
(“CRESTMARK”)
On June
29, 2015 (the “Closing Date”), the Company entered into
a Loan and Security Agreement (“LSA”) with Crestmark
related to a revolving line of credit (the “Crestmark
LOC”). The Crestmark LOC is used for working capital and
general corporate purposes and expires on June 22,
2020.
The
Crestmark LOC provides the Company with a revolving line of credit
up to $1,500,000 (“Maximum Amount”) with a minimum loan
balance requirement of $500,000. At June 30, 2019, the Company did
not meet this minimum loan balance requirement as our balance was
$378,000. Under the LSA, Crestmark has the right to calculate
interest on the minimum balance requirement rather than the actual
balance on the Crestmark LOC. The Crestmark LOC 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, or 100%
of Eligible Accounts Receivable. However, as a result of an
amendment executed on June 25, 2018, the amount available under the
inventory component of the line of credit was changed to 40% of
eligible inventory plus up to 10% of Eligible Generic Packaging
Components not to exceed the lesser of $250,000 (“Inventory
Sub-Cap Limit”) or 100% of Eligible Accounts Receivable. In
addition, the Inventory Sub-Cap Limit is being permanently reduced
by $10,000 per month as of July 1, 2018 and thereafter on the first
day of the month until the Inventory Sub-Cap Limit is reduced to
$0.
So long
as any obligations are due to Crestmark, the Company must comply
with a minimum Tangible Net Worth (“TNW”) Covenant. As
a result of an amendment executed on June 25, 2018, the TNW
covenant was reduced from $650,000 to $150,000 as of June 30, 2018.
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 still
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
has not complied with the TNW covenant since the year ended
December 31, 2017 but, has received waivers from Crestmark. As
consideration for the granting of the waiver for December 31, 2017,
Crestmark increased the interest rate on the Crestmark LOC from
Prime Rate plus 2% to Prime Rate plus 3%. The increase in interest
rate was effective as of May 1, 2018. Thereafter, and through the
quarter ended March 31, 2019, the Company was charged a fee of
$5,000 for each waiver. In June 2019, the Crestmark LSA was amended
to lower than TNW Covenant to (-$600,000) and to remove the
quarterly net income requirements indicated previously within this
paragraph. The Company is in compliance with the TNW covenant as of
June 30, 2019.
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 (that is not waived by
Crestmark), Crestmark is permitted to charge an Extra Rate. The
Extra Rate is the Company’s then current interest rate plus
12.75% per annum.
Interest on the
Crestmark LOC is at a variable rate based on the Prime Rate plus 3%
with a floor of 5.25%. As of June 30, 2019, the interest only rate
on the Crestmark LOC was 8.50%. As of June 30, 2019, with all fees
considered (the interest rate + an Annual Loan Fee of $7,500 + a
monthly maintenance fee of 0.30% of the actual average monthly
balance from the prior month), the interest rate on the Crestmark
LOC was 13.83%.
The
Company recognized $25,000 in interest expense related to the
Crestmark LOC in the six months ended June 30, 2019 ($0 of which is
debt issuance cost amortization recorded as interest expense). The
Company recognized $44,000 in interest expense related to the
Crestmark LOC in the six months ended June 30, 2018 (of which
$15,000 is debt issuance cost amortization recorded as interest
expense).
The
Company recognized $12,000 in interest expense related to the
Crestmark LOC in the three months ended June 30, 2019 ($0 of which
is debt issuance cost amortization recorded as interest expense).
The Company recognized $23,000 in interest expense related to the
Crestmark LOC in the three months ended June 30, 2018 (of which
$7,000 is debt issuance cost amortization recorded as interest
expense).
Given
the nature of the administration of the Crestmark LOC, at June 30,
2019, 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 LOC.
As of
June 30, 2019, the balance on the Crestmark LOC was $378,000, and
as of December 31, 2018, the balance on the Crestmark LOC was
$502,000.
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 and Promissory Note with
Crestmark. The amendments addressed the inclusion of the term loan
into the LSA and an extension of the Crestmark LOC. No terms of the
Crestmark LOC were changed in the amendment. The interest rate on
the term loan is the WSJ Prime Rate plus 3%; or 8.50% as of the
date of this report.
The
Company incurred $1,000 in interest expense in the six months ended
June 30, 2019 and $1,000 in interest expense in the six months
ended June 30, 2018 related to the Equipment Loan. The Company
incurred less than $1,000 in interest expense in both the three
months ended June 30, 2019 and June 30, 2018 related to the
Equipment Loan. The balance on the Equipment Loan is $13,000 at
June 30, 2019 and $19,000 at December 31, 2018.
2018 TERM LOAN WITH CHEROKEE
On
March 2, 2018, the Company entered into a one-year Loan Agreement
made as of February 15, 2018 (the “Closing Date”) with
Cherokee under which Cherokee provided the Company with $150,000
(the “2018 Cherokee Term Loan”). The proceeds from the
2018 Cherokee Term Loan were used by the Company to pay a $75,000
principal reduction payment to Cherokee that was due on February
15, 2018 and $1,000 in legal fees incurred by Cherokee. Net
proceeds (to be used for working capital and general business
purposes) were $74,000.
The
annual interest rate for the 2018 Cherokee Term Loan was 12% to be
paid quarterly in arrears with the first interest payment being
made on May 15, 2018. The 2018 Cherokee Term Loan was required to
be paid in full on February 15, 2019. In connection with the 2018
Cherokee Term Loan, the Company issued 150,000 restricted shares of
common stock to Cherokee on March 8, 2018.
The
Company recognized $3,000 in interest expense related to the 2018
Cherokee Term Loan in the six months ended June 30, 2019, (of which
$1,000 was debt issuance cost amortization recorded as interest
expense), and $14,000 in interest expense in the six months ended
June 30, 2018, (of which $8,000 was debt issuance cost amortization
recorded as interest expense). The Company recognized $0 in
interest expense related to the 2018 Cherokee Term Loan in the
three months ended June 30, 2019 (as the 2018 Cherokee Term Loan
was paid in full with the proceeds of the 2019 Cherokee Term Loan),
and $9,000 in interest expense in the three months ended June 30,
2018 (of which $5,000 was debt issuance costs recorded as interest
expense).
At June
30, 2019, the balance on the 2018 Cherokee Term Loan was $0, and at
December 31, 2018, the balance on the 2018 Cherokee Term Loan was
$150,000.
2019 TERM LOAN WITH CHEROKEE
On
February 25, 2019 (the “Closing Date”), the Company
entered into an agreement dated (and effective) February 13, 2019
(the “Agreement”) with Cherokee under which Cherokee is
providing the Company with a loan in the amount of $200,000 (the
“2019 Cherokee Term Loan”). The Agreement provided the
Company with $200,000; $150,000 of which was used to satisfy the
2018 Cherokee Term Loan and an additional $50,000 in gross
proceeds; $48,000 in net proceeds after Cherokee’s legal fees
in connection with the financing. The Company utilized the net
proceeds to pay a portion of the $75,000 principal reduction
payment under the Company’s Loan and Security Agreement with
Cherokee (with the remaining $27,000 being paid with cash on
hand).
The
annual interest rate under the new term loan is 18% paid quarterly
in arrears with the first interest payment being made on May 15,
2019. The loan is required to be paid in full on February 15, 2020
unless paid off earlier (with no penalty) at the Company’s
sole discretion. In connection with the 2019 Cherokee Term Loan,
the Company issued 200,000 restricted shares of common stock to
Cherokee in the three months ended March 31, 2019.
In the
event of default, this includes, but is not limited to, the
Company’s inability to make any payments due under the
Agreement, Cherokee has the right to increase the interest rate on
the financing to 20%, automatically add a delinquent payment
penalty of $20,000 to the outstanding principal and the Company
would be required to issue an additional 200,000 shares of
restricted common stock.
The
Company recognized $22,000 in interest expense related to the 2019
Cherokee Term Loan in the six months ended June 30, 2019, (of which
$7,000 is debt issuance cost amortization recorded as interest
expense), and $0 in interest expense in the six months ended June
30, 2018 (as the 2019 Cherokee Term Loan was not yet in place). The
Company recognized $13,000 in interest expense related to the 2019
Cherokee Term Loan in the three months ended June 30, 2019, (of
which $4,000 was debt issuance cost amortization recorded as
interest expense), and $0 in interest expense in the three months
ended June 30, 2018 (as the 2019 Cherokee Term Loan was not yet in
place). The Company had $5,000 in accrued interest related to the
2019 Cherokee Term Loan at June 30, 2019.
The
balance on the 2019 Term Loan is $200,000 at June 30, 2019
(however, the discounted balance is $191,000), and $0 at December
31, 2018 (as the facility was not in place at December 31,
2018).
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, 2019, the Company issued options to
purchase 20,000 shares of stock to each of its non-employee board
members as an annual stock option grant (for a total of 80,000
options) under the 2001 Plan. During the three months ended June
30, 2018, the Company issued options to purchase 20,000 shares of
stock to each of its 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, 2019 and June 30,
2018 is summarized as follows (the figures contained within the
tables below have been rounded to the nearest
thousand):
|
|
Six
months ended June 30, 2019
|
Six months ended
June 30, 2018
|
|
|
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value as
of
June
30,
2019
|
|
Weighted Average
Exercise Price
|
Aggregate Intrinsic
Value as of
June
30,
2018
|
|
Options outstanding
at beginning of period
|
2,222,000
|
$
0.13
|
|
2,147,000
|
$
0.13
|
|
|
Granted
|
80,000
|
$
0.07
|
|
80,000
|
$
0.13
|
|
|
Exercised
|
0
|
N/A
|
|
0
|
N/A
|
|
|
Cancelled/expired
|
0
|
N/A
|
|
0
|
N/A
|
|
Options outstanding
at end of period
|
2,302,000
|
$
0.13
|
$
1,000
|
2,227,000
|
$
0.13
|
$
5,000
|
Options exercisable
at end of period
|
2,142,000
|
$
0.13
|
|
2,147,000
|
$
0.13
|
|
The
Company recognized $3,000 in share based payment expense in the six
months ended June 30, 2019 and $7,000 in share based payment
expense in the six months ended June 30, 2018. The Company
recognized $1,000 in share based payment expense in the three
months ended June 30, 2019, and $3,000 in share based payment
expense in the three months ended June 30, 2018.
At June 30,
2019 there was approximately $4,000 of total unrecognized share
based payment expense related to stock options. The cost is
expected to be recognized over 11 months.
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, 2019 and June 30,
2018:
|
|
|
|
|
|
|
|
Volatility
|
85
%
|
79
%
|
|
Expected term
(years)
|
10 years
|
10 years
|
|
Risk-free interest
rate
|
2.01
%
|
2.90
%
|
|
Dividend
yield
|
0
%
|
0
%
|
Warrants
Warrant
activity for the six months ended June 30, 2019 and the six months
ended June 30, 2018 is summarized as follows:
|
|
Six months ended
June 30, 2019
|
Six months ended
June 30, 2018
|
|
|
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value as
of
June
30,
2019
|
|
Weighted Average
Exercise Price
|
Aggregate Intrinsic
Value as of
June
30,
2018
|
|
Warrants
outstanding at beginning of period
|
2,000,000
|
$
0.18
|
|
2,060,000
|
$
0.18
|
|
|
Granted
|
0
|
NA
|
|
0
|
0
|
|
|
Exercised
|
0
|
NA
|
|
0
|
0
|
|
|
Cancelled/expired
|
0
|
NA
|
|
60,000
|
$
0.18
|
|
|
Warrants
outstanding at end of period
|
2,000,000
|
$
0.18
|
None
|
2,000,000
|
$
0.18
|
None
|
|
Warrants
exercisable at end of period
|
2,000,000
|
$
0.18
|
|
2,000,000
|
$
0.18
|
|
In the
six months ended June 30, 2019 and June 30, 2018, 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, 2019 and June 30, 2018, the Company
recognized $0 in debt issuance and deferred finance costs related
to the issuance of the above warrants. As of June 30, 2019, there
was $0 of total unrecognized expense.
NOTE G - SUBSEQUENT EVENT
ABMC v. Todd
Bailey
On
August 5, 2019, the parties entered into a Settlement Agreement and
Release (“Settlement Agreement”) in which the parties
elected to resolve the litigation and settle any and all claims
made within the litigation. Neither party admitted to any of the
allegations contained within the ABMC v. Baily litigation
(including any allegations made by Bailey in his counterclaim). As
a result of the execution of the Settlement Agreement, both parties
have agreed to dismiss all claims made against each
other.
I
tem 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
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, 2018, 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
Sales
in the six months ended June 30, 2019 were negatively impacted by
the expiration of a government account in the second quarter of
2018 as well as the price competitive nature of the market in which
we sell our drugs of abuse products. Products manufactured outside
the United States continue to dominate one of our core markets,
Government/Law Enforcement; for which most of the business is
obtained via a bidding process that puts a tremendous amount of
value on the cheapest price. We continue to feel the impact of the
loss of another government account in late 2017. This account did
not impact the sales decline when comparing the six months ended
June 30, 2019 to the six months ended June 30, 2018; however, we do
believe that sales under this account would have continued to
improve over time and for this reason, the loss of this account
continues to negatively impact our ability to minimize declines
and/or grow sales.
We have
brought on new products and service offerings to diversify our
revenue stream through third party relationships. These new
products and services include products for the detection of alcohol
and alternative sample options for drug testing (such as lab based
oral fluid testing and hair testing). We are also now offering
customers lower-cost alternatives for onsite drug testing. And in
late 2018, we began distributing point of care products for certain
infectious diseases.
In May
2019, our Consent Decree of Permanent Injunction (Consent Decree)
with the U.S. Food and Drug Administration (FDA) was vacated and
the case was closed. This action resolved a long-standing inability
for us to market and sell oral fluid drug tests in the employment
market. We are now allowed to sell oral fluid drugs tests in the
employment and insurance markets under the limited exemption set
forth by the FDA on July 11, 2017. We have been unable to sell oral
fluid drug tests in the employment market since 2013 (although we
have continued to sell OralStat in the U.S. forensic markets and in
markets outside the United States). We are hopeful that gaining
access to this market again will enable us to see near term revenue
growth and in the longer-term, enable us to add significantly to
our annual revenue.
We are
focusing our efforts on 1) further penetration of markets with new
products, including, but not limited to, the infectious disease
products we are now offering, 2) marketing oral fluid drug tests in
the employment market and 3) contract manufacturing opportunities;
one of which started generating sales in the three months ended
March 31, 2019.
Operating expenses
continued to decline when comparing six and three months ended June
30, 2019 with the three and six months ended June 30, 2018. This is
a result of our continued efforts to ensure that expenses are in
line with revenue. In the year ended December 31, 2018, we
consolidated job responsibilities in certain areas of the Company
as a result of employee retirement and other departures; this
consolidation enabled us to implement personnel reductions. We also
continued to maintain a salary deferral program for our sole
executive officer and another member of senior management
throughout the quarter ended June 30, 2019. The salary deferral
program consists of a 10% salary deferral for our Chief Executive
Officer/Principal Financial Officer Melissa Waterhouse and our
non-executive VP Operations. The salary deferral level was reduced
from 20% as of October 1, 2018 given the length of time the
deferral has been in place and the increasing balances on the
deferred compensation. As of June 30, 2019, we had total deferred
compensation owed to these two individuals in the amount of
$183,000. As cash flow from operations allows, we intend to repay
portions of the deferred compensation, however we did not make any
payments on deferred compensation in the six months ended June 30,
2019 or the six months ended June 30, 2018. We expect the salary
deferral program will continue for an undetermined period of
time.
Our
continued existence is dependent upon several factors, including
our ability to: 1) raise revenue levels even though we have lost
significant accounts and the market continues to be infiltrated by
product manufactured outside of the United States, 2) control
operational 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, 2019
compared to the six months ended June 30, 2018
NET SALES:
Net sales for six months
ended June 30, 2019 decreased 10.9%, when compared to net sales in
the six months ended June 30, 2018. Decreased international sales,
decreased government sales (due to the expiration of an account in
the second quarter of 2018) and other decreased sales in various
other markets were partially offset by increased contract
manufacturing sales (due to a new contract manufacturing customer)
and increased regional clinical sales.
GROSS PROFIT:
Gross profit decreased to
32.5% of net sales in the six months ended June 30, 2019 from 38.3%
of net sales in the six months ended June 30, 2018. The decline in
gross profit stems primarily from the fact that decreased sales
resulted in a decrease in the number of testing strips made and
product assembled and packaged for shipment when comparing the two
six-month periods. The majority of our labor and overhead costs are
fixed. When revenues decline, fewer testing strips are produced;
this results in a manufacturing inefficiency (i.e. less fixed
overhead cost absorption and a higher amount being expensed through
cost of goods). In addition, the low product prices from foreign
manufacturers have required us to decrease pricing of our own
products to be more competitive. And finally, the lower cost
product alternative is generally sold at margins lower than our
production margins. We have taken actions to adjust our production
schedules to try to mitigate future inefficiencies and, we closely
examine our gross profit margins on our manufactured products and
the products we distribute.
Operating expenses
decreased 13.8%, in the six months ended June 30, 2019 compared to
the six months ended June 30, 2018. Expenses in all operational
areas of the Company decreased. More specifically:
Research and development (“R&D”)
R&D
expense decreased 11.4% when comparing the six months ended June
30, 2019 with the six months ended June 30, 2018. Decreased FDA
compliance costs (associated with timing of facility registration
fees) were the primary reason for the decline in expenses along
with a decrease in supplies and materials. All other expenses
remained relatively consistent when comparing the two six-month
periods. In the six months ended June 30, 2019,
our
R&D department primarily focused their efforts on the
enhancement of our current products and the evaluation of potential
contract manufacturing opportunities as well as the final product
development of our new contract manufacturing
customer.
Selling and marketing
Selling
and marketing expense in the six months ended June 30, 2019
decreased 29.4% when compared to the six months ended June 30,
2018. Reductions in sales & marketing salaries, benefits and
travel (due to decreased sales and marketing personnel) were the
primary reasons for the decline. All other expenses remained
relatively consistent when comparing the two six-month periods. In
the six months ended June 30, 2019, we promoted additional products
(through relationships with third parties) for the detection of
alcohol, alternative sample options for drug testing (such as lab
based oral fluid testing and hair testing), lower-cost alternatives
for onsite drug testing and point of care products for infectious
disease. The addition of these offerings did not result in
increased selling and marketing expenses. Starting in June 2019, we
also began our efforts to re-enter the employment market with oral
fluid drug tests. We will continue to take all steps necessary to
ensure selling and marketing expenditures are in line with
sales.
General and administrative (“G&A”)
G&A
expense decreased 7.3% in the six months ended June 30, 2019 when
compared to G&A expense in the six months ended June 30, 2018.
Decreased costs associated with administrative and quality
assurance employees (due to fewer employees and/or the
consolidation of job responsibilities), consultant fees, insurance
costs, ISO certification fees (due to the timing of our ISO audit
this year versus last year and the fact that 2018 was a
recertification audit), were partially offset by increased
warehouse salaries (as a result of reclassification of an
employee’s salaries into warehouse due to dual function), QA
supplies and materials, accounting fees, legal fees (associated
with timing of activities in the ABMC vs. Bailey litigation), and
fees related to patents. Share based payment expense also declined
to $3,000 in the six months ended June 30, 2019 from $7,000 in the
six months ended June 30, 2018.
Other income and
expense:
Other income and expense of $35,000 in the six
months ended June 30, 2019 consisted of interest expense associated
with our credit facilities (our line of credit and equipment loan
with Crestmark Bank and our two loans with Cherokee Financial, LLC)
offset by other income from proceeds for an insurance claim related
to our New Jersey facility (a claim that resulted from actions of a
service vendor) and a gain on an accrual for a contingent
liability. Other income and expense of $(130,000) in the six months
ended June 30, 2018 consisted of interest expense associated with
our credit facilities (our line of credit and equipment loan with
Crestmark Bank and our two loans with Cherokee Financial, LLC),
offset by other income related to gains on certain liabilities and
a small amount of interest income.
Results
of operations for the three months ended June 30,
2019,
compared
to the three months ended June 30, 2018
NET SALES:
Net sales for the three
months ended June 30, 2019 decreased 10.4%, when compared to the
three months ended June 30, 2018. Decreased international sales,
decreased government sales (due to the expiration of an account in
the second quarter of 2018) and other decreased sales in various
other markets were partially offset by increased contract
manufacturing sales (due to a new contract manufacturing customer)
and increased regional government sales.
GROSS PROFIT:
Gross profit decreased to
31.9% of net sales in the three months ended June 30, 2019, from
40.9% of net sales in the three months ended June 30, 2018. The
decline in gross profit stems primarily from the fact that
decreased sales resulted in a decrease in the number of testing
strips made and product assembled and packaged for shipment when
comparing the two three-month periods. The majority of our labor
and overhead costs are fixed. When revenues decline, fewer testing
strips are produced; this results in a manufacturing inefficiency
(i.e. less fixed overhead cost absorption and a higher amount being
expensed through cost of goods). In addition, the low product
prices from foreign manufacturers have required us to decrease
pricing of our own products to be more competitive. And finally,
the lower cost product alternative is generally sold at margins
lower than our production margins. We have taken actions to adjust
our production schedules to try to mitigate future inefficiencies
and, we closely examine our gross profit margins on our
manufactured products and the products we distribute.
Operating expenses
decreased 9.8% in the three months ended June 30, 2019 compared to
the three months ended June 30, 2018. Selling and marketing and
general and administrative expenses were nominally offset by
increased expenses in research and development. More
specifically:
Research and development (“R&D”)
R&D
expense increased 5.3% when comparing the three months ended June
30, 2019 with the three months ended June 30, 2018. Slightly higher
utility costs in our New Jersey facility were the primary reason
for the slight increase in expense. All other expenses remained
relatively consistent when comparing the two three-month periods.
In the three months ended June 30, 2019, our R&D department
primarily focused their efforts on the evaluation and development
of potential contract manufacturing opportunities as well as
maintenance of our current product lines.
Selling and marketing
Selling
and marketing expense in the three months ended June 30, 2019
decreased 27.7% when compared to the three months ended June 30,
2018. Reductions in sales & marketing salaries, benefits and
travel (due to decreased sales and marketing personnel) were the
primary reasons for the decline. All other expenses remained
relatively consistent when comparing the two three-month periods.
In the three months ended June 30, 2019, we promoted additional
products (through relationships with third parties) for the
detection of alcohol, alternative sample options for drug testing
(such as lab based oral fluid testing and hair testing), lower-cost
alternatives for onsite drug testing and point of care products for
infectious disease. The addition of these offerings did not result
in increased selling and marketing expenses. Starting in June 2019,
we also began our efforts to re-enter the employment market with
oral fluid drug tests. We will continue to take all steps necessary
to ensure selling and marketing expenditures are in line with
sales.
General and administrative (“G&A”)
G&A
expense decreased 2.9% in the three months ended June 30, 2019 when
compared to G&A expense in the three months ended June 30,
2018. Decreased costs associated with administrative and quality
assurance employees (due to fewer employees and/or the
consolidation of job responsibilities), consultant fees, and
insurance costs, were partially offset by increased legal fees
(associated with timing of activities in the ABMC vs. Bailey
litigation),
ISO
certification fees (due to the timing of our ISO audit this year
versus last year), bank fees and warehouse salaries (as a result of
reclassification of an employee’s salaries into warehouse due
to dual function). Share based payment expense also declined to
$1,000 in the three months ended June 30, 2019 from $3,000 in the
three months ended June 30, 2018.
Other income and
expense:
Other income and expense of $101,000 in the three
months ended June 30, 2019 consisted of interest expense associated
with our credit facilities (our line of credit and equipment loan
with Crestmark Bank and our two loans with Cherokee Financial, LLC)
offset by other income from proceeds for an insurance claim related
to our New Jersey facility (a claim that resulted from actions of a
service vendor) and a gain on an accrued contingent liability.
Other income and expense of $(71,000) in the three months ended
June 30, 2018 consisted of interest expense associated with our
credit facilities (our line of credit and equipment loan with
Crestmark Bank and our two loans with Cherokee Financial, LLC),
offset by other income related to gains on certain liabilities and
a small amount of interest income.
Liquidity and Capital Resources as of June 30, 2019
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, legal costs, and effective management
of inventory levels and production levels in response to sales
history and forecasts. We expect to devote capital resources
related to selling and marketing initiatives. We are examining
other growth opportunities including strategic alliances. Given our
current and historical cash position, 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, 2018 were
prepared assuming we will continue as a going concern.
On
December 20, 2018, we entered into a Securities Purchase Agreement
(the “Purchase Agreement”) with Chaim Davis (the
Chairman of our Board of Directors) and certain other accredited
investors (altogether the “Investors”), under which we
issued and sold to the Investors in a private placement (the
“Private Placement”) 2,000,000 units (the
“Units”). We closed on the Private Placement on
December 24, 2018. Each Unit consists of one (1) share of the
Company’s common stock, par value $0.01 per share
(“Common Share”), at a price per Unit of $0.10 (the
“Purchase Price”) for net proceeds of $200,000 as there
were no expenses related to the Private Placement. We did not
utilize a placement agent for the Private Placement. The net
proceeds were used for working capital and general corporate
purposes.
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 2020. At June
30, 2019, we have negative Stockholders’ Equity of $419,000.
Our loan and security agreement with Cherokee Financial, LLC
expires on February 15, 2020 and our line of credit expires on June
22, 2020. Our 2019 Term Loan with Cherokee Financial LLC expires on
February 15, 2020. As of June 30, 2019, all amounts due under our
Loan and Security Agreement with Cherokee Financial, LLC were
included in our short-term debt given the facility expires in less
than 12 months. Although our line of credit has a maximum
availability of $1,500,000, the amount available under our line of
credit is much lower as it is based upon the balance of our
accounts receivable and inventory. As of June 30, 2019, 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 continue to decline, 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 continue to decrease if sales levels
continue to decline further, which would result in further reduced
availability on our line of credit. In addition to decreased
inventory value, as a result of an amendment executed on June 25,
2018, the amount available under the inventory component of the
line of credit was changed to 40% of eligible inventory plus up to
10% of Eligible Generic Packaging Components not to exceed the
lesser of $250,000 (“Inventory Sub-Cap Limit”) or 100%
of Eligible Accounts Receivable. In addition, starting July 1,
2018, the Inventory Sub-Cap Limit is being permanently reduced by
$10,000 per month on the first day of each month until the
Inventory Sub-Cap Limit is reduced to $0. Although this
“staggered” reduction did not have a material immediate
impact on our availability under the line of credit, it will
eventually result in no availability under the line of credit
related to inventory and the line of credit will be an accounts
receivable based line only.
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 which
could have a material adverse effect on our business. 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, 2019, we had the following debt/credit
facilities:
|
Facility
|
Debtor
|
Balance as
of
June
30,
2019
|
|
Loan and Security
Agreement
|
Cherokee Financial,
LLC
|
$
900,000
|
|
Revolving Line of
Credit
|
Crestmark
Bank
|
$
378,000
|
|
Equipment
Loan
|
Crestmark
Bank
|
$
13,000
|
|
Term
Loan
|
Cherokee Financial,
LLC
|
$
200,000
|
|
Total
Debt
|
|
$
1,491,000
|
Working Capital
At the
end of the six months ended June 30, 2019, we are operating at a
working capital deficit of $1,239,000; this is a greater than the
working capital deficit of $212,000 reported for the year ended
December 31, 2018. This increase in our working capital deficit was
primarily a result of all amounts under our Loan and Security
Agreement (with Cherokee Financial, LLC) being recorded as short
term liability instead of a significant portion of the loan being
recorded as a long-term liability (due to the upcoming expiration
of the facility in February 2020). Decreased sales also continue to
negatively impact our working capital. We have historically
satisfied working capital requirements through cash from operations
and bank 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 have
taken steps (and will continue to take steps) to ensure that
operating expenses and manufacturing costs remain in line with
sales levels, however, we have been incurring increased costs
related to litigation (although our ongoing litigation was settled
on August 5, 2019 (see Note G – Subsequent Event), our line
of credit (due to covenant non-compliance that has been previously
waived by our lender) and other administrative requirements. We
have consolidated job responsibilities in other areas of the
Company and this enabled us to implement personnel reductions. In
other efforts to reduce cash requirements, we have issued shares of
restricted stock in lieu of cash. More specifically, we issued (1)
277,778 restricted shares of common stock to Landmark Pegasus, Inc.
in connection with an extension of our Financial Advisory Agreement
in June 2018, and (2) 135,228 restricted shares of common stock to
our Chairman of the Board for his attendance at two meetings of our
Board of Directors in 2018 and two meetings in the six months ended
June 30, 2019 and (3) 200,000 restricted shares of common stock to
Cherokee Financial, LLC in connection with our 2019 Term Loan. In
addition, in December 2018, we closed on a private placement of
2,000,000 shares of our common stock resulting in net proceeds of
$200,000.We expect to issue additional restricted shares of common
stock for attendance at meetings of the Board of Directors if a
director (or directors) choose(s) payment in shares in lieu of cash
as their form of payment.
The
continuous decline in sales results in lower cash balances and
lower availability on our line of credit at times. Two large
government accounts (one of which was in the year ended December
31, 2017 and the other in the year ended December 31, 2016) were
lost due to alleged actions on the part of a former
employee/consultant. These two accounts represented approximately
$1,000,000 in annual sales to the Company (of which $718,000
impacted sales revenues in Fiscal 2018; when compared to Fiscal
2017). Also, in the early part of Fiscal 2018, we had another
government contract expire and this contributed to the sales
decline in the three and six months ended June 30, 2019 (when
compared to the three and six months ended June 30, 2018). To
address the declines, we are promoting 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) lower-cost alternatives for onsite drug testing and point
of care products for infectious disease. In June 2019, we also
commenced efforts to re-enter the employment market selling oral
fluid drug tests since our Consent Decree was vacated in late May
2019. And finally, we are currently discussing a number of contract
manufacturing opportunities with other entities; one of which
started to generate sales in the six months ended June 30, 2019,
which did partially offset the sales declines in other
areas.
Our
ability to be in compliance with our obligations under our current
credit facilities will depend on our ability to replace lost sales
and further increase sales. Our ability to repay our current debt
(all of which is due within the next 12 months) may also be
affected by general economic, financial, competitive, regulatory,
legal, business and other factors beyond our control, including
those discussed herein. If we are unable to meet our credit
facility obligations, we would be required to raise money through
new equity and/or debt financing(s) and, there is no assurance that
we would be able to find new financing, or that any new financing
would be at favorable terms.
A
failure to comply with the TNW covenant under our Crestmark LOC (a
failure that is not waived by Crestmark) could result in an event
of default, which, if not cured, could result in the Company being
required to pay much 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. There is also no assurance
that we could obtain alternative debt facilities. 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.
As of
the date of this report, our credit facilities with Cherokee
Financial, LLC have expiration dates of less than 12 months. Our
total debt at June 30, 2019 with Cherokee Financial, LLC is
$1,100,000. We do not expect cash from operations within the next
12 months to be sufficient to pay the amounts due under these
credit facilities. We are currently in discussions with Cherokee
Financial, LLC regarding a new facility that would refinance the
amounts due under their current credit facilities or an extension
of our current facility. Our line of credit facility with Crestmark
Bank expires in June 2020. We have not had such discussions with
Crestmark Bank; however, we would expect to begin discussions in
the near future.
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, 3), we are
unable to utilize equity as a form of payment in lieu of cash, or
4) 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.
Although we have good relationships with our current creditors and
we do believe that we will be able to refinance our current credit
facilities, if we are unable to refinance our debt with Cherokee
Financial, LLC, this would result in a default which could result
in Cherokee Financial, LLC exercising their rights which includes,
but is not limited to, forfeiture of the collateral assets under
their facilities. A default under our facilities with Cherokee
Financial, LLC would also create a cross-default under our line of
Credit with Crestmark Bank. Such default could also result in
Crestmark Bank exercising their rights under our line of credit
which includes, but it not limited to, forfeiture of the collateral
assets under the line of credit.