Note A - The Company and its
Significant Accounting Policies
The Company:
American Bio Medica
Corporation (the “Company”) 1) manufactures and sells
lateral flow immunoassay tests, primarily for the immediate
detection of drugs in urine and oral fluid, 2) provides strip
manufacturing and assembly and packaging services for unaffiliated
third parties and 3) sells (via distribution) a number of other
products related to the immediate detection of drugs in urine and
oral fluid as well as point of care diagnostic products via
distribution.
Going Concern:
The
Company’s financial statements have been prepared assuming
the Company will continue as a going concern, which assumes the
realization of assets and the satisfaction of liabilities in the
normal course of business. For the year ended December 31, 2019
(“Fiscal 2019”), the Company had a net loss of $681,000
and net cash provided by operating activities of $58,000, compared
to a net loss of $1,028,000 and net cash used in operating
activities of $220,000 in the year ended December 31, 2018
(“Fiscal 2018”). The Company’s cash position
decreased by $109,000 in Fiscal 2019 and increased by $77,000 in
Fiscal 2019. The Company had a working capital deficit of $463,000
at December 31, 2019 compared to a working capital deficit of
$212,000 at December 31, 2018. This increase in working capital
deficit is primarily due to decreased sales.
As of
December 31, 2019, the Company had an accumulated deficit of
$22,554,000. Over the course of the last several fiscal years, the
Company has implemented a number of expense and personnel cuts,
implemented a salary and commission deferral program (which
currently only consists of salary deferral), consolidated certain
manufacturing operations of the Company, and refinanced
debt.
The
salary deferral program consists of a 10% salary deferral for the
Company’s Chief Executive Officer/Principal Financial Officer
Melissa Waterhouse. The salary of another member of senior
management was also deferred 10% until his retirement in November
2019. As of December 31, 2019, the Company had total deferred
compensation owed to these two individuals in the amount of
$191,000. As cash flow from operations allows, the Company intends
to repay portions of the deferred compensation. The Company did not
make any payments on deferred compensation to Melissa Waterhouse in
Fiscal 2019 or Fiscal 2018. After the member of senior management
retired in November 2019, the Company agreed to make payments for
the deferred comp owed to this individual. In Fiscal 2019, the
Company made payments totaling $4,000 to this individual and no
payments in Fiscal 2018. The Company expects the salary deferral
program will continue for an undetermined period of
time.
The
Company’s current cash balances, together with cash generated
from future operations and amounts available under its credit
facilities may not be sufficient to fund operations through June
2021. At December 31, 2019, the Company had negative
Stockholders’ Equity of $790,000.
The
Company’s loan and security agreement and 2019 Term Note with
Cherokee for $900,000 and $200,000, respectively, expired on
February 15, 2020. As of December 31, 2019, all amounts due to
Cherokee are included in our short-term debt given the facilities
expire in less than 12 months. The Company did extend the
facilities with Cherokee as indicated in Note J – Subsequent
Events.
The
Crestmark line of credit has a maximum availability of $1,500,000;
however, the amount available under the line of credit is much
lower as it is based upon the balance of the Company’s
accounts receivable and a limited amount of inventory. Lower sales
levels result in reduced availability on the line of credit, and
starting in July 2018, the Inventory Sub-Cap Limit on the line of
credit (which determines our availability from the inventory) is
being reduced by $10,000 per month until the Inventory Sub-Cap
Limit is $0 (making the line of credit an accounts-receivable based
line only). This means that as of December 31, 2019, the Inventory
Sub-Cap Limit is only $70,000 and that the Company’s
availability related to inventory is significantly reduced. As of
December 31, 2019, based on an availability calculation, there were
no additional amounts available under the Crestmark line of credit
because the Company draws any balance available on a daily basis.
If sales levels continue to decline, the Company will have reduced
availability on the line of credit due to decreased accounts
receivable balances. The line of credit with Crestmark expires on
June 22, 2020. Based on discussions with Crestmark, the Company
expects to extend the current facility or enter into a new facility
with Crestmark prior to the expiration date of June 22,
2020.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
If
availability under the Crestmark line of credit is not sufficient
to satisfy the Company’s 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 Company’s 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.
The
Company’s ability to be in compliance with the obligations
under its current credit facilities will depend on the
Company’s ability to replace lost sales and further increase
sales. The Company’s ability to repay its current debt may
also be affected by general economic, financial, competitive,
regulatory, legal, business and other factors beyond the
Company’s control, including those discussed herein. If the
Company is unable to meet its credit facility obligations, the
Company would be required to raise money through new equity and/or
debt financing(s) and, there is no assurance that the Company would
be able to find new financing, or that any new financing would be
at favorable terms.
On June 22, 2020, the Company extended the Crestmark line of credit
until June 22, 2021. All terms and conditions of the Crestmark line
of credit remain unchanged under the extension period with the
exception of the following, 1) the maximum availability under the
Crestmark line of credit was reduced from $1,500,000 to $1,000,000,
2) availability under the Crestmark line of credit is based on
receivables only (under the same terms), 3) the requirement for
field audits of the Company was removed, and 4) the Tangible Net
Worth (TNW) covenant was removed.
Prior
to the extension, the Company was not in compliance with the TNW
covenant under the Crestmark line of credit as of December 31,
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 December 31, 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 the Crestmark line of
credit for the quarter ended December 31, 2019 or the quarter ended
March 31, 2020; if the Company is not compliant at March 31, 2020,
(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.
The
Company’s history of limited cash flow and/or operating cash
flow deficits, its current cash position and lack of access to
capital raise doubt about its ability to continue as a going
concern and its continued existence is dependent upon several
factors, including its ability to raise revenue levels and control
costs to generate positive cash flows, to sell additional shares of
the Company’s common stock to fund operations and obtain
additional credit facilities. Selling additional shares of the
Company’s common stock and obtaining additional credit
facilities may be more difficult as a result of limited access to
equity markets and the tightening of credit markets.
If
events and circumstances occur such that 1) the Company cannot
raise revenue levels, 2) the Company is unable to control
operational costs to generate positive cash flows, 3) the Company
cannot maintain its current credit facilities or refinance its
current credit facilities, 4) the Company is unable to utilize its
common stock as a form of payment in lieu of cash and 4) the
Company is unable to obtain working capital by selling additional
shares of common stock, , the Company may be required to further
reduce expenses or take other steps which could have a material
adverse effect on the Company’s future performance. The
Company’s financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amount of or classification of liabilities that
might be necessary as a result of this uncertainty.
In
March 2020, the World Health Organization declared COVID-19 to be a
pandemic. COVID-19 has spread throughout the globe, including in
the State of New York where the Company’s headquarters are
located, and in the State of New Jersey where the Company’s
strip manufacturing facility is located. In response to the
outbreak, the Company has followed the guidelines of the U.S.
Centers for Disease Control and Prevention (“CDC”) and
applicable state government authorities to protect the health and
safety of the Company’s employees, families, suppliers,
customers and communities. While these existing measures and,
COVID-19 generally, have not materially disrupted the
Company’s business to date, any future actions necessitated
by the COVID-19 pandemic may result in disruption to the
Company’s business.
While
the COVID-19 pandemic continues to rapidly evolve, the Company
continues to assess the impact of the COVID-19 pandemic to best
mitigate risk and continue the operations of the Company’s
business. The extent to which the outbreak impacts the
Company’s business, liquidity, results of operations and
financial condition will depend on future developments, which are
highly uncertain and cannot be predicted with confidence, including
new information that may emerge concerning the severity of the
COVID-19 pandemic and the actions to contain it or treat its
impact, among others. If the Company, its customers or suppliers
experience prolonged shutdowns or other business disruptions, the
Company’s business, liquidity, results of operations and
financial condition are likely to be materially adversely affected,
and the Company’s ability to access the capital markets may
be limited.
Significant Accounting Policies:
[1]
Cash equivalents: The Company considers
all highly liquid financial instruments purchased with a maturity
of three months or less to be cash equivalents.
[2]
Accounts Receivable: Accounts receivable
consists of mainly trade receivables due from customers for the
sale of our products. Payment terms vary on a
customer-by-customer basis, and currently range from cash on
delivery to net 60 days. Receivables are considered past due
when they have exceeded their payment terms. Accounts
receivable have been reduced by an estimated allowance for doubtful
accounts. The Company estimates its allowance for doubtful accounts
based on facts, circumstances and judgments regarding each
receivable. Customer payment history and patterns, length of
relationship with the customer, historical losses, economic and
political conditions, trends and individual circumstances are among
the items considered when evaluating the collectability of the
receivables. Accounts are reviewed regularly for collectability and
those deemed uncollectible are written off. At December 31, 2019
and December 31, 2018, the Company had an allowance for doubtful
accounts of $34,000 and $36,000, respectively.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
[3]
Inventory: Inventory is stated at the
lower of cost or net realizable value. Work in process and finished
goods are comprised of labor, overhead and raw material costs.
Labor and overhead costs are determined on a rolling average cost
basis and raw materials are determined on an average cost basis. At
December 31, 2019 and December 31, 2018, the Company established an
allowance for slow moving and obsolete inventory of $291,000 and
$268,000, respectively.
[4]
Income taxes: The Company follows ASC
740 “Income Taxes” (“ASC 740”) which
prescribes the asset and liability method whereby deferred tax
assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and
are measured using the enacted laws and tax rates that will be in
effect when the differences are expected to reverse. The
measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits that are not expected to
be realized. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that such tax rate
changes are enacted. Under ASC 740, tax benefits are recorded only
for tax positions that are more likely than not to be sustained
upon examination by tax authorities. The amount recognized is
measured as the largest amount of benefit that is greater than 50
percent likely to be realized upon ultimate settlement.
Unrecognized tax benefits are tax benefits claimed in the
Company’s tax returns that do not meet these recognition and
measurement standards.
On
December 22, 2017, the Tax Reform Act was signed into law. Among
the provisions, the Tax Reform ACT reduces the U.S. federal
corporate income tax rate from a maximum of 35% to a flat 21%
effective January 1, 2018, requires companies to pay a one-time
transition tax on deemed repatriated earnings of certain foreign
subsidiaries that were previously tax deferred, and creates new
taxes on certain foreign sourced earnings. At December 31, 2019,
the Company has completed its accounting for the tax effects of the
enactment of the Tax Reform Act. The Company has finalized the tax
effects on its existing deferred tax balances and the one-time
transition tax under Staff Accounting Bulletin No. 118 ("SAB 118").
The Company has also included current year impacts of the Tax
Reform Act in our tax provision. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to reverse.
[5]
Depreciation and amortization: Property,
plant and equipment are depreciated on the straight-line method
over their estimated useful lives; generally 3-5 years for
equipment and 30 years for buildings. Leasehold improvements and
capitalized lease assets are amortized by the straight-line method
over the shorter of their estimated useful lives or the term of the
lease. Intangible assets include the cost of patent applications,
which are deferred and charged to operations over 19 years. The
accumulated amortization of patents is $190,000 at December 31,
2019 and $182,000 at December 31, 2018. Annual amortization expense
of such intangible assets is expected to be $7,000 per year for the
next 5 years.
[6]
Revenue recognition: The Company adopted
ASU 2014-09, “Revenue from Contracts with Customers” in
the first quarter of Fiscal 2018.The Company's revenues result from
the sale of goods and reflect the consideration to which the
Company expects to be entitled. The Company records revenues based
on a five-step model in accordance with ASU 2014-09. The Company
has defined purchase orders as contracts in accordance with ASU
2014-09. For its customer contracts, the Company’s
performance obligations are identified; which is delivering goods
at a determined transaction price, allocation of the contract
transaction price with performance obligations (when applicable),
and recognition of revenue when (or as) the performance obligation
is transferred to the customer. Goods are transferred when the
customer obtains control of the goods (which is upon shipment to
the customer). The Company's revenues are recorded at a point in
time from the sale of tangible products. Revenues are recognized
when products are shipped.
In
Fiscal 2018, the Company elected the Modified Retrospective Method
(the "Cumulate Effect Method") to comply with ASU 2014-09. The
Cumulative Effect Method does not affect the amounts for the prior
periods, but requires that the current period be reported in
accordance with ASU 2014-09. ASU 2014-09 was adopted on January 1,
2018 which was the first day of the Company's 2018 fiscal year.
There was no material impact on the Company’s financial
position or results of operations.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
Product
returns, discounts and allowances are variable consideration and
are recorded as a reduction of revenue in the same period that the
related sale is recorded. The Company has reviewed the overall
sales transactions for variable consideration and has determined
that these costs are not significant. The Company has not
experienced any impairment losses, has no future performance
obligations and does not capitalize costs to obtain or fulfill
contracts.
[7]
Shipping and handling: Shipping and
handling fees charged to customers are included in net sales, and
shipping and handling costs incurred by the Company, to the extent
of those costs charged to customers, are included in cost of
sales.
[8]
Research and development: Research and
development (“R&D”) costs are charged to operations
when incurred. These costs include salaries, benefits, travel,
costs associated with regulatory applications, supplies,
depreciation of R&D equipment and other miscellaneous
expenses.
[9]
Net loss per common share: Basic loss
per common share is calculated by dividing net loss by the weighted
average number of outstanding common shares during the
period.
Potential common
shares outstanding as of December 31, 2019 and 2018:
|
|
|
|
|
Warrants
|
2,000,000
|
2,000,000
|
|
Options
|
2,252,000
|
2,222,000
|
|
Total
|
4,252,000
|
4,222,000
|
For
Fiscal 2019 and Fiscal 2018, the number of securities not included
in the diluted loss per share was 4,252,000 and 4,222,000,
respectively, as their effect was anti-dilutive due to a net loss
in each year.
[10]
Use of estimates: The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Our management believes the major estimates
and assumptions impacting our financial statements are the
following:
●
estimates of the
fair value of stock options and warrants at date of grant;
and
●
estimates of
accounts receivable reserves; and
●
estimates of the
inventory reserves; and
●
estimates of
accruals and liabilities; and
●
deferred tax
valuation.
The
fair value of stock options issued to employees, members of our
Board of Directors, and consultants and of warrants issued in
connection with debt financings is estimated on the date of grant
based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected
remaining lives of the awards. The assumptions used in calculating
the fair value of share-based payment awards represent management's
best estimates, but these estimates involve inherent uncertainties
and the application of management judgment.
As a
result, if factors change and the Company uses different
assumptions, the Company's equity-based compensation expense could
be materially different in the future. In addition, the Company is
required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. In estimating
the Company's forfeiture rate, the Company analyzed its historical
forfeiture rate, the remaining lives of unvested options, and the
amount of vested options as a percentage of total options
outstanding.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
If the
Company's actual forfeiture rate is materially different from its
estimate, or if the Company reevaluates the forfeiture rate in the
future, the equity-based compensation expense could be
significantly different from what we have recorded in the current
period.
Actual
results may differ from estimates and assumptions of future
events.
[11]
Impairment of long-lived assets: The
Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of
those assets. The Company has performed an analysis of the
undiscounted cash flows expected to be generated from the
Company’s fixed assets and intangibles. Based on the
Company’s analysis, the Company believes the carrying value
of these assets are recoverable and an impairment does not
exist.
[12]
Financial Instruments: The carrying
amounts of cash, accounts receivable, accounts payable, accrued
expenses, and other assets/liabilities approximate their fair value
based on the short term nature of those items.
Estimated fair
value of financial instruments is determined using available market
information. In evaluating the fair value information, considerable
judgment is required to interpret the market data used to develop
the estimates. The use of different market assumptions and/or
different valuation techniques may have a material effect on the
estimated fair value amounts.
Accordingly, the
estimates of fair value presented herein may not be indicative of
the amounts that could be realized in a current market
exchange.
ASC
Topic 820, “Fair Value Measurements and Disclosures”
(“ASC Topic 820”) establishes a hierarchy for ranking
the quality and reliability of the information used to determine
fair values. ASC Topic 820 requires that assets and liabilities
carried at fair value be classified and disclosed in one of the
following three categories:
Level
1: Unadjusted quoted market prices in active markets for identical
assets or liabilities.
Level
2: Unadjusted quoted prices in active markets for similar assets or
liabilities, unadjusted quoted prices for identical or similar
assets or liabilities in markets that are not active, or inputs
other than quoted prices are observable for the asset or
liability.
Level
3: Unobservable inputs for the asset or liability.
The
Company endeavors to utilize the best available information in
measuring fair value. Financial assets and liabilities are
classified based on the lowest level of input that is significant
to the fair value measurement. The following methods and
assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
Cash
—The carrying amount reported in the balance sheet for cash
and cash equivalents approximates its fair value due to the
short-term maturity of these instruments.
Line of
Credit and Long-Term Debt—The carrying amounts of the
Company’s borrowings under its line of credit agreement and
other long-term debt approximates fair value, based upon current
interest rates, some of which are variable interest
rates.
Other
Asset/liabilities – The carrying amounts reported in the
balance sheet for other current assets and liabilities approximates
their fair value, based on the nature of the assets and
liabilities.
In
August 2018, ASU 2018-13, “Fair Value Measurement (Topic
820): Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurement”, was issued. ASU 2018-03 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 adopted ASU 2018-03 in the quarter ended
March 31, 2020 and the adoption did not have an impact on its
financial position or results of operations.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
[13]
Accounting for share-based payments and stock
warrants: In
accordance with the provisions of ASC Topic 718, “Accounting
for Stock Based Compensation”, the Company recognizes
share-based payment expense for stock options and warrants. In June
2018, ASU 2018-07,
“Compensation - Stock Compensation/Improvements to
Nonemployee Share-Based Payment Accounting”, was issued. ASU
2018-07 expands the scope of ASC 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 was effective for fiscal years beginning
after December 15, 2018, including interim reporting periods within
that fiscal year. 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.
The
weighted average fair value of options issued and outstanding in
Fiscal 2019 and Fiscal 2018 was $0.13 in each year. (See Note H [2]
– Stockholders’ Equity)
In
Fiscal 2018, the Company accounted for derivative instruments in
accordance with ASC Topic 815 “Derivatives and Hedging”
(“ASC Topic 815”). The guidance within ASC Topic 815
requires the Company to recognize all derivatives as either assets
or liabilities on the statement of financial position unless the
contract, including common stock warrants, settles in the
Company’s own stock and qualifies as an equity instrument. A
contract designated as an equity instrument is included in equity
at its fair value, with no further fair value adjustments required;
and if designated as an asset or liability is carried at fair value
with any changes in fair value recorded in the results of
operations. The weighted average fair value of warrants issued and
outstanding was $0.18 in both Fiscal 2019 and Fiscal 2018. (See
Note H [3] – Stockholders’ Equity)
[14]
Concentration of credit risk: The
Company sells products primarily to United States customers and
distributors. Credit is extended based on an evaluation of the
customer’s financial condition.
At
December 31, 2019, one customer accounted for 55.6% of the
Company’s net accounts receivable and another customer
accounted for 15.0%. A substantial portion of both of these
balances were collected in the first quarter of the year ending
December 31, 2020. Due to the long standing nature of the
Company’s relationship with these customers and contractual
obligations, the Company is confident it will recover these
amounts.
At
December 31, 2018, one customer accounted for 56.5% of the
Company’s net accounts receivable. A substantial portion of
this balance was collected in the first quarter of the year ended
December 31, 2019. Due to the long standing nature of the
Company’s relationship with this customer and contractual
obligations, the Company is confident it will recover these
amounts.
The
Company has established an allowance for doubtful accounts of
$34,000 and $36,000 at December 31, 2019 and December 31, 2018,
respectively, based on factors surrounding the credit risk of our
customers and other information.
One of
the Company’s customers accounted for 44.8% of net sales in
Fiscal 2019 and 44.0% of net sales in Fiscal 2018.
The
Company maintains certain cash balances at financial institutions
that are federally insured and at times the balances have exceeded
federally insured limits.
[15]
Reporting comprehensive income: The
Company reports comprehensive income in accordance with the
provisions of ASC Topic 220, “Reporting Comprehensive
Income” (“ASC Topic 220”). The provisions of ASC
Topic 220 require the Company to report the change in the Company's
equity during the period from transactions and events other than
those resulting from investments by, and distributions to, the
shareholders. For Fiscal 2019 and Fiscal 2018, comprehensive income
was the same as net income.
[16]
Reclassifications: Certain items have
been reclassified from the prior years to conform to the current
year presentation.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
[17]
New
accounting pronouncements:
In
the year ended December 31, 2019, we 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 was effective for all annual and interim periods
beginning January 1, 2019, and was 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 of Fiscal 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 of Fiscal 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 was effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2018. The Company adopted ASU 2017-11 in the first quarter of
Fiscal 2019 and the adoption did not have an impact on its
financial position or results of operations.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
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 was effective for fiscal
years beginning after December 15, 2018, including interim
reporting periods within that fiscal year. The Company adopted ASU
2018-07 in the first quarter of Fiscal 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.
The
following accounting standards have been issued prior to the end of
Fiscal 2019 but, did not require adoption as in Fiscal
2019:
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.
ASU 2019-08, Compensation –
Stock Compensation (Topic 718) and Revenue from Contracts with
Customers (Topic 606)”, issued in November 2019,
clarifies that an entity must measure and classify share-based
payment awards granted to a customer by applying the guidance in
Topic 718. ASU 2019-08 is effective for fiscal years beginning
after December 15, 2019, including interim reporting periods within
those fiscal years. The Company does not believe ASU 2019-08 will
have a material effect on its financial statements.
ASU 2019-12, “Income Taxes
(Topic 740): Simplifying the Accounting for Income
Taxes”, issued in December 2019 reduces the complexity
by removing exemptions and simplifying the accounting for franchise
taxes, deferred taxes and taxes related to employee’s stock
ownership plan. The requirements in ASU 2019-12 will be effective
for public companies for fiscal years beginning after December 15,
2020, including interim periods. The Company is evaluating the
impact of ASU 2019-12.
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.
NOTE B - INVENTORY
Inventory is
comprised of the following:
|
|
|
|
|
Raw
Materials
|
$670,000
|
$778,000
|
|
Work In
Process
|
141,000
|
184,000
|
|
Finished
Goods
|
290,000
|
325,000
|
|
Allowance for slow
moving and obsolete inventory
|
(291,000)
|
(268,000)
|
|
|
$810,000
|
$1,019,000
|
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
NOTE C – PROPERTY, PLANT AND EQUIPMENT
Property, plant and
equipment, at cost, are as follows:
|
|
|
|
|
|
|
|
|
Land
|
$102,000
|
$102,000
|
|
Buildings
and improvements
|
1,352,000
|
1,352,000
|
|
Manufacturing
and warehouse equipment
|
2,108,000
|
2,108,000
|
|
Office
equipment (incl. furniture and fixtures)
|
412,000
|
412,000
|
|
|
3,974,000
|
3,974,000
|
|
Less
accumulated depreciation
|
(3,330,000)
|
(3,256,000)
|
|
|
$644,000
|
$718,000
|
Depreciation
expense was $74,000 in both Fiscal 2019and Fiscal
2018.
NOTE D – ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
Accrued
expenses and other current liabilities consisted of the
following:
|
|
|
|
|
Accounting
fees
|
$77,000
|
$75,000
|
|
Interest
payable
|
15,000
|
13,000
|
|
Accounts receivable
credit balances
|
55,000
|
34,000
|
|
Sales tax
payable
|
142,000
|
115,000
|
|
Deferred
compensation
|
191,000
|
167,000
|
|
Customer
Deposits
|
10,000
|
25,000
|
|
Other current
liabilities
|
52,000
|
20,000
|
|
|
$542,000
|
$449,000
|
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
NOTE E – DEBT AND LINE OF CREDIT
The
Company’s Line of Credit and Debt consisted of the following
as of December 31, 2019 and 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
|
$975,000
|
|
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
12.32%.
|
337,000
|
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 6.25% as of the
date of this report.
|
7,000
|
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.
|
10,000
|
0
|
|
December 2019 Convertible Note:
Convertible note with a conversion date of 120 days or upon the
closing of a 2020 funding transaction (whichever is
sooner).
|
25,000
|
0
|
|
|
$1,479,000
|
$1,646,000
|
|
|
|
|
|
Less debt discount
& issuance costs (Cherokee Financial, LLC loans)
|
(17,000)
|
(111,000)
|
|
Total debt,
net
|
$1,462,000
|
$1,535,000
|
|
|
|
|
|
Current
portion
|
$354,000
|
$739,000
|
|
Long-term portion,
net of current portion
|
$1,125,000
|
$796,000
|
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
At
December 31, 2019, the following are the debt maturities for each
of the next five years:
|
2020
|
$369,000
|
|
2021
|
1,110,000
|
|
2022
|
0
|
|
2023
|
0
|
|
2024
|
0
|
|
|
$1,479,000
|
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). 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 $166,000 in interest expense related to the
Cherokee LSA in Fiscal 2019 (of which $94,000 is debt issuance cost
amortization recorded as interest expense and $173,000 in interest
expense related to the Cherokee LSA in Fiscal 2018 (of which
$94,000 is debt issuance cost amortization recorded as interest
expense).
The
Company had $15,000 in accrued interest expense at December 31,
2019 and $13,000 in accrued interest expense at December 31,
2018.
As of
December 31, 2019, the balance on the Cherokee LSA was $900,000;
however, the discounted balance was $884,000. As of December 31,
2018, the balance on the Cherokee LSA was $975,000; however the
discounted balance was $866,000.
A final
balloon payment was due on February 15, 2020. See Note J –
Subsequent Events for information regarding the extension of the
Cherokee LSA.
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 expired on June 22, 2020. (See Note
J- Subsequent Event for information related to the extension of the
Crestmark LOC).
The
Crestmark LOC provided 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 December 30, 2019, the Company
did not meet this minimum loan balance requirement as our balance
was $337,000. 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).
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
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, (making the Crestmark LOC an accounts-receivable based line
only). This means that as of December 31, 2019, the Inventory
Sub-Cap Limit is only $70,000 and that our availability related to
inventory is significantly reduced.
So long
as any obligations are due to Crestmark (and until the extension
executed on June 22, 2020, the Company had to 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) effective with the quarter ended 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 December 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.
On June
22, 2020, we extended the Crestmark LOC and as a result of this
extension, the TNW covenant was removed effective with the quarter
ending June 30, 2020. We were not in compliance with the TNW
covenant at December 31, 2019 and with the exception of the quarter
ended June 30, 2019; we have not been in compliance with prior TNW
covenants since December 31, 2017. We are in the process of
obtaining a waiver from Crestmark Bank in connection with the
non-compliance with the TNW covenant at December 31, 2019. If we
are not compliant with the TNW covenant for the quarter ending
March 31, 2020, we also expect to receive a waiver from Crestmark
Bank. We have received a waiver from Crestmark related to our
non-compliance with the TNW covenant. 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) and the March 31, 2020 waiver (if needed).
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 and until the extension was executed on June 22, 2020),
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 December 31, 2019, the interest only
rate on the Crestmark LOC was 7.75%; however, as of the date of
this report, the interest only rate on the Crestmark LOC was 6.25%
due to a decrease in the Prime Rate effective March 15, 2020. 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 12.32%.
The
Company recognized $46,000 in interest expense related to the
Crestmark LOC in Fiscal 2019 ($0 of which is debt issuance cost
amortization recorded as interest expense) and $76,000 in interest
expense related to the Crestmark LOC in Fiscal 2018 (of which
$15,000 is debt issuance cost amortization recorded as interest
expense).
Given
the nature of the administration of the Crestmark LOC, at December
31, 2019, the Company had $0 in accrued interest expense related to
the Crestmark LOC, and there is $0 in additional availability under
the Crestmark LOC.
As of
December 31, 2019, the balance on the Crestmark LOC was $337,000,
and as of December 31, 2018, the balance on the Crestmark LOC was
$502,000.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
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 6.25% as of the
date of this report.
The
Company incurred $1,000 in interest expense in Fiscal
2019 and
$2,000 in interest expense in Fiscal 2018 related to the Equipment
Loan. The balance on the Equipment Loan is $7,000 at December 31,
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 Fiscal 2019, (of which $2,000 was debt
issuance cost amortization recorded as interest expense), and
$33,000 in interest expense related to the Cherokee Term Loan in
Fiscal 2018 (of which $19,000 was debt issuance costs recorded as
interest expense). At December 31, 2019, the balance on the 2018
Cherokee Term Loan was $0 (as it was refinanced in February 2019),
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 November 2019. The loan was required to be paid in full on
February 15, 2020. 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 $48,000 in interest expense related to the 2019
Cherokee Term Loan in Fiscal 2019, (of which $15,000 is debt
issuance cost amortization recorded as interest expense), and $0 in
interest expense in Fiscal 2018 (as the 2019 Cherokee Term Loan was
not yet in place).
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
The
Company had $9,000 in accrued interest related to the 2019 Cherokee
Term Loan at December 31, 2019 and $0 in accrued interest expense
at December 31, 2018 (as the 2019 Cherokee Term Loan was not yet in
place).
The
balance on the 2019 Term Loan is $200,000 at December 31, 2019
(however, the discounted balance is $199,000), and $0 at December
31, 2018 (as the facility was not in place at December 31, 2018).
See Note J – Subsequent Event for information regarding the
extension of the 2019 Term Loan.
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
less than $1,000 in interest expense in Fiscal 2019 and $0 in
interest expense in Fiscal 2018 (as the facility was not in place
until July 2019). The balance on the July 2019 Term Loan was
$10,000 at December 31, 2019, and $0 at December 31, 2018 (as the
facility was not in place at December 31, 2018).
DECEMBER 2019 CONVERTIBLE NOTE
On
December 31, 2019, the Company entered into a Convertible Note with
one individual in the amount of $25,000 (“2019 Convertible
Note”). Under the terms of the 2019 Convertible Note, the
principal amount would convert into equity within 120 days of the
origination of the note or upon the close of a contemplated private
placement in early 2020, whichever was sooner. The 2019 Convertible
Note did not bear any interest and was ultimately converted into
equity as part of a private placement closed in February 2020. The
balance on the 2019 Convertible Note was $25,000 at December 31,
2019 and $0 at December 31, 2018 (as the convertible note was not
in place at December 31, 2018).
NOTE
F – INCOME TAXES
The
Company follows ASC 740 “Income Taxes” (“ASC
740”) which prescribes the asset and liability method whereby
deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted laws and tax rates
that will be in effect when the differences are expected to
reverse. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits that are
not expected to be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period
that such tax rate changes are enacted. Under ASC 740, tax benefits
are recorded only for tax positions that are more likely than not
to be sustained upon examination by tax authorities. The amount
recognized is measured as the largest amount of benefit that is
greater than 50 percent likely to be realized upon ultimate
settlement. Unrecognized tax benefits are tax benefits claimed in
the Company’s tax returns that do not meet these recognition
and measurement standards.
On
December 22, 2017, the Tax Reform Act was signed into law. Among
the provisions, the Tax Reform ACT reduces the U.S. federal
corporate income tax rate from a maximum of 35% to a flat 21%
effective January 1, 2018, requires companies to pay a one-time
transition tax on deemed repatriated earnings of certain foreign
subsidiaries that were previously tax deferred, and creates new
taxes on certain foreign sourced earnings. At December 31, 2019,
the Company has completed its accounting for the tax effects of the
enactment of the Tax Reform Act. The Company has finalized the tax
effects on its existing deferred tax balances and the one-time
transition tax under Staff Accounting Bulletin No. 118 ("SAB 118").
The Company has also included current year impacts of the Tax
Reform Act in our tax provision. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to reverse.
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security
Act (CARES Act) was enacted in response to the COVID-19 pandemic.
The CARES Act, among other things, permits NOL carryovers and
carrybacks to offset 100% of taxable income for taxable years
beginning before 2021. In addition, the CARES Act allows NOLs
incurred in tax years 2018, 2019, and 2020 to be carried back to
each of the five preceding taxable years to generate a refund of
previously paid income taxes. The CARES Act also contains
modifications on the limitation of business interest for tax years
beginning in 2019 and 2020. The modifications to Section 163(j)
increase the allowable interest expense deduction. Any tax benefit
as a result of the CARES Act is primarily due to the carryback of
net operating losses to prior years and increased interest expense
deductions.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
A
reconciliation of the U.S. Federal statutory income tax rate to the
effective income tax rate is as follows:
|
|
Year
Ended
December
31,
2019
|
|
Year
Ended
December
31,
2018
|
|
Tax expense at
federal statutory rate
|
(21%)
|
|
(21%)
|
|
State tax expense,
net of federal tax effect
|
0%
|
|
0%
|
|
Expired
NOL
|
46%
|
|
0%
|
|
Deferred income tax
asset valuation allowance
|
(26%)
|
|
21%
|
|
Effective income
tax rate
|
(1%)
|
|
0%
|
Significant
components of the Company’s deferred income tax assets are as
follows:
|
|
|
|
|
|
|
|
|
Inventory
capitalization
|
$8,000
|
$9,000
|
|
Inventory
allowance
|
76,000
|
70,000
|
|
Allowance for
doubtful accounts
|
9,000
|
9,000
|
|
Accrued
compensation
|
18,000
|
22,000
|
|
Stock based
compensation
|
168,000
|
168,000
|
|
Deferred wages
payable
|
50,000
|
43,000
|
|
Depreciation
– Property, Plant & Equipment
|
(1,000)
|
(6,000)
|
|
Net operating loss
carry-forward
|
3,339,000
|
3,569,000
|
|
Total gross
deferred income tax assets
|
3,667,000
|
3,884,000
|
|
Less deferred
income tax assets valuation allowance
|
(3,667,000)
|
(3,884,000)
|
|
Net deferred income
tax assets
|
$0
|
$0
|
The
valuation allowance for deferred income tax assets as of December
31, 2019 and December 31, 2018 was $3,667,000 and $3,884,000,
respectively. The net change in the deferred income tax assets
valuation allowance was $217,000 for Fiscal 2019 and $265,000 for
Fiscal 2018. The Company believes that it is more likely than not
that the deferred tax assets will not be realized.
As of
December 31, 2019, the prior three years remain open for
examination by the federal or state regulatory agencies for
purposes of an audit for tax purposes.
At
December 31, 2019, the Company had Federal net operating loss
carry-forwards for income tax purposes of approximately $3,339,000.
The Company’s net operating loss carry-forwards began to
expire in 2019 and continue to expire through 2035. In assessing
the realizability of deferred income tax assets, management
considers whether or not it is more likely than not that some
portion or all deferred income tax assets will be realized. The
ultimate realization of deferred income tax assets is dependent
upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning
strategies in making this assessment.
The
Company’s ability to utilize the operating loss
carry-forwards may be subject to an annual limitation in future
periods pursuant to Section 382 of the Internal Revenue Code of
1986, as amended, if future changes in ownership
occur.
The
Company recognizes potential interest and penalties related to
income tax positions as a component of the provision for income
taxes on operations. The Company does not anticipate that total
unrecognized tax benefits will materially change in the next twelve
months.
NOTE G – OTHER INCOME / EXPENSE
Other
expense in Fiscal 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 in Fiscal 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.
NOTE H – STOCKHOLDERS’ EQUITY
[1]
Stock option plans: 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.
[2]
Stock options: During Fiscal 2019, the
Company issued four stock option grants to non-employee members of
our board of directors (under the Fiscal 2001 Plan) to purchase
20,000 shares of common stock (each); for a total of 80,000 common
shares. During
Fiscal 2018, the Company issued four stock option grants to
non-employee members of our board of directors to purchase 20,000
shares of common stock (each); for a total of 80,000 common
shares.
As of
December 31, 2019, there were 2,252,000 options issued and
outstanding under the 2001 Plan. There were no options issued under
the 2013 Plan, making the total issued and outstanding options
2,252,000 as of December 31, 2019. Of the total options issued and
outstanding, 2,172,000 were fully vested as of December 31, 2019.
As of December 31, 2019, there were 1,465,000 options available for
issuance under the 2001 Plan and 4,000,000 options available under
the 2013 Plan.
Stock
option activity for Fiscal 2019 and Fiscal 2018 is summarized as
follows: (the figures contained within the tables below have been
rounded to the nearest thousand)
|
|
Year Ended
December 31,2019
|
Year Ended
December 31, 2018
|
|
|
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value
as of December 31, 2019
|
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value as of December 31, 2018
|
|
Options outstanding
at beginning of year
|
2,222,000
|
$0.13
|
$3,000
|
2,147,000
|
$0.13
|
|
|
Granted
|
80,000
|
$0.07
|
|
80,000
|
$0.10
|
|
|
Exercised
|
0
|
|
|
0
|
|
|
|
Cancelled/expired
|
(50,000)
|
$0.20
|
|
(5,000)
|
$0.26
|
|
|
Options outstanding
at end of year
|
2,252,000
|
$0.14
|
$1,000
|
2,222,000
|
$0.13
|
$3,000
|
|
Options exercisable
at end of year
|
2,172,000
|
$0.13
|
|
2,142,000
|
$0.13
|
|
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
The
following table presents information relating to stock options
outstanding as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.07
- $0.10
|
365,000
|
$0.09
|
4.43
|
285,000
|
$0.09
|
|
$0.11
- $0.14
|
1,485,000
|
$0.12
|
5.35
|
1,485,000
|
$0.12
|
|
$0.15
- $0.26
|
402,000
|
$0.18
|
3.47
|
402,000
|
$0.18
|
|
TOTAL
|
2,252,000
|
$0.14
|
4.87
|
2,172,000
|
$0.13
|
The
following table summarizes weighted-average assumptions using the
Black-Scholes option-pricing model used on the date of the grants
issued during Fiscal 2019 and Fiscal 2018:
|
|
|
|
|
|
|
|
Volatility
|
85%
|
79%
|
|
Expected term
(years)
|
|
|
|
Risk-free interest
rate
|
2.01%
|
2.90%
|
|
Dividend
yield
|
0%
|
0%
|
The
Company recognized $6,000 in share based payment expense related to
stock options in Fiscal 2019, and $10,000 in share based payment
expense related to stock options in Fiscal 2018. As of December 31,
2019, there was approximately $2,000 of total unrecognized share
based payment expense related to stock options. This cost is
expected to be recognized over 5 months.
Warrant
activity for Fiscal 2018 and Fiscal 2017 is summarized as follows.
Any common shares issued as a result of the exercise of warrants
would be new common shares issued from our authorized issued
shares.
|
|
Year
Ended December 31, 2019
|
Year Ended December
31, 2018
|
|
|
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value as
of
December
31,
2019
|
|
Weighted Average
Exercise Price
|
Aggregate Intrinsic
Value as of
December
31,
2018
|
|
Warrants
outstanding at beginning of year
|
2,000,000
|
$0.18
|
None
|
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 year
|
2,000,000
|
$0.18
|
None
|
2,000,000
|
$0.18
|
None
|
|
Warrants
exercisable at end of year
|
2,000,000
|
$0.18
|
|
2,000,000
|
$0.18
|
|
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
The
Company recognized $0 in debt issuance and deferred finance costs
related to the issuance of these warrants outstanding in Fiscal
2019 and Fiscal 2018. As of December 31, 2019, there was $0 of
total unrecognized debt issuance costs associated with the issuance
of the above warrants outstanding.
NOTE I – COMMITMENTS, CONTINGENCIES AND OTHER
MATTERS
[1]
Operating leases: The Company leases
office and R&D/production facilities in New Jersey under a,
non-cancellable operating lease through December 31, 2019. In
December 2019, the Company extended the lease for the New Jersey
facility through December 31, 2022. The Company also leases office
support equipment through July 2022 and December 2025. At December
31, 2019, the future minimum rental payments under these operating
leases are as follows:
|
2020
|
$37,000
|
|
2022
|
37,000
|
|
2022
|
36,000
|
|
2023
|
1,000
|
|
2024
|
1,000
|
|
Thereafter
|
1,000
|
|
|
$113,000
|
Rent
Expense was $46,000 and $43,000 in Fiscal 2019 and Fiscal 2018,
respectively.
[2]
Employment agreements: The Company has
an employment agreement in place with its Chief Executive
Officer/Principal Financial Officer, Melissa Waterhouse. The
employment agreement with Ms. Waterhouse provides for a $160,000
annual salary (although the salary of Ms. Waterhouse is still
deferred by 10% through the date of this report; resulting in
deferred compensation due to Waterhouse in the amount of $99,000
through December 31, 2019). It automatically renews unless either
party gives advance notice of 60 days. The employment agreement
contains severance provisions; in the event the Company terminates
Ms. Waterhouse’s employment for any reason other than cause
(which is defined under the employment agreement), Ms. Waterhouse
would receive severance pay equal to 12 months of her base salary
at the time of termination, with continuation of all medical
benefits during the twelve-month period at the Company’s
expense. In addition, Ms. Waterhouse may tender her resignation and
elect to exercise the severance provision if she is required to
relocate more than 50 miles from the Company’s New York
facility as a continued condition of employment, if there is a
substantial change in the responsibilities normally assumed by her
position, or if she is asked to commit or conceal an illegal act by
an officer or member of the board of directors of the Company. In
the case of a change in control of the Company, Ms. Waterhouse
would be entitled to severance pay equal to two times her base
salary under certain circumstances.
[3]
Legal:
ABMC v. Todd Bailey
On
August 5, 2019, we settled litigation with 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. Our complaint
sought damages related to profits and revenues that resulted from
actions taken by Bailey related to our 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. We believed the amount sought
was not due to Bailey given the actions indicated in our
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.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
NOTE J – SUBSEQUENT EVENTS
PRIVATE PLACEMENT
On
February 20, 2020, the Company entered into a Securities Purchase
Agreement (the “Purchase Agreement”) with Chaim Davis
(the Chairman of our Board of Directors) and certain other
accredited investors (the “Investors”), pursuant to
which the Company agreed to issue and sell to the Investors in a
private placement (the “Private Placement”), 2,842,857
Units (the “Units”).
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 $0.07 (the “Purchase Price”) for aggregate
gross proceeds of approximately $199,000. The Company received net
proceeds of $199,000 from the Private Placement as expenses related
to the Private Placement were minimal. The Company did not utilize
a placement agent for the Private Placement. The Company used the
net proceeds for working capital and general corporate
purposes.
The
Company does not intend to register the Units issued under the
Private Placement; rather the Units issued will be subject to the
holding period requirements and other conditions of Rule
144.
CHEROKEE FINANCIAL LLC LOAN EXTENSIONS
On
February 24, 2020 (the “Closing Date”), the Company
completed a transaction related to a one-year Extension Agreement
dated February 14, 2020 (the “Extension Agreement”)
with Cherokee under which Cherokee extended the due date of the
Company’s credit facilities (a $900,000 (mortgage) Term Note
and a $200,000 2019 Term Loan) to February 15, 2021. No terms of
either facility were changed under the Extension Agreement. For
consideration of the Extension Agreement, the Company issued 1.5%
of the $200,000 principal, or $3,000, in 42,857 restricted shares
of the Company’s common stock to Cherokee and, 2% of the
$900,000 principal, or $18,000, in 257,143 restricted shares of the
Company’s common stock to Cherokee on behalf of their
investors.
The
Company also paid Cherokee’s legal fees in the amount of
$1,000.
SBA PAYCHECK PROTECTION LOAN (PPP LOAN)
On
April 22, 2020, the Company entered into a Promissory Note
(“PPP Note”) for $332,000 with Crestmark Bank, pursuant
to the U.S. Small Business Administration Paycheck Protection
Program under Title I of the Coronavirus Aid, Relief, and Economic
Security (“CARES”) Act passed by Congress and signed
into law on March 27, 2020. The PPP Note is unsecured, bears
interest at 1.00% per annum, with principal and interest payments
deferred for the first six months, and matures in two years. The
principal is payable in equal monthly installments, with interest,
beginning on the first business day after the end of the deferment
period. The PPP Note may be forgiven subject to the terms of the
Paycheck Protection Program.
Additionally,
certain acts of the Company, including but not limited to: (i) the
failure to pay any taxes when due, (ii) becoming the subject of a
proceeding under any bankruptcy or insolvency law, (iii) making an
assignment for the benefit of creditors, or (iv) reorganizing,
merging, consolidating or otherwise changing ownership or business
structure without PPP Lender’s prior written consent, are
considered events of default which grant Lender the right to seek
immediate payment of all amounts owing under the PPP
Note.
COVID-19
On
March 11, 2020, the World Health Organization declared a pandemic
related to the rapidly spreading COVID-19 outbreak, which has led
to a global health emergency. The extent of the public-health
impact of the outbreak is currently unknown and rapidly evolving,
and the related health crisis could adversely affect the global
economy, resulting in an economic downturn. Any disruption of the
Company’s facilities or those of our suppliers could likely
adversely impact the Company’s operations. Currently, there
is significant uncertainty relating to the potential effect of the
novel coronavirus on our business.
DISTRIBUTION OF COVID-19 RAPID TEST
On
March 23, 2020, the Company announced in a press releases that it
began marketing (on March 17, 2020), via a distribution
partnership, a Rapid Test to detect Covid-19 antibodies in whole
blood, serum or plasma.. The test is not available for consumer use
and is being marketed in full compliance with the March 16, 2020
Emergency Use Authorization (“EUA”) policy set forth by
the FDA. An EUA was issued by FDA on May 29, 2020. While The
Company does expect the marketing of the Covid-19 test to
positively impact its revenues in Fiscal 2021, the Company does not
yet know the full extent of the positive impact of COVID-19 test
sales on its business, its financial condition and results of
operations. The extent to which sales of the COVID-19 test may
impact the Company’s business, operating results, financial
condition, or liquidity in the future will depend on future
developments which are evolving and highly uncertain including the
duration of the outbreak and the need for antibody testing in the
future.
EXTENSION OF THE CRESTMARK LINE OF CREDIT
On June
22, 2020, the Company extended its line of credit with Crestmark
Bank extending the line of credit until June 22, 2021. All terms
and conditions of the line of credit remain unchanged under the
extension period with the exception of the following, 1) the
maximum availability under the line of credit was reduced from
$1,500,000 to $1,000,000, 2) availability under the line of credit
is based on receivables only (under the same terms), 3) the
requirement for field audits of the Company was removed, and 4) the
Tangible Net Worth (TNW) covenant was removed.
NOTE L- SEGMENT AND GEOGRAPHIC INFORMATION
The
Company operates in one reportable segment. All of the
Company’s long-lived assets are located within the United
States.
Information
concerning net sales by principal geographic location is as
follows:
|
|
Year
Ended
December
31,
2019
|
Year
Ended
December
31,
2018
|
|
United
States
|
$3,189,000
|
$3,411,000
|
|
North America (not
domestic)
|
11,000
|
56,000
|
|
Europe
|
108,000
|
133,000
|
|
Asia/Pacific
Rim
|
13,000
|
25,000
|
|
South
America
|
344,000
|
246,000
|
|
Africa
|
0
|
1,000
|
|
|
$3,655,000
|
$3,872,000
|