Item 1. Condensed Financial
Statements
American Bio Medica Corporation
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ASSETS
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Current
assets
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Cash and cash
equivalents
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$15,000
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$113,000
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Accounts
receivable, net of allowance for doubtful accounts of $34,000 at
September 30, 2019 and $36,000 at December 31, 2018
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492,000
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452,000
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Inventory, net of
allowance of $286,000 at September 30, 2019 and $268,000 at
December 31, 2018
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890,000
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1,019,000
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Prepaid expenses
and other current assets
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24,000
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29,000
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Right of use asset
– operating leases
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12,000
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0
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Total current
assets
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1,433,000
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1,613,000
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Property, plant and
equipment, net
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663,000
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718,000
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Patents,
net
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118,000
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123,000
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Right of use asset
– operating leases
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11,000
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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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$2,246,000
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$2,475,000
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LIABILITIES
AND STOCKHOLDERS’ DEFICIT
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Current
liabilities
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Accounts
payable
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$606,000
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$359,000
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Accrued expenses
and other current liabilities
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534,000
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449,000
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Right of use
liability – operating leases
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12,000
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0
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Wages
payable
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136,000
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278,000
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Line of
credit
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431,000
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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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1,079,000
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237,000
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Total current
liabilities
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2,798,000
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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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0
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796,000
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Right of use
liability – operating leases
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11,000
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0
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2,809,000
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2,621,000
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COMMITMENTS AND
CONTINGENCIES
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Stockholders'
deficit:
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Preferred stock;
par value $.01 per share; 5,000,000 shares authorized, none issued
and outstanding at September 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 September 30, 2019 and 32,279,368 issued
and outstanding at 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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(22,313,000)
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(21,873,000)
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Total
stockholders’ deficit
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(563,000)
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(146,000)
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Total liabilities
and stockholders’ deficit
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$2,246,000
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$2,475,000
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The accompanying notes are an integral part of the condensed
financial statements
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American Bio Medica Corporation
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Condensed Statements of Operations
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For The
Nine Months Ended
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Net
sales
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$2,775,000
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$2,988,000
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Cost of goods
sold
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1,805,000
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1,815,000
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Gross
profit
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970,000
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1,173,000
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Operating
expenses:
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Research and
development
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62,000
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64,000
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Selling and
marketing
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350,000
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435,000
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General and
administrative
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968,000
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1,087,000
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1,380,000
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1,586,000
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Operating
loss
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(410,000)
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(413,000)
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Other income /
(expense):
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Interest
expense
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(200,000)
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(217,000)
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Interest
Income
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0
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2,000
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Other income,
net
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172,000
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15,000
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(28,000)
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(200,000)
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(438,000)
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(613,000)
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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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$(440,000)
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$(615,000)
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Basic
and diluted loss per common share
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$(0.01)
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$(0.02)
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Weighted average
number of shares outstanding – basic &
diluted
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32,479,123
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30,001,598
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The accompanying notes are an integral part of the condensed
financial statements
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American Bio Medica Corporation
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Condensed Statements of Operations
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For The
Three Months Ended
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Net
sales
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$895,000
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$878,000
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Cost of goods
sold
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536,000
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514,000
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Gross
profit
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359,000
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364,000
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Operating
expenses:
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Research and
development
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23,000
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20,000
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Selling and
marketing
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131,000
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125,000
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General and
administrative
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286,000
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351,000
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440,000
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496,000
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Operating
loss
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(81,000)
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(132,000)
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Other income /
(expense):
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Interest
expense
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(66,000)
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(71,000)
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Other income,
net
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3,000
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1,000
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(63,000)
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(70,000)
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(144,000)
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(202,000)
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Income tax benefit
/ (expense)
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0
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0
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$(144,000)
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$(202,000)
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Basic
and diluted loss per common share
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$(0.00)
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$(0.01)
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Weighted average
number of shares outstanding – basic &
diluted
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32,545,776
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30,241,313
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The accompanying notes are an integral part of the condensed
financial statements
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American Bio Medica Corporation
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Condensed Statements of Cash Flows
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For The
Nine Months Ended
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Cash flows from operating activities:
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Net
loss
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$(440,000)
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$(615,000)
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Depreciation
and amortization
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61,000
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61,000
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Amortization
of debt issuance costs
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82,000
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98,000
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Allowance
for doubtful accounts
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(2,000)
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3,000
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Provision
for slow moving and obsolete inventory
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63,000
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14,000
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Share-based
payment expense
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4,000
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8,000
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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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(38,000)
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(202,000)
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Inventory
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66,000
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209,000
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Prepaid
expenses and other current assets
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11,000
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51,000
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Accounts
payable
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247,000
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85,000
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Accrued
expenses and other current liabilities
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78,000
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114,000
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Wages
payable
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(142,000)
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0
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Net cash used in operating
activities
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(5,000)
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(171,000)
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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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(21,000)
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Net
cash used in investing activities
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0
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(21,000)
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Cash flows from financing activities:
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Proceeds
from debt financing
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62,000
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150,000
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Payments
on debt financing
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(85,000)
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(84,000)
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Proceeds
from lines of credit
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2,876,000
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3,194,000
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Payments
on lines of credit
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(2,946,000)
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(3,045,000)
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Net
cash (used in) / provided by financing activities
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(93,000)
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215,000
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Net change in cash and cash equivalents
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(98,000)
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23,000
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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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$15,000
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$59,000
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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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$24,000
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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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$21,000
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Cash
paid during period for interest
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$117,000
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$118,000
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Cash
paid / ( received) 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
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Notes
to condensed financial statements (unaudited)
September 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 September 30, 2019, and
the results of operations for the three and nine month periods
ended September 30, 2019 and September 30, 2018 and cash flows for
the nine month periods ended September 30, 2019 and September 30,
2018.
Operating results
for the nine months ended September 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 nine months ended September 30, 2019, 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 November 2020. The
Company’s current line of credit matures on June 22, 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 September 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 September 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 or an extension of the current
facility.
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’s inventory
levels have been declining each consecutive quarter for some time
(with the exception of the inventory level in the three months
ended September 30, 2019 which, did increase from inventory levels
in the three months ended June 30, 2019 due to manufacturing
activities in response to orders). We are also reporting increased
sales in the three months ended September 30, 2019 when compared to
sales in the three months ended September 30, 2018. Regardless of
the increased inventory and the increased sales just discussed, we
would expect inventory levels to decrease if sales levels decline;
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 are three operating leases that fall within
the scope of the standard, as amended, a lease for a copier in the
Company’s New York facility, a lease related to the
Company’s New Jersey facility and a lease for a copier in the
Company’s New Jersey facility (implemented September 2019).
The Company is recognizing a lease liability and a right-of-use
asset on its balance sheet related to these three
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:
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|
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Raw
Materials
|
$741,000
|
$778,000
|
|
Work In
Process
|
183,000
|
184,000
|
|
Finished
Goods
|
252,000
|
325,000
|
|
Allowance for slow
moving and obsolete inventory
|
(286,000)
|
(268,000)
|
|
|
$890,000
|
$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 September 30, 2019 and
2018:
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|
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Warrants
|
2,000,000
|
2,000,000
|
|
Options
|
2,252,000
|
2,222,000
|
|
|
4,252,000
|
4,222,000
|
The
number of securities not included in the diluted net loss per share
for the three and nine months ended September 30, 2019 was
4,252,000, 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 nine months ended September 30, 2018 was
4,222,000, as their effect would have been anti-dilutive due to the
net loss in each period.
Note D – Litigation/Legal Matters
ABMC v. Todd Bailey
On
August 5, 2019, the Company settled litigation with a former
employee/consultant (Todd Bailey; a former Vice President, Sales
& Marketing and sales consultant of the Company until December
23, 2016; hereinafter referred to as “Bailey”). The
litigation was filed by the Company in the Northern District of New
York in February 2017. The Company’s complaint sought damages
related to profits and revenues that resulted from actions taken by
the Defendant related to Company customers. The settlement also
addressed a counter-claim filed by Bailey in October 2017 (filed
originally in Minnesota but, transferred to the Norther District of
New York in January 2019). Bailey was seeking deferred commissions
in the amount of $164,000 that he alleged were 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 believed the amount sought
was not due to Bailey given the actions indicated in the
Company’s litigation.
Under
the settlement, both 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). Both parties also agreed to dismiss all claims made
against each other.
Note E – Line of Credit and Debt
|
|
|
September 30,
2019
|
December 31,
2018
|
|
Loan and Security Agreement with Cherokee
Financial, LLC: 5 year note at a fixed 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
|
$975,00
|
|
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
13.3%.
|
|
431,000
|
502,000
|
|
Crestmark Equipment Loan: 38 month
equipment loan related to the purchase of manufacturing equipment,
at an interest rate of WSJ Prime Rate plus 3%; or 7.75% as of the
date of this report.
|
|
10,000
|
19,000
|
|
2018 Term Loan with Cherokee Financial
LLC: 1 year note at an
annual fixed 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
|
|
July 2019 Term Loan with Chaim Davis, et
al: Notes at an annual fixed interest rate of 7.5% paid
monthly in arrears with the first payment being made on September
1, 2019 and the final payment being made on October 1,
2020.
|
|
13,000
|
0
|
|
|
|
$1,554,000
(44,000)
|
$1,646,000
(111,000)
|
|
Less
debt discount & issuance costs (Cherokee Financial LLC
loans)
|
|
$1,510,000
|
$1,535,000
|
|
Total
debt, net
|
|
|
|
|
|
|
|
|
|
Current
portion
|
|
$1,510,000
|
$739,000
|
|
Long-term
portion, net of current portion
|
|
$0
|
$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. 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 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). 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 $125,000 in interest expense related to the
Cherokee LSA in the nine months ended September 30, 2019 (of which
$70,000 is debt issuance cost amortization recorded as interest
expense), and, $130,000 in interest expense related to the Cherokee
LSA in the nine months ended September 30, 2018 (of which $70,000
is debt issuance cost amortization recorded as interest expense).
The Company had $9,000 in accrued interest expense at September 30,
2019 and $13,000 in accrued interest expense at September 30,
2018.
The
Company recognized $42,000 in interest expense related to the
Cherokee LSA in the three months ended September 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 September 30, 2018 (of which $23,000
is debt issuance cost amortization recorded as interest
expense).
As of
September 30, 2019, the balance on the Cherokee LSA was $900,000;
however the discounted balance was $861,000. 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 September 30, 2019, the Company
did not meet this minimum loan balance requirement as our balance
was $431,000. 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 in June 2019, the TNW covenant
was reduced from $150,000 to $(600,000) as of June 30, 2019. 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 was not in compliance with the TNW covenant at September
30, 2019 and with the exception of the quarter ended June 30, 2019;
the Company has not been in compliance with prior TNW covenants
since December 31, 2017. As of the date of this report, the Company
is in the process of obtaining a waiver from Crestmark. Due to
internal requirements within Crestmark, the waiver could not be
obtained prior to the date of this report. The Company expects to
be charged a fee of $5,000 for the receipt of this latest waiver
(as this has been the fee charged for all prior
waivers).
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 September 30, 2019, the interest only
rate on the Crestmark LOC was 8.00%; however, as of the date of
this report, the interest only rate on the Crestmark LOC was 7.75%
due to a decrease in the Prime Rate effective October 31, 2019. As
of the date of this report, 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 13.3%.
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.
The
Company recognized $36,000 in interest expense related to the
Crestmark LOC in the nine months ended September 30, 2019 ($0 of
which is debt issuance cost amortization recorded as interest
expense). The Company recognized $61,000 in interest expense
related to the Crestmark LOC in the nine months ended September 30,
2018 (of which $15,000 is debt issuance cost amortization recorded
as interest expense).
The
Company recognized $11,000 in interest expense related to the
Crestmark LOC in the three months ended September 30, 2019 (of
which $0 is debt issuance cost amortization recorded as interest
expense). The Company recognized $18,000 in interest expense
related to the Crestmark LOC in the three months ended September
30, 2018 (of which $0 is debt issuance cost amortization recorded
as interest expense).
Given
the nature of the administration of the Crestmark LOC, at September
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
September 30, 2019, the balance on the Crestmark LOC was $431,000,
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 7.75% as of the
date of this report.
The Company
incurred $1,000 in interest expense in the nine months ended
September 30, 2019 and $2,000 in interest expense in the nine
months ended September 30, 2018 related to the Equipment Loan. The
Company incurred less than $1,000 in interest expense in both the
three months ended September 30, 2019 and September 30, 2018
related to the Equipment Loan. The balance on the Equipment Loan is
$10,000 at September 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 nine months ended September 30, 2019, (of
which $2,000 was debt issuance cost amortization recorded as
interest expense), and $24,000 in interest expense related to the
Cherokee Term Loan in the nine months ended September 30, 2018 (of
which $13,000 was debt issuance costs recorded as interest
expense). The Company recognized $0 in interest expense related to
the 2018 Cherokee Term Loan in the three months ended September 30,
2019 (as the 2018 Cherokee Term Loan was paid in full with the
proceeds of the 2019 Cherokee Term Loan), and recognized $9,000 in
interest expense related to the Cherokee Term Loan in the three
months ended September 30, 2018 (of which $5,000 was debt issuance
costs recorded as interest expense)
At
September 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
provided the Company with a loan in the amount of $200,000 (the
“2019 Cherokee Term Loan”). Gross proceeds of the 2019
Cherokee Term Loan were $200,000; $150,000 of which was used to
satisfy the 2018 Cherokee Term Loan, $48,000 (which was used to pay
a portion of the $75,000 principal reduction payment; with the
remaining $27,000 being paid with cash on hand) and $2,000 which
was used to pay Cherokee’s legal fees in connection with the
financing.
The
annual interest rate under the 2019 Cherokee Term Loan is 18%
(fixed) paid quarterly in arrears with the first interest payment
being made on May 15, 2019 and the latest interest payment being
made in August 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 $35,000 in interest expense related to the 2019
Cherokee Term Loan in the nine months ended September 30, 2019, (of
which $11,000 is debt issuance cost amortization recorded as
interest expense), and $0 in interest expense in the nine months
ended September 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 September 30 2019 (of
which $4,000 is debt issuance cost amortization recorded as
interest expense), and $0 in interest expense in the three months
ended September 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 September 30, 2019 and $0 in accrued interest expense
(as the 2019 Cherokee Term Loan was not yet in place).
The
balance on the 2019 Term Loan is $200,000 at September 30, 2019
(however, the discounted balance is $195,000), and $0 at December
31, 2018 (as the facility was not in place at December 31,
2018).
JULY 2019 TERM LOAN WITH CHAIM DAVIS, ET AL
On July
31, 2019, the Company entered into loan agreements with two (2)
individuals, under which each individual provided the Company the
sum of $7,000 (for a total of $14,000) to be used in connection
with certain fees and/or expenses related legal matters of the
Company (the “July 2019 Term Loan”). One of the
individuals was our Chairman of the Board Chaim Davis. There were
no expenses related to the July 2019 Term Loan. The first payment
of principal and interest was due on September 1, 2019 and the last
payment of principal and interest is due on October 1, 2020. The
annual interest rate of the July 2019 Term Loan is fixed at 7.5%
(which represented the WSJ Prime Rate +2.0%). The Company incurred
minimal interest expense in the three and nine months ended
September 30, 2019 and $0 in interest expense in the three and nine
months ended September 30, 2018 (as the facility was not in place
until July 2019). The balance on the July 2019 Term Loan was
$13,000 at September 30, 2019, 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 September 30, 2019 and September 30, 2018,
the Company issued 0 options to purchase shares of
stock.
Stock
option activity for the nine months ended September 30, 2019 and
September 30, 2018 is summarized as follows (the figures contained
within the tables below have been rounded to the nearest
thousand):
|
|
Nine months ended
September 30, 2019
|
Nine months ended
September 30, 2018
|
|
|
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic
Value as of
September 30, 2019
|
|
Weighted Average
Exercise
Price
|
Aggregate
Intrinsic
Value as of
September 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
|
$0.10
|
|
|
Exercised
|
0
|
NA
|
|
0
|
NA
|
|
|
Cancelled/expired
|
(50,000)
|
$0.20
|
|
(5,000)
|
$0.26
|
|
Options outstanding
at end of period
|
2,252,000
|
$0.13
|
$1,000
|
2,222,000
|
$0.13
|
$3,000
|
Options exercisable
at end of period
|
2,172,000
|
$0.13
|
|
2,142,000
|
$0.13
|
|
The
Company recognized $4,000 in share based payment expense in the
nine months ended September 30, 2019 and $8,000 in share based
payment expense in the nine months ended September 30, 2018. The
Company recognized $1,000 in share based payment expense in the
three months ended September 30, 2019, and $2,000 in share based
payment expense in the three months ended September 30, 2018. At
September 30, 2019 there was approximately $3,000 of total
unrecognized share based payment expense related to stock options.
This cost is expected to be recognized over 8 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 nine months ended September 30, 2019 and
September 30, 2018:
|
|
|
|
|
|
|
|
Volatility
|
85%
|
79%
|
|
Expected term
(years)
|
|
|
|
Risk-free interest
rate
|
2.01%
|
2.90%
|
|
Dividend
yield
|
0%
|
0%
|
Warrants
Warrant
activity for the nine months ended September 30, 2019 and September
30, 2018 is summarized as follows:
|
|
Nine months ended
September 30, 2019
|
Nine months ended
September 30, 2018
|
|
|
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic
Value
as of September 30,
2019
|
|
Weighted Average
Exercise Price
|
Aggregate Intrinsic
Value
as
of
September 30,
2018
|
|
Warrants
outstanding at beginning of period
|
2,000,000
|
$0.18
|
|
2,060,000
|
$0.18
|
|
|
Granted
|
0
|
NA
|
|
0
|
NA
|
|
|
Exercised
|
0
|
NA
|
|
0
|
NA
|
|
|
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
nine months ended September 30, 2019 and September 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 September 30, 2019 and September 30, 2018, the
Company recognized $0 in debt issuance and deferred finance costs
related to the issuance of the above warrants. As of September 30,
2019, there was $0 of total unrecognized expense.
NOTE G - CHANGES IN STOCKHOLDERS’ EQUITY/
(DEFICIT)
The
following table summarizes the changes in stockholders’
equity/(deficit) for the three and nine month periods ending
September 30, 2019 and September 30, 2018:
|
|
|
|
|
|
|
|
|
|
Additional Paid in
Capital
|
|
|
|
Balance
– December 31, 2018
|
32,279,368
|
$323,000
|
$21,404,000
|
$(21,873,000)
|
$(146,000)
|
|
Shares issued to
Cherokee in connection with loan
|
200,000
|
2,000
|
12,000
|
|
14,000
|
|
Shares issued for
board meeting attendance in lieu of cash
|
38,993
|
*
|
3,000
|
|
3,000
|
|
Share based payment
expense
|
|
|
2,000
|
|
2,000
|
|
Net
loss
|
|
|
|
(240,000)
|
(240,000)
|
|
Balance-March
31, 2019
|
32,518,361
|
$325,000
|
$21,421,000
|
$(22,113,000)
|
$(367,000)
|
|
Shares issued for
board meeting attendance in lieu of cash
|
27,415
|
*
|
2,000
|
|
2,000
|
|
Share based payment
expense
|
|
|
2,000
|
|
2,000
|
|
Net
loss
|
|
|
|
(56,000)
|
(56,000)
|
|
Balance
– June 30, 2019
|
32,545,776
|
$325,000
|
$21,425,000
|
$(22,169,000)
|
$(419,000)
|
|
Share based payment
expense
|
|
|
*
|
|
*
|
|
Net
loss
|
|
|
|
(144,000)
|
(144,000)
|
Balance
– September 30, 2019
|
32,545,776
|
$325,000
|
$21,425,000
|
$(22,313,000)
|
$(563,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– December 31, 2017
|
29,782,770
|
$298,000
|
$21,170,000
|
$(20,845,000)
|
$623,000
|
|
Shares issued to
Cherokee in connection with loan
|
150,000
|
1,000
|
17,000
|
|
18,000
|
|
Share based payment
expense
|
|
|
4,000
|
|
4,000
|
|
Net
loss
|
|
|
|
(267,000)
|
(267,000)
|
|
Balance
– March 31, 2018
|
$29,932,770
|
$299,000
|
$21,191,000
|
$(21,112,000)
|
$378,000
|
|
Shares issued for
board meeting attendance in lieu of cash
|
33,784
|
1,000
|
3,000
|
|
4,000
|
|
Share based payment
expense
|
|
|
2,000
|
|
2,000
|
|
Net
loss
|
|
|
|
(146,000)
|
(146,000)
|
|
Balance
– June 30, 2018
|
29,966,554
|
$300,000
|
$21,196,000
|
$(21,258,000)
|
$238,000
|
|
Shares issued to
Landmark in connection with consulting agreement
|
277,778
|
2,000
|
22,000
|
|
24,000
|
|
Share based payment
expense
|
|
|
2,000
|
|
2,000
|
|
Net
loss
|
|
|
|
(202,000)
|
(202,000)
|
|
Balance
– September 30, 2018
|
30,244,332
|
$302,000
|
$21,220,000
|
$(21,460,000)
|
$62,000
|
*Indicates less
than $1,000
Item 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 nine months ended September 30, 2019 were negatively
impacted by the price competitive nature of the markets in which we
sell our drugs of abuse testing 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 also 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 nine months
ended September 30, 2019 to the nine months ended September 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. And finally, one of our other
government accounts expired in early 2018 (and the nine months
ended September 30, 2018 did include sales from this
account).
Starting in late
2018 and into 2019, we expanded our contract manufacturing
operations with two (2) new customers. One of these customers
started generating sales in the three months ended March 31, 2019
while the other customer started generating sales in the fourth
quarter ending December 31, 2019.
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; although revenue in the nine months ended
September 30, 2019 is negligible.
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 in the United State and sales of oral fluid
drug tests outside the United States, and 3) further expanding our
contract manufacturing business.
Operating expenses
continued to decline when comparing nine and three months ended
September 30, 2019 with the nine and three months ended September
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 September 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 September 30, 2019, we had total
deferred compensation owed to these two individuals in the amount
of $190,000. 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 nine months ended
September 30, 2019 or the nine months ended September 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 nine months ended September 30,
2019
compared
to the nine months ended September 30, 2018
NET SALES: Net sales for the nine months
ended September 30, 2019 decreased 7.1% when compared to net sales
in the nine months ended September 30, 2018. The majority of the
decline was due to $91,000 in lost government product sales due to
the expiration of a contract with another government entity.
International sales also contributed to the decline (although our
sales in South America increased). In the Clinical market, sales
also declined; however, there were also increased clinical sales to
a number of our customers. These declines were partially offset by
increased contract manufacturing sales (due to one of our new
contract manufacturing customers).
GROSS PROFIT: Gross profit in the nine
months ended September 30, 2019 decreased to 34.9% of net sales
compared to 39.3% of net sales in the nine months ended September
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 nine-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, low product prices
from foreign manufacturers have required us to decrease pricing of
our own products to be more competitive. 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: Operating expenses
decreased 13.0% in the nine months ended September 30, 2019
compared to the nine months ended September 30, 2018. Expenses in
all operational areas of the Company decreased. More
specifically:
Research and development (“R&D”)
R&D
expense decreased 3.1% when comparing the nine months ended
September 30, 2019 with the same period last year. Decreased FDA
compliance costs were partially offset by increased utility costs
and repairs and maintenance. All other expense remained relatively
consistent. In the nine months ended September 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 final product
development of our new contract manufacturing
customer.
Selling and marketing
Selling
and marketing expense in the nine months ended September 30, 2019
decreased 19.5% when compared to the same period last
year.
Reductions in sales
& marketing salaries, benefits and travel (due to decreased
sales and marketing personnel) and reduced trade show expense were
the primary reasons for the decline. These reductions were
nominally offset by increased advertising/promotional expense. All
other expenses remained relatively consistent when comparing the
two nine-month periods. In the nine months ended September 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 10.9% in the nine months ended September 30, 2019
when compared to the same period last year. Decreases in SEC report
fees and investor relations expense (due to timing of charges for
reporting), 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) and bank service fees, 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 and legal fees
(associated with timing of activities in the ABMC vs. Bailey
litigation). Share based payment expense also declined to $4,000 in
the nine months ended September 30, 2019 from $8,000 in the nine
months ended September 30, 2018.
Other income and
expense: Other expense of $28,000 in the nine months ended
September 30, 2019 consisted of interest expense associated with
our credit facilities, 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 expense of $200,000 in the nine
months ended September 30, 2018 consisted of interest expense
associated with our credit facilities, 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 September 30,
2019
compared
to the three months ended September 30, 2018
NET SALES: Net sales for the three
months ended September 30, 2019 increased 1.9% when compared to the
three months ended September 30, 2018. Clinical sales increased
(including sales to our lab partner) along with an increase in
International sales (most of which is due to sales in South
American countries); while government sales decreased (due to the
expiration of the government account previously mentioned) along
with decrease in contract manufacturing sales (which is purely due
to timing as contract manufacturing sales increased year over
year).
GROSS PROFIT: Gross profit remained
relatively consistent at 40.1% of net sales in the three months
ended September 30, 2019, compared to 41.5% of net sales in the
three months ended September 30, 2018. Increased sales resulted in
an increase in the number of testing strips made and product
assembled and packaged for shipment when comparing the two
three-month periods. This increase results in manufacturing
efficiencies. However, these efficiencies were offset by increased
material costs and some lower priced product sales. We will
continue to adjust our production schedules to try to mitigate
manufacturing inefficiencies and monitor manufacturing
needs.
OPERATING EXPENSES: Operating expenses
decreased 11.3% in the three months ended September 30, 2019, when
compared to the three months ended September 30, 2018. Expenses in
G&A decreased while expenses in selling and marketing and
R&D increased. More specifically:
Research and development (“R&D”)
R&D
expense increased 15.0% when comparing the three months ended
September 30, 2019 with the three months ended September 30, 2018.
Increased costs related to repairs and maintenance in our New
Jersey facility was the primary reason for the increase. All other
expense remained relatively consistent. In the three months ended
September 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 September 30, 2019
increased 4.8%when compared to the three months ended September 30,
2018. Increased costs related to shipping and sales literature were
offset by reductions in sales & marketing salaries, benefits
and travel (due to decreased sales and marketing personnel). All
other expenses were relatively consistent when comparing the two
three-month periods. In the three months ended September 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. We also continued 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 18.5% in the three months ended September 30,
2019 when compared to G&A expense in the three months ended
September 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, patents and bank service fees were partially offset by
increased warehouse salaries (as a result of the re-allocations of
salaries due to a dual functioning employee) and legal fees
(associated with timing of activities in the ABMC v. Bailey
litigation). Share based payment expense declined slightly to
$1,000 in the three months ended September 30, 2019 from $2,000 in
the three months ended September 30, 2018. We do expect legal fees
to decline now that the ABMC v. Bailey litigation has been settled.
We also continue to monitor administrative needs to ensure they are
appropriate.
Other income and
expense: Other expense of $62,000 in the three months ended
September 30, 2019 consisted of interest expense associated with
our credit facilities offset by a small amount of interest income.
Other expense of $70,000 in the three months ended September 30,
2018 also consisted of interest expense associated with our credit
facilities offset by a small amount of interest
income.
Liquidity and Capital Resources as of September 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 November 2020. At
September 30, 2019, we have negative Stockholders’ Equity of
$563,000. 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 September 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 September 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, although
inventory levels in the three months ended September 30, 2019
increased from the quarter ended June 30, 2019, we would expect our
inventory levels 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 is not having 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
September 30, 2019, we had the following debt/credit
facilities:
|
Facility
|
Debtor
|
Balance as of
September 30, 2019
|
|
Loan and Security
Agreement
|
Cherokee Financial,
LLC
|
$900,000
|
|
Revolving Line of
Credit
|
Crestmark
Bank
|
$431,000
|
|
Equipment
Loan
|
Crestmark
Bank
|
$10,000
|
|
Term
Loan
|
Cherokee Financial,
LLC
|
$200,000
|
|
Term
Loan
|
Individuals
|
$13,000
|
|
Total
Debt
|
|
$1,554,000
|
Working Capital
At the
end of the nine months ended September 30, 2019, we are operating
at a working capital deficit of $1,365,000; 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 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 so we expect
our legal costs to decline significantly going forward), 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 certain 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 nine months
ended September 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. In fact, we issued shares
to all four (4) of our independent board members for their
attendance at a meeting held in October 2019.
Sales
declines result in lower cash balances and lower availability on
our line of credit at times. The loss of a large government account
in the fourth quarter of the year ended December 31, 2017
represented approximately $800,000 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 the year ended
December 31, 2018, we had another government contract expire and
this contributed to the sales decline in the three and nine months
ended September 30, 2019 (when compared to the three and nine
months ended September 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
secured the business of two (2) new contract manufacturing
customers, one of which generated sales in the nine months ended
September 30, 2019, which did partially offset the sales declines
in other areas. The other customer started generating sales in the
fourth quarter of the year ending December 31, 2019.
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.
We were
not in compliance with the TNW covenant under our Crestmark LOC as
of September 30, 2019. As of the date of this report, the Company
is in the process of obtaining another waiver from Crestmark
related to the TNW non-compliance for the three months ended
September 30, 2019. Due to internal requirements within Crestmark,
the waiver could not be obtained prior to the date of this report.
The Company expects to be charged a fee of $5,000 for this waiver
when it is received. 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 September 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 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 had preliminary discussions with
Crestmark and at this time they have indicated a willingness to
extend our credit facility when it expires.
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.