UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2021 |
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ___________ to ___________ |
Commission File Number: 0-28666
AMERICAN BIO MEDICA CORPORATION | |
(Exact name of registrant as specified in its charter) |
New York | 14-1702188 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
122 Smith Road, Kinderhook, New York | 12106 | |
(Address of principal executive offices) | (Zip Code) |
518-758-8158
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | ABMC | OTCQB® Venture Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date:
43,803,476 Common Shares as of November 16, 2020
American Bio Medica Corporation
Index to Quarterly Report on Form 10-Q
For the quarter ended SeptemberJune 30, 2020
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
September 30, | December 31, | |
2020 | 2019 | |
| ASSETS | (Unaudited) | |
| Current assets | ||
| Cash and cash equivalents | $61,000 | $4,000 |
| Accounts receivable, net of allowance for doubtful accounts of $35,000 at September 30, 2020 and $34,000 at December 31, 2019 | 364,000 | 370,000 |
| Inventory, net of allowance of $397,000 at September 30, 2020 and $291,000 at December 31, 2019 | 602,000 | 810,000 |
| Prepaid expenses and other current assets | 85,000 | 6,000 |
| Right of use asset – operating leases | 35,000 | 34,000 |
| Total current assets | 1,147,000 | 1,224,000 |
| Property, plant and equipment, net | 594,000 | 644,000 |
| Patents, net | 110,000 | 116,000 |
| Right of use asset – operating leases | 49,000 | 73,000 |
| Other assets | 21,000 | 21,000 |
| Total assets | $1,921,000 | $2,078,000 |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||
| Current liabilities | ||
| Accounts payable | $604,000 | $652,000 |
| Accrued expenses and other current liabilities | 577,000 | 543,000 |
| Right of use liability – operating leases | 33,000 | 34,000 |
| Wages payable | 98,000 | 104,000 |
| Line of credit | 208,000 | 337,000 |
| PPP Loan | 332,000 | 0 |
| Current portion of long-term debt, net of deferred finance costs | 1,120,000 | 17,000 |
| Total current liabilities | 2,972,000 | 1,687,000 |
| Long-term debt/other liabilities , net of current portion and deferred finance costs | 0 | 1,108,000 |
| Right of use liability – operating leases | 49,000 | 73,000 |
| Total liabilities | 3,021,000 | 2,868,000 |
| COMMITMENTS AND CONTINGENCIES | ||
| Stockholders' deficit: | ||
| Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at September 30, 2020 and December 31, 2019 | 0 | 0 |
| Common stock; par value $.01 per share; 50,000,000 shares authorized; 35,953,476 issued and outstanding at September 30, 2020 and 32,680,984 issued and outstanding as of December 31, 2019 | 359,000 | 327,000 |
| Additional paid-in capital | 21,658,000 | 21,437,000 |
| Accumulated deficit | (23,117,000) | (22,554,000) |
| Total stockholders’ deficit | (1,100,000) | (790,000) |
| Total liabilities and stockholders’ deficit | $1,921,000 | $2,078,000 |
American Bio Medica Corporation | ||||||||
Condensed Balance Sheets | ||||||||
|
|
|
|
|
|
| ||
|
| June 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
ASSETS |
| (Unaudited) |
|
|
|
| ||
Current assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 30,000 |
|
| $ | 98,000 |
|
Accounts receivable, net of allowance for doubtful accounts of $5,000 at June 30, 2021 and $22,000 at December 31, 2020 |
|
| 387,000 |
|
|
| 407,000 |
|
Inventory, net of allowance of $321,000 at June 30, 2021 and $279,000 at December 31, 2020 |
|
| 475,000 |
|
|
| 536,000 |
|
Prepaid expenses and other current assets |
|
| 25,000 |
|
|
| 104,000 |
|
Right of use asset – operating leases |
|
| 36,000 |
|
|
| 35,000 |
|
Total current assets |
|
| 953,000 |
|
|
| 1,180,000 |
|
Property, plant and equipment, net |
|
| 544,000 |
|
|
| 576,000 |
|
Patents, net |
|
| 104,000 |
|
|
| 108,000 |
|
Right of use asset – operating leases |
|
| 22,000 |
|
|
| 41,000 |
|
Other assets |
|
| 21,000 |
|
|
| 21,000 |
|
Total assets |
| $ | 1,644,000 |
|
| $ | 1,926,000 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 593,000 |
|
| $ | 577,000 |
|
Accrued expenses and other current liabilities |
|
| 487,000 |
|
|
| 620,000 |
|
Right of use liability – operating leases |
|
| 26,000 |
|
|
| 33,000 |
|
Wages payable |
|
| 92,000 |
|
|
| 107,000 |
|
Line of credit |
|
| 287,000 |
|
|
| 277,000 |
|
PPP Loan |
|
| 332,000 |
|
|
| 332,000 |
|
Current portion of long-term debt, net of deferred finance costs |
|
| 1,290,000 |
|
|
| 75,000 |
|
Total current liabilities |
|
| 3,107,000 |
|
|
| 2,021,000 |
|
Long-term debt/other liabilities , net of current portion and deferred finance costs |
|
| 0 |
|
|
| 1,120,000 |
|
Right of use liability – operating leases |
|
| 30,000 |
|
|
| 41,000 |
|
Total liabilities |
|
| 3,137,000 |
|
|
| 3,182,000 |
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
Stockholders’ deficit: |
|
|
|
|
|
|
|
|
Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at June 30, 2021 and December 31, 2020 |
|
| 0 |
|
|
| 0 |
|
Common stock; par value $.01 per share; 75,000,000 shares authorized; 42,603,476 issued and outstanding at June 30, 2021 and 37,703,476 issued and outstanding as of December 31, 2020 |
|
| 426,000 |
|
|
| 377,000 |
|
Additional paid-in capital |
|
| 22,232,000 |
|
|
| 21,717,000 |
|
Accumulated deficit |
|
| (24,151,000 | ) |
|
| (23,350,000 | ) |
Total stockholders’ deficit |
|
| (1,493,000 | ) |
|
| (1,256,000 | ) |
Total liabilities and stockholders’ deficit |
| $ | 1,644,000 |
|
| $ | 1,926,000 |
|
The accompanying notes are an integral part of the condensed financial statements
For The Nine Months Ended | ||
September 30, | ||
2020 | 2019 | |
| Net sales | $3,370,000 | $2,775,000 |
| Cost of goods sold | 2,362,000 | 1,805,000 |
| Gross profit | 1,008,000 | 970,000 |
| Operating expenses: | ||
| Research and development | 77,000 | 62,000 |
| Selling and marketing | 408,000 | 350,000 |
| General and administrative | 951,000 | 968,000 |
1,436,000 | 1,380,000 | |
| Operating loss | (428,000) | (410,000) |
| Other (expense) / income : | ||
| Interest expense | (133,000) | (200,000) |
| Other income, net | 0 | 172,000 |
(133,000) | (28,000) | |
| Net loss before tax | (561,000) | (438,000) |
| �� | ||
| Income tax expense | (2,000) | (2,000) |
| Net loss | $(563,000) | $(440,000) |
| Basic and diluted loss per common share | $(0.02) | $(0.01) |
| Weighted average number of shares outstanding – basic & diluted | 35,278,455 | 32,479,123 |
| 3 |
| Table of Contents |
|
| For The Six Months Ended |
| |||||
|
| June 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
| ||
Net sales |
| $ | 1,095,000 |
|
| $ | 2,486,000 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 854,000 |
|
|
| 1,714,000 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 241,000 |
|
|
| 772,000 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
| 41,000 |
|
|
| 52,000 |
|
Selling and marketing |
|
| 155,000 |
|
|
| 319,000 |
|
General and administrative |
|
| 798,000 |
|
|
| 656,000 |
|
Total Operating expenses |
|
| 994,000 |
|
|
| 1,027,000 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
| (753,000 | ) |
|
| (255,000 | ) |
|
|
|
|
|
|
|
|
|
Other (expense) / income : |
|
|
|
|
|
|
|
|
Interest expense |
|
| (96,000 | ) |
|
| (91,000 | ) |
Other income, net |
|
| 50,000 |
|
|
| 0 |
|
Total Other (expense) / income |
|
| (46,000 | ) |
|
| (91,000 | ) |
|
|
|
|
|
|
|
|
|
Net loss before tax |
|
| (799,000 | ) |
|
| (346,000 | ) |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| (2,000 | ) |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (801,000 | ) |
| $ | (346,000 | ) |
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share |
| $ | (0.02 | ) |
| $ | (0.01 | ) |
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding – basic & diluted |
|
| 39,910,658 |
|
|
| 34,937,236 |
|
The accompanying notes are an integral part of the condensed financial statements
For The Three Months Ended | ||
September 30, | ||
2020 | 2019 | |
| Net sales | $883,000 | $895,000 |
| Cost of goods sold | 648,000 | 536,000 |
| Gross profit | 235,000 | 359,000 |
| Operating expenses: | ||
| Research and development | 24,000 | 23,000 |
| Selling and marketing | 89,000 | 131,000 |
| General and administrative | 294,000 | 286,000 |
407,000 | 440,000 | |
| Operating loss | (172,000) | (81,000) |
| Other (expense) / income: | ||
| Interest expense | (42,000) | (66,000) |
| Other income, net | 0 | 3,000 |
(42,000) | (63,000) | |
| Net loss before tax | (214,000) | (144,000) |
| Income tax expense | (2,000) | (0) |
| Net loss | $(216,000) | $(144,000) |
| Basic and diluted loss per common share | $(0.01) | $(0.00) |
| Weighted average number of shares outstanding – basic & diluted | 35,953,476 | 32,545,776 |
| 4 |
| Table of Contents |
|
|
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| |||||
|
| For The Three Months Ended |
| |||||
|
| June 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
| ||
Net sales |
| $ | 529,000 |
|
| $ | 1,758,000 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 393,000 |
|
|
| 1,176,000 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 136,000 |
|
|
| 582,000 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
| 21,000 |
|
|
| 19,000 |
|
Selling and marketing |
|
| 72,000 |
|
|
| 230,000 |
|
General and administrative |
|
| 287,000 |
|
|
| 317,000 |
|
Total Operating expenses |
|
| 380,000 |
|
|
| 566,000 |
|
|
|
|
|
|
|
|
|
|
Operating (loss) / income |
|
| (244,000 | ) |
|
| 16,000 |
|
|
|
|
|
|
|
|
|
|
Other income / (expense): |
|
|
|
|
|
|
|
|
Interest expense |
|
| (49,000 | ) |
|
| (37,000 | ) |
Other income, net |
|
| 50,000 |
|
|
| 0 |
|
Total Other (expense) / income |
|
| 1,000 |
|
|
| (37,000 | ) |
|
|
|
|
|
|
|
|
|
Net loss before tax |
|
| (243,000 | ) |
|
| (21,000 | ) |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| (2,000 | ) |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (245,000 | ) |
| $ | (21,000 | ) |
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share |
| $ | (0.01 | ) |
| $ | (0.00 | ) |
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding – basic & diluted |
|
| 40,950,729 |
|
|
| 35,905,948 |
|
The accompanying notes are an integral part of the condensed financial statements
For The Nine Months Ended | ||
September 30, | ||
2020 | 2019 | |
| Cash flows from operating activities: | ||
| Net loss | $(563,000) | $(440,000) |
| Adjustments to reconcile net loss to net cash provided by / (used in) operating activities: | ||
| Depreciation and amortization | 60,000 | 61,000 |
| Amortization of debt issuance costs | 37,000 | 82,000 |
| Allowance for doubtful accounts | 1,000 | (2,000) |
| Provision for slow moving and obsolete inventory | 114,000 | 63,000 |
| Share-based payment expense | 2,000 | 4,000 |
| Director fee paid with restricted stock | 31,000 | 5,000 |
| Refinance fee paid with restricted stock | 21,000 | 0 |
| Changes in: | ||
| Accounts receivable | 5,000 | (38,000) |
| Inventory | 94,000 | 66,000 |
| Prepaid expenses and other current assets | (56,000) | 11,000 |
| Accounts payable | (48,000) | 247,000 |
| Accrued expenses and other current liabilities | 9,000 | 78,000 |
| Wages payable | (6,000) | (142,000) |
| Net cash used in operating activities | (299,000) | (5,000) |
| Cash flows from investing activities: | ||
| Purchase of property, plant, and equipment | (4,000) | 0 |
| Net cash used in investing activities | (4,000) | 0 |
| Cash flows from financing activities: | ||
| Proceeds from debt financing | 332,000 | 62,000 |
| Payments on debt financing | (7,000) | (85,000) |
| Proceeds from Private Placement | 164,000 | 0 |
| Proceeds from lines of credit | 3,449,000 | 2,876,000 |
| Payments on lines of credit | (3,578,000) | (2,946,000) |
| Net cash provided by / (used in) financing activities | 360,000 | (93,000) |
| Net change in cash and cash equivalents | 57,000 | (98,000) |
| Cash and cash equivalents - beginning of period | 4,000 | 113,000 |
| Cash and cash equivalents - end of period | $61,000 | $15,000 |
| Supplemental disclosures of cash flow information | ||
| Non-Cash transactions: | ||
| Debt issuance cost paid with restricted stock | $0 | $14,000 |
| Loans converted to stock | $39,000 | $0 |
| Cash paid during period for interest | $109,000 | $117,000 |
| Cash paid during period for taxes | $2,000 | $2,000 |
| 5 |
| Table of Contents |
|
|
|
| |||||
|
| For The Six Months Ended June 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | (801,000 | ) |
| $ | (346,000 | ) |
Adjustments to reconcile net loss to net cash (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 36,000 |
|
|
| 41,000 |
|
Amortization of debt issuance costs |
|
| 0 |
|
|
| 37,000 |
|
Penalty added to Cherokee loan balance |
|
| 120,000 |
|
|
| 0 |
|
Allowance for doubtful accounts |
|
| (17,000 | ) |
|
| 0 |
|
Provision for slow moving and obsolete inventory |
|
| 42,000 |
|
|
| 72,000 |
|
Share-based payment expense |
|
| 0 |
|
|
| 2,000 |
|
Director fee paid with restricted stock |
|
| 0 |
|
|
| 30,000 |
|
Refinance fee paid with restricted stock |
|
| 0 |
|
|
| 21,000 |
|
Changes in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 37,000 |
|
|
| 20,000 |
|
Inventory |
|
| 19,000 |
|
|
| (32,000 | ) |
Prepaid expenses and other current assets |
|
| 97,000 |
|
|
| (112,000 | ) |
Accounts payable |
|
| 16,000 |
|
|
| (25,000 | ) |
Accrued expenses and other current liabilities |
|
| (150,000 | ) |
|
| 103,000 |
|
Wages payable |
|
| (15,000 | ) |
|
| 31,000 |
|
Net cash (used in) operating activities |
|
| (616,000 | ) |
|
| (158,000 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from debt financing |
|
| 0 |
|
|
| 332,000 |
|
Payments on debt financing |
|
| (25,000 | ) |
|
| (6,000 | ) |
Proceeds from Private Placement |
|
| 0 |
|
|
| 164,000 |
|
Proceeds from Lincoln Park financing |
|
| 564,000 |
|
|
| 0 |
|
Proceeds from lines of credit |
|
| 1,143,000 |
|
|
| 2,352,000 |
|
Payments on lines of credit |
|
| (1,134,000 | ) |
|
| (2,463,000 | ) |
Net cash provided by financing activities |
|
| 548,000 |
|
|
| 379,000 |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
| (68,000 | ) |
|
| 221,000 |
|
Cash and cash equivalents - beginning of period |
|
| 98,000 |
|
|
| 4,000 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of period |
| $ | 30,000 |
|
| $ | 225,000 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
Non-Cash transactions: |
|
|
|
|
|
|
|
|
Loans converted to stock |
| $ | 0 |
|
| $ | 39,000 |
|
Director fees paid with restricted stock |
| $ | 0 |
|
| $ | 30,000 |
|
Cash paid during period for interest |
| $ | 90,000 |
|
| $ | 73,000 |
|
Cash paid during period for taxes |
| $ | 2,000 |
|
| $ | 0 |
|
The accompanying notes are an integral part of the condensed financial statements
June 30, 2020
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, 2019.2020. 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 SeptemberJune 30, 2020,2021, and the results of operations for the three and ninesix month periods ended SeptemberJune 30, 20202021 and SeptemberJune 30, 20192020 and cash flows for the ninesix month periods ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019.
Operating results for the ninesix months ended SeptemberJune 30, 20202021 are not necessarily indicative of results that may be expected for the year ending December 31, 2020.2021. Amounts at December 31, 20192020 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
During the ninesix months ended SeptemberJune 30, 2020,2021, 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, 2019.
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, 2019,2020, 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 2021.
Through the ninesix months ended SeptemberJune 30, 2020,2021, the Company had a line of credit with Crestmark Bank. The maximum availability on the Company’s line of credit was $1,000,000 beginning June 22, 2020 when the facility was amended and extended. However, because the amount available under the line of credit is based upon the Company’s accounts receivable and inventory, the amounts actually available under our line of credit (historically) have been significantly less than the maximum availability. As of SeptemberJune 30, 2020,2021, 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.
In February 2020,2021, our credit facilities with Cherokee Financial, LLC were extended for another 12 months, or until February 15, 2021 (which2022, which is less than 12 months from the date of this report).report. Our total debt at SeptemberJune 30, 20202021 with Cherokee Financial, LLC is $1,120,000.$1,240,000. 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, 2021.2022. We are currently looking at alternatives to further extend or refinance these facilities.
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On December 9, 2020, we entered into a Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) under which Lincoln Park agreed to purchase from the Company, from time to time, up to $10,250,000 of our shares of common stock, par value $0.01 per share, subject to certain limitations set forth in the Purchase Agreement, during the term of the Purchase Agreement. Pursuant to the terms of the Registration Rights Agreement, we were required to file with the SEC, a registration statement on Form S-1 (the “Registration Statement”) to register for resale under the Securities Act of 1933, as amended (the “Securities Act”), the shares of common stock that we had already issued and sold to Lincoln Park (500,000 shares of common stock for a purchase price of $125,000 along with 1,250,000 shares of common stock issued to Lincoln Park’s for their irrevocable commitment to purchase common shares upon the terms of and subject to satisfaction of the conditions set forth in the Purchase Agreement), and shares of common stock we may in the future elect to issue and sell to Lincoln Park from time to time under the Purchase Agreement.
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. If availability under the Company’s line of credit isand the Lincoln Park Security Agreement are not sufficient to satisfy itsour working capital and capital expenditure requirements, the Companywe 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
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 2019-12ASU 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)”
, issued in January 2020, clarifies certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. The requirements in ASUASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”,
issued in August 2020 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments also simplify the guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. The amendments are effective for public companies for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The guidance must be adopted as of the beginning of the fiscal year of adoption. The Company adopted ASU 2020-06 on January 1, 2021 and the adoption did not have an impact on the Company’s financial condition or results of operation.| 8 |
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Accounting Standards Issued; Not Yet Adopted
ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), issued in May 2021, addresses an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is evaluatingeffective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company will evaluate the impact of ASU 2020-06.
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: | September 30, 2020 | December 31, 2019 |
| Raw Materials | $695,000 | $670,000 |
| Work In Process | 113,000 | 141,000 |
| Finished Goods | 191,000 | 290,000 |
| Allowance for slow moving and obsolete inventory | (397,000) | (291,000) |
$602,000 | $810,000 |
Inventory is comprised of the following:
|
| June 30, 2021 |
|
| December 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Raw Materials |
| $ | 536,000 |
|
| $ | 534,000 |
|
Work In Process |
|
| 122,000 |
|
|
| 127,000 |
|
Finished Goods |
|
| 138,000 |
|
|
| 154,000 |
|
Allowance for slow moving and obsolete inventory |
|
| (321,000 | ) |
|
| (279,000 | ) |
|
| $ | 475,000 |
|
| $ | 536,000 |
|
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 SeptemberJune 30, 20202021 and 2019:
September 30, 2020 | September 30, 2019 | |
| Warrants | 0 | 2,000,000 |
| Options | 2,142,000 | 2,252,000 |
2,142,000 | 4,252,000 |
|
| June 30, 2021 |
|
| June 30, 2020 |
| ||
|
|
|
|
|
|
| ||
Warrants |
|
| 0 |
|
|
| 0 |
|
Options |
|
| 1,987,000 |
|
|
| 2,192,000 |
|
|
|
| 1,987,000 |
|
|
| 2,192,000 |
|
The number of securities not included in the diluted net loss per share for the three and ninesix months ended SeptemberJune 30, 2021 and June 30, 2020 was 1,987,000 and the three and nine months ended September 30, 2019 was 2,142,000 and 4,252,000,2,192,000, respectively, as their effect would have been anti-dilutive due to the net loss in both of the three and ninesix month periods.
Note D – Litigation/Legal Matters
From time to time, the Company may be named in legal proceedings in connection with matters that arose during the normal course of business. While the ultimate outcome of any such litigation cannot be predicted, if the Company is unsuccessful in defending any such litigation, the resulting financial losses are not expected to have a material adverse effect on the financial position, results of operations and cash flows of the Company.
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Note E – Line of Credit and Debt
The Company’s Line of Credit and Debt consisted of the following as of SeptemberJune 30, 20202021 and December 31, 2019:
September 30, 2020 | December 31, 2019 | |
Loan and Security Agreement with Cherokee Financial, LLC: 5 year note executed on February 15, 2015, 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 was extended for one year (until February 15, 2021) on February 15, 2020 under the same terms and conditions as original loan. Loan is collateralized by a first security interest in building, land and property. | $900,000 | $900,000 |
Crestmark Line of Credit: Line of credit maturing on September 22, 2021 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 12.94%. | 208,000 | 337,000 |
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%. The loan was satisfied in the quarter ended September 30, 2020. | 0 | 7,000 |
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. Loan was extended for another year (or until February 15, 2021) under the same terms and conditions. A penalty of $20,000 was added to the loan principal on February 15, 2020 in connection with the extension of the loan. | 220,000 | 200,000 |
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. Loan principal was fully converted into restricted common shares on March 2, 2020. | 0 | 10,000 |
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). Note principal was fully converted into restricted common shares on March 2, 2020 as part of our February 2020 private placement. | 0 | 25,000 |
April 2020 PPP Loan with Crestmark: 2 year SBA loan at 1% interest with first payment due October 2020. Company intends to apply for forgiveness of loan under PPP guidelines after 24 weeks, or after October 2020. | 332,000 | 0 |
$1,660,000 | $1,479,000 | |
| Less debt discount & issuance costs (Cherokee Financial, LLC loans) | 0 | (17,000) |
| Total debt, net | $1,660,000 | $1,462,000 |
| Current portion | $1,660,000 | $354,000 |
| Long-term portion, net of current portion | $0 | $1,125,000 |
|
| June 30, 2021 |
| December 31, 2020 |
| |||||
Loan and Security Agreement with Cherokee Financial, LLC: 5 year note executed on February 15, 2015, 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 was extended for one year (until February 15, 2021) on February 15, 2020 under the same terms and conditions as original loan. Loan was further extended in February 2021 to February 15, 2022.A penalty of $100,000 was added to the loan principal and the annual interest rate was increased to 10% on February 15, 2021 in connection with the extension. Loan is collateralized by a first security interest in building, land and property. |
|
| $ | 1,000,000 |
|
|
| $ | 900,000 |
|
Crestmark Line of Credit: Line of credit maturing on June 22, 2022 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 11.99%. |
|
|
| 287,000 |
|
|
|
| 277,000 |
|
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. Loan was extended in February 2020, until February 15, 2021, under the same terms and conditions. A penalty of $20,000 was added to the loan principal on February 15, 2020 in connection with the extension of the loan. Loan was further extended in February 2021 to February 15, 2022. Another penalty of $20,000 was added to the loan principal on February 15, 2021 in connection with the additional extension of the loan. |
|
|
| 240,000 |
|
|
|
| 220,000 |
|
April 2020 PPP Loan with Crestmark: 2 year SBA loan at 1% interest with first payment due October 2020. Company applied for forgiveness of loan under PPP guidelines in June 2021. |
|
|
| 332,000 |
|
|
|
| 332,000 |
|
November 2020 Shareholder Note: with Chaim Davis; no terms, note was paid on February 24, 2021 with proceeds from Lincoln Park financing. |
|
|
| 0 |
|
|
|
| 25,000 |
|
November 2020 Shareholder Note: Term loan at 7% interest (Prime + 3.75%), with an initial term of 6 months which was extended for another 6 months on May 4, 2021. Interest only payments made on February 4, 2021 and May 4, 2021. Final interest and $50,000 principal due on November 4, 2021. |
|
|
| 50,000 |
|
|
|
| 50,000 |
|
Total Debt |
|
| $ | 1,909,000 |
|
|
| $ | 1,804,000 |
|
Current portion |
|
| $ | 1,909,000 |
|
|
| $ | 684,000 |
|
Long-term portion, net of current portion |
|
| $ | 0 |
|
|
| $ | 1,120,000 |
|
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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%.; paid quarterly in arrears. In addition to the 8% interest, the Company is required to pay 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 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) were deducted from the balance on the Cherokee LSA and were amortized over the initial term of the debt (in accordance with ASU No. 2015-03). The Company was required to make annual principal reduction payments 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 last 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).
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 Cherokee LSA (with a balance of $900,000) to February 15, 2021. No terms of the facility were changed under the Extension Agreement. For consideration of the Extension Agreement, the Company issued 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.
On February 24, 2021, the Company completed a transaction related to another one-year Extension Agreement dated February 14, 2021 (the “Second Extension Agreement”) with Cherokee under which Cherokee extended the due date of the Cherokee LSA to February 15, 2022.
Under the terms of the Extension Agreement, the Cherokee LSA was increased to $1,000,000 to include a $100,000 penalty that was due as a result of the Company being unable to pay back the principal balance to Cherokee on February 15, 2021. Under the Second Extension Agreement, the annual interest rate on the Cherokee LSA was increased to a fixed rate of 10% (the prior fixed rate was 8%) plus a 1% annual oversight fee (that remained unchanged). Interest and the oversight fee are paid quarterly with the first payment being made on May 15, 2021. Under the terms of the Second Extension Agreement, if the Company doesn’t pay off the principal on or before February 15, 2022, there will be an 8% delinquent fee charged. This delinquent fee will only apply to whatever the principal balance is on February 15, 2022. If the Company pays any portion (or all) of the principal back, the 8% fee will not be due on the prepaid amounts. The Company can prepay all of part of the facility back prior to February 15, 2022 with no penalty.
Cantone Research, Inc. earned a 3% fee on the extended principal of $900,000 (or $27,000) for their services related to securing the second extension with Cherokee investors. This 3% service fee will be “rebated” when/if the Company prepays any, or a portion, of the loan. As an example, if the Company makes a principal reduction payment of $100,000, only $97,000 in cash will need to be remitted to Cherokee to have the $100,000 taken off the principal balance. The fee paid to Cantone Research, Inc. was recorded as a bank fee and is included in general and administrative expenses. No common stock was issued in connection with the extensions. The Company also paid Cherokee’s legal fees in the amount of $1,000.
In the event of default, this includes, but is not limited to; the Company’s inability to make any payments due under the Cherokee LSA (as amended) Cherokee has the right to increase the interest rate on the financing to 18%. If the amount due is not paid by the extended due date, Cherokee will automatically add a delinquent payment penalty of $100,000 to the outstanding principal.
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The Company recognized $72,000$48,000 in interest expense related to the Cherokee LSA in the ninesix months ended SeptemberJune 30, 20202021 (of which $16,000$0 is debt issuance cost amortization recorded as interest expense), and $125,000$53,000 in interest expense related to the Cherokee LSA in the ninesix months ended SeptemberJune 30, 20192020 (of which $70,000$17,000 is debt issuance cost amortization recorded as interest expense). The Company recognized $20,000$25,000 in interest expense related to the Cherokee LSA in the three months ended SeptemberJune 30, 2021 (of which of which $0 is debt issuance cost amortization recorded as interest expense) and $18,000 in interest expense related to the Cherokee LSA in the three months ended June 30, 2020 (of which $0 is debt issuance cost amortization recorded as interest expense), and $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).
The Company had $12,000$17,000 in accrued interest expense at SeptemberJune 30, 2021 and $14,000 in accrued interest expense at June 30, 2020 related to the Cherokee LSA and $10,000 in accrued interest expense at September 30, 2019.
As of SeptemberJune 30, 2021, the balance on the Cherokee LSA was $1,000,000 including the $100,000 penalty referenced above. As of December 31, 2020, the balance on the Cherokee LSA was $900,000. As of December 31, 2019, the balance on the Cherokee LSA was $900,000; however, the discounted balance was $884,000.
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. The Company amendedUpon completion of the initial 5 year term, the Crestmark LOC automatically renews for additional one (1) year terms unless notice of termination from the Company is received by Crestmark not less than sixty (60) days prior to the end of the renewal term. The Company did not provide Crestmark with a notice of non-renewal and therefore, the Crestmark LOC automatically renewed on June 22, 2020 and as a result of this amendment,2021 for another one year term, or until June 22, 2022.
Originally, availability under the Crestmark LOC expireswas based on June 22, 2021.
The Crestmark LOC has a minimum loan balance requirement of $500,000. At SeptemberJune 30, 2020,2021, the Company did not meet the minimum loan balance requirement as our balance was $208,000.$287,000. Under the LSA, Crestmark has the right to calculate interest on the minimum balance requirement rather than the actual balance on the Crestmark LOC (and they are exercising that right). 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).
As part of the amendment on June 22, 2020, the Crestmark LOC contained a minimum Tangible Net Worth (“TNW”) covenant (previously defined in other periodic reports). was removed effective with the quarter ended June 30, 2020. With the exception of the quarter ended June 30, 2019, the Company did not historically comply with the TNW covenant and Crestmark previously provided a number of waivers (for which the Company was charged $5,000 each). The TNW covenant was removed effective with the quarter ended June 30, 2020.
In the event of a default underof the LSA, which includes but is not limited to, failure of the Company to make any payment when due, Crestmark is permitted to charge an Extra Rate. The Extra Rate is the Company’s then current interest rate plus 12.75% per annum.
Interest on the Crestmark LOC is at a variable rate based on the Prime Rate plus 3% with a floor of 5.25%. As of June 30, 2021 and as of the date of this report, the interest only rate on the Crestmark LOC is 6.25%. 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 12.94%is 11.99%.
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The Company recognized $29,000$24,000 in interest expense related to the Crestmark LOC in the ninesix months ended SeptemberJune 30, 20202021 and $36,000$17,000 in interest expense related to the Crestmark LOC in the ninesix months ended SeptemberJune 30, 2019.2020. The Company recognized $10,000 in interest expense in the three months ended September 30, 2020 and $11,000 in interest expense in the three months ended SeptemberJune 30, 2019.
At SeptemberJune 30 2021, the balance on the Crestmark LOC was $287,000 and as of December 31, 2020, the balance on the Crestmark LOC was $208,000 and as of December 31, 2019, the balance on the Crestmark LOC was $337,000.
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. 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.
On February 24, 2020, 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 2019 Term Loan to February 15, 2021. No terms of the 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. The Company also incurred a penalty in the amount of $20,000 which was added to the principal balance of the Cherokee Term Loan.
A final balloon payment was due on February 15, 2021; however the Company further extended the 2019 Cherokee Term Loan on February 24, 2021 to February 15, 2022. Under the terms of the extension, the 2019 Cherokee Term Loan was increased to $240,000 to include a $20,000 penalty that was due as a result of the Company being unable to pay back the principal balance to Cherokee on February 15, 2021. The annual interest rate under the 2019 Cherokee Term Loan remains fixed at 18% paid quarterly in arrears with the first interest payment being due on May 15, 2021. If the Company doesn’t pay off the principal on or before February 15, 2022, there will be an 8% delinquent fee charged. This delinquent fee will only apply to whatever the principal balance is on February 15, 2022. If the Company pays any portion (or all) of the principal back, the 8% fee will not be due on the prepaid amounts. The Company can prepay all of part of the facility back prior to February 15, 2022 with no penalty.
In the event of default, this includes, but is not limited to, the Company’s inability to make any payments due under the Agreement,Agreement; Cherokee has the right to increase the interest rate on the financing to 20% and Cherokee will automatically add a delinquent payment penalty of $20,000 to the outstanding principal.
The Company recognized $30,000$21,000 in interest expense related to the 2019 Cherokee Term Loan in six months ended June 30, 2021 and $21,000 in interest expense related to the 2019 Cherokee Term Loan in the ninesix months ended SeptemberJune 30, 2020 (of which $1,000 is debt issuance cost amortization recorded as interest expense) and $35,0002020. The Company recognized $11,000 in interest expense (of which $11,000 was debt issuance costs recorded as interest expense)related to the 2019 Cherokee Term Loan in the ninethree months ended SeptemberJune 30, 2019. The Company recognized2021 and $10,000 in interest expense related to the 2019 Cherokee Term Loan in the three months ended SeptemberJune 30, 2020 (of which $0 is debt issuance cost amortization recorded as interest expense) and $13,000 in interest expense in the three months ended September 30, 2019, (of which $4,000 was debt issuance cost amortization recorded as interest expense).
The balance on the 2019 Term Loan is $220,000 at September 30, 2020 (including the $20,000 penalty referenced above). As of December 31, 2019, the balance on the Cherokee Term Loan was $200,000; however, the discounted balance was $199,000.
SBA PAYCHECK PROTECTION LOAN (PPP LOAN)
On April 22, 2020, we 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. TheOn June 5, 2021, the Company intends to applyapplied for forgiveness of loan in the amount of $332,000 under PPP guidelines after 24 weeks, or after October 2020.
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The Company recognized $2,000$1,000 in interest expense in the six months ended June 30, 2021 and $0 in interest expense in the six months ended June 30, 2020 (as the PPP loan was not in place until April 2020). The Company recognized less than $1,000 in interest expense in the three months ended June 30, 2021 and $0 in interest expense in the three months ended June 30, 2020 (as the PPP loan was not in place until April 2020). The Company had less than $1,000 in accrued interest expense at June 30 2021 and $2,000 in accrued interest expense at December 31, 2020 related to the PPP loan in the nine and three months ended September 30, 2020. The $2,000 wasLoan. This accrued at September 30, 2020 andinterest is eligible for forgiveness under PPP loan guidelines.
NOVEMBER 2020 TERM LOAN
On November 4, 2020, the Company entered into a loan agreement with an individual shareholder in the amount of $50,000. There were no expenses related to the term loan and the interest rate is 7% (Prime + 3.75%). The first interest only payment was paid on February 4, 2021 and the final interest payment and 50,000 principal was due on May 4, 2021. On May 4, 2021, the Company extended this loan for another 6 months, or until November 4, 2021. The interest rate and all other terms of the note remain unchanged under the Extension. The interest payment due to the shareholder on May 4, 2021 was paid as required with the next interest payment being due on August 4, 2021.
The company recognized $2,000 of interest expense related to the term loan in the six months ended June 30, 2021 and $0 in interest expense in the six months ended June 30, 2020 (as the loan was not in place until November 4, 2020). The Company had less than $1,000 in accrued interest expense related to this loan as of June 30, 2021.
The company recognized and accrued less than $1,000 of interest expense related to the term loan in the three months ended June 30, 2021 and $0 in interest expense in the three months ended June 30, 2020 (as the loan was not in place until November 4, 2020). The balance on the November 2020 Term Loan was $50,000 at June 30, 2021 and at December 31, 2020.
OTHER DEBT INFORMATION
In addition to the current debt indicated previously, previous debt facilities (paid in full via refinance or conversion into equity) had financial impact on the ninethree and/or six months ended June 30, 2020. More specifically:
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 was 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 was the WSJ Prime Rate plus 3% throughout the term of the loan.
The Company did not incur any interest expense in the six months ended June 30, 2021 as the Equipment Loan was satisfied in full in the quarter ended September 30, 2020 and minimal interest expense in the six months ended June 30, 2020.
The Company did not incur any interest expense in the three months ended June 30, 2021 as the Equipment Loan was satisfied in full in the quarter ended September 30, 2020 and minimal interest expense in the three months ended June 30, 2020. More specifically:
NOVEMBER 2020 LOAN WITH CHEROKEE
On March 2, 2018,November 6, 2020, the Company entered into a one-year Loan Agreement made asloan agreement with our (now former) Chairman of February 15, 2018 (the “Closing Date”) with Cherokeethe Board Chaim Davis, 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. 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 2018 Cherokee Term Loan was required to be paid in full on February 15, 2019 and was paid in full via refinance into the 2019 Term Loan with Cherokee.
| 14 |
| Table of Contents |
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 SeptemberJune 30, 2021 and the three months ended June 30, 2020, the Company issued 0 options to purchase shares of common stock. During the three months ended September 30, 2019, the Company issued 0 options to purchase shares of stock to any of its non-employee board members.
Stock option activity for the ninesix months ended SeptemberJune 30, 20202021 and the ninesix months ended SeptemberJune 30, 20192020 is summarized as follows (the figures contained within the tables below have been rounded to the nearest thousand):
Nine months ended September 30, 2020 | Nine months ended September 30, 2019 | |||||
Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value as of September 30, 2020 | Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value as of September 30, 2019 | |
| Options outstanding at beginning of year | 2,252,000 | $0.13 | 2,222,000 | $0.13 | ||
| Granted | 0 | NA | 80,000 | $0.07 | ||
| Exercised | 0 | NA | 0 | NA | ||
| Cancelled/expired | (110,000) | $0.10 | (50,000) | $0.20 | ||
| Options outstanding at end of period | 2,142,000 | $0.13 | $398,000 | 2,252,000 | $0.13 | $1,000 |
| Options exercisable at end of period | 2,142,000 | $0.13 | 2,172,000 | $0.13 | ||
|
| Six months ended June 30, 2021 |
|
| Six months ended June 30, 2020 |
| ||||||||||||||||||
|
| Shares |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value as of June 30, 2021 |
|
| Shares |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value as of June 30, 2020 |
| ||||||
Options outstanding at beginning of year |
|
| 1,987,000 |
|
| $ | 0.13 |
|
|
|
|
|
| 2,252,000 |
|
| $ | 0.14 |
|
|
|
| ||
Granted |
|
| 0 |
|
| NA |
|
|
|
|
|
| 0 |
|
| NA |
|
|
|
| ||||
Exercised |
|
| 0 |
|
| NA |
|
|
|
|
|
| 0 |
|
| NA |
|
|
|
| ||||
Cancelled/expired |
|
| 0 |
|
| NA |
|
|
|
|
|
| (60,000 | ) |
| $ | 0.13 |
|
|
|
| |||
Options outstanding at end of quarter |
|
| 1,987,000 |
|
| $ | 0.13 |
|
|
| 25,000 |
|
|
| 2,192,000 |
|
| $ | 0.12 |
|
| $ | 177,000 |
|
Options exercisable at end of quarter |
|
| 1,987,000 |
|
| $ | 0.13 |
|
|
|
|
|
|
| 2,192,000 |
|
| $ | 0.12 |
|
|
|
|
|
The Company recognized $0 in share based payment expense in the six months ended June 30, 2021 and $2,000 in share based payment expense in the ninesix months ended SeptemberJune 30, 2020 and $4,000 in share based payment expense in the nine months ended September 30, 2019.2020. The Company recognized $0 in share based payment expense in the three months ended SeptemberJune 30, 20202021 and $1,000 in share based payment expense in the three months ended SeptemberJune 30, 2019.2020. At SeptemberJune 30, 2020,2021, there was $0 of total unrecognized share based payment expense related to stock options.
| Nine months ended | ||||
| 2020 | 2019 | |||
| Volatility | NA | 85% | ||
| Expected term (years) | NA | 10 years | ||
| Risk-free interest rate | NA | 2.01% | ||
| Dividend yield | NA | 0% | ||
Warrants
Warrant activity for the ninesix months ended SeptemberJune 30, 2020 and the ninesix months ended SeptemberJune 30, 2019 is summarized as follows:
Nine months ended September 30, 2020 | Nine months ended September 30, 2019 | |||||
Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value as of September 30, 2020 | Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value as of September 30, 2019 | |
| Warrants outstanding at beginning of year | 2,000,000 | $0.18 | 2,000,000 | $0.18 | ||
| Granted | 0 | NA | 0 | NA | ||
| Exercised | 0 | NA | 0 | NA | ||
| Cancelled/expired | (2,000,000) | $0.18 | 0 | NA | ||
| Warrants outstanding at end of year | 0 | NA | None | 2,000,000 | $0.18 | None |
| Warrants exercisable at end of year | 0 | NA | 2,000,000 | $0.18 | ||
|
| Six months ended June 30, 2021 |
| Six months ended June 30, 2020 | |||||||||||||||
|
| Shares |
|
| Weighted Average Exercise Price |
| Aggregate Intrinsic Value as of June 30, 2021 |
| Shares |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value as of June 30, 2020 | ||||
Warrants outstanding at beginning of year |
|
| 0 |
|
| NA |
|
|
|
| 2,000,000 |
|
| $ | 0.18 |
|
|
| |
Granted |
|
| 0 |
|
| NA |
|
|
|
| 0 |
|
| NA |
|
|
| ||
Exercised |
|
| 0 |
|
| NA |
|
|
|
| 0 |
|
| NA |
|
|
| ||
Cancelled/expired |
|
| 0 |
|
| NA |
|
|
|
| (2,000,000 | ) |
| $ | 0.18 |
|
|
| |
Warrants outstanding at end of quarter |
|
| 0 |
|
| NA |
| None |
|
| 0 |
|
| NA |
|
| None | ||
Warrants exercisable at end of quarter |
|
| 0 |
|
| NA |
|
|
|
| 0 |
|
| NA |
|
|
| ||
In the ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, the Company recognized $0 in debt issuance and deferred finance costs related to the issuance of warrants.the above warrants outstanding. In the three months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, the Company recognized $0 in debt issuance and deferred finance costs related to the issuance of the above warrants. AsThe warrants expired in January 2021 and as of SeptemberJune 30, 2020,2021; there was $0 of total unrecognized expense.
| 15 |
| Table of Contents |
NOTE G – CHANGES IN STOCKHOLDERS’ DEFICIT
The following table summarizes the changes in stockholders’ deficit for the ninesix month periods ending June 30, 2021 and June 30, 2020:
|
| Common Stock |
|
| Additional Paid in |
|
| Accumulated |
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
|
| Capital | Deficit | Total |
| ||||||||
Balance January 1, 2021 |
|
| 37,703,476 |
|
| $ | 377,000 |
|
| $ | 21,717,000 |
|
| $ | (23,350,000 | ) |
| $ | (1,256,000 | ) |
Shares issued to Lincoln Park for balance of Initial Purchase under the 2020 Lincoln Park Equity Line |
|
| 500,000 |
|
|
| 5,000 |
|
|
| 120,000 |
|
|
|
|
|
|
| 125,000 |
|
Shares issued to Lincoln Park for purchases under the 2020 Lincoln Park Equity Line |
|
| 4,400,000 |
|
|
| 44,000 |
|
|
| 395,000 |
|
|
|
|
|
|
| 439,000 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 801,000 |
|
|
| 801,000 |
|
Balance – June 30, 2021 |
|
| 42,603,476 |
|
| $ | 426,000 |
|
| $ | 22,232,000 |
|
| $ | 24,151,000 |
|
| $ | 1,493,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – January 1, 2020 |
|
| 32,680,984 |
|
| $ | 327,000 |
|
| $ | 21,437,000 |
|
|
| (22,554,000 | ) |
| $ | (790,000 | ) |
Shares issued in connection with private placement* |
|
| 2,842,856 |
|
|
| 28,000 |
|
|
| 171,000 |
|
|
|
|
|
|
| 199,000 |
|
Shares issued to Cherokee in connection with loan |
|
| 300,000 |
|
|
| 3,000 |
|
|
| 18,000 |
|
|
|
|
|
|
| 21,000 |
|
Share based payment expense |
|
|
|
|
|
|
|
|
|
| 2,000 |
|
|
|
|
|
|
| 2,000 |
|
Shares issued for board meeting attendance in lieu of cash |
|
| 129,636 |
|
|
| 1,000 |
|
|
| 30,000 |
|
|
|
|
|
|
| 31,000 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (346,000 | ) |
|
| (346,000 | ) |
Balance – June 30, 2020 |
|
| 35,953,476 |
|
| $ | 359,000 |
|
| $ | 21,658,000 |
|
| $ | (22,900,000 | ) |
| $ | (883,000 | ) |
LINCOLN PARK EQUITY LINE OF CREDIT – DECEMBER 2020
On December 9, 2020, the Company entered into a Purchase Agreement and a Registration Rights Agreement with Lincoln Park (together the “Agreements”) under which Lincoln Park agreed to purchase from the Company, from time to time, up to $10,250,000 of our shares of common stock, par value $0.01 per share, subject to certain limitations set forth in the Purchase Agreement, during the term of the Purchase Agreement (two years). Pursuant to the terms of the Registration Rights Agreement, the Company was required to file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1 (the “Registration Statement”) to register for resale under the Securities Act of 1933, as amended (the “Securities Act”), the shares of common stock issued and sold as well as the shares of common stock that the Company may elect in the future to issue and sell to Lincoln Park from time to time under the Purchase Agreement.
On December 9, 2020, the Company sold 500,000 shares of common stock to Lincoln Park in an initial purchase under the Purchase Agreement for a purchase price of $125,000. As consideration for Lincoln Park’s irrevocable commitment to purchase common shares upon the terms of and subject to satisfaction of the conditions set forth in the Purchase Agreement, on December 9, 2020, the Company also issued 1,250,000 shares of common stock to Lincoln Park as commitment shares. The commitment shares were valued at $138,000 and recorded as an addition to equity for the issuance of common stock and treated as a reduction to equity as a cost of capital to be raised under the Lincoln Park facility. While this commitment fee relates to the entire offering and the purchases of common shares that will occur over time, the Company has recorded the entire commitment fee as issuance costs in additional paid-in capital at the time the commitment fee was paid because the offering has been consummated, and there is no guaranteed future economic benefit from this payment.
| 16 |
| Table of Contents |
The Company did not have the right to commence any further sales to Lincoln Park under the Purchase Agreement until all of the conditions that are set forth in the Purchase Agreement had been satisfied, including, but not limited to, the Registration Statement being declared effective by the SEC (at which time all conditions are satisfied, the “Commencement”).
On January 4, 2021, the Company was notified by the SEC that they would not review the Registration Statement on Form S-1 filed by the Company on December 29, 2020. The Company was subsequently instructed by the SEC (through counsel) to amend the originally filed Form S-1 to include certain information for the fiscal year ended SeptemberDecember 31, 2020 in place of the information in the original filing that was for the fiscal year ended December 31, 2019. The Company filed a Form S-1/A on January 7, 2021 and requested (through counsel) that the SEC declare the Form S-1 effective on January 11, 2021. The SEC granted the Company’s request. On January 11, 2021, the Company sold the remaining 500,000 shares of common stock to Lincoln Park required as an initial purchase under the Purchase Agreement for a purchase price of $125,000.
From and after the Commencement, under the Purchase Agreement, on any business day selected by the Company on which the closing sale price of its common stock exceeds $0.05, the Company may direct Lincoln Park to purchase up to 200,000 common shares on the applicable purchase date (a “Regular Purchase”), which maximum number of shares may be increased to certain higher amounts up to a maximum of 250,000 common shares, if the market price of the Company’s common stock at the time of the Regular Purchase equals or exceeds $0.20 and which maximum number of shares may be further increased to certain higher amounts up to a maximum of 500,000 common shares, if the market price of the Company’s common stock at the time of the Regular Purchase equals or exceeds $0.50 (such share and dollar amounts subject to proportionate adjustments for stock splits, recapitalizations and other similar transactions as set forth in the Purchase Agreement), provided that Lincoln Park’s purchase obligation under any single Regular Purchase may not exceed $500,000. The purchase price of the shares of common stock the Company may elect to sell to Lincoln Park under the Purchase Agreement in a Regular Purchase, if any, will be based on 95% of the lower of: (i) the lowest sale price on the purchase date for such Regular Purchase and (ii) the arithmetic average of the three lowest closing sale prices for the Company’s common shares during the 15 consecutive business days ending on the business day immediately preceding the purchase date for a Regular Purchase (in each case, to be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split or other similar transaction.) In addition to Regular Purchases, the Company may also direct Lincoln Park to purchase other amounts of the Company’s common shares in “accelerated purchases” and in “additional accelerated purchases” under the terms set forth in the Purchase Agreement.
Lincoln Park cannot require the Company to sell any common stock to Lincoln Park, but Lincoln Park is obligated to make purchases as the Company directs, subject to certain conditions. There are no upper limits on the price per share that Lincoln Park must pay for the Company’s common shares that the Company may elect to sell to Lincoln Park pursuant to the Purchase Agreement. In all instances, the Company may not sell common shares to Lincoln Park under the Purchase Agreement to the extent that the sale of shares would result in Lincoln Park beneficially owning more than 9.99% of our common shares. There are no restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement or Registration Rights Agreement, other than the Company’s agreement not to enter into any “variable rate” transactions (as defined in the Purchase Agreement) with any third party, subject to certain exceptions set forth in the Purchase Agreement, for the period set forth in the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any direct or indirect short selling or hedging of the Company’s common stock.
Actual sales of common stock to Lincoln Park under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the Company’s common stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. The net proceeds to the Company from sales of common stock to Lincoln Park under the Purchase Agreement, if any, will depend on the frequency and prices at which the Company sells common stock to Lincoln Park under the Purchase Agreement. Any proceeds that the Company receives from sales of common stock to Lincoln Park under the Purchase Agreement will be used at the sole discretion of Company management and will be used for general corporate purposes, capital expenditures and working capital.
| 17 |
| Table of Contents |
The Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, conditions and indemnification obligations of the parties. During any “event of default” under the Purchase Agreement, Lincoln Park does not have the right to terminate the Purchase Agreement; however, the Company may not initiate any Regular Purchase or any other purchase of common shares by Lincoln Park, until such event of default is cured. The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty. In addition, in the event of bankruptcy proceedings by or against the Company, the Purchase Agreement will automatically terminate. The representations, warranties and covenants contained in such agreements were made only for purposes of such agreements and as of specific dates, were solely for the benefit of the parties to such agreements, and may be subject to limitations agreed upon by the contracting parties.
In the six months ended June 30, 2021, the Company sold 500,000 shares of common stock that represented the balance of the Initial Purchase and 4,400,000 shares of common stock to Lincoln Park as Regular Purchases. The Company received proceeds of $564,000 from these purchases. There were no purchases in the six months ended June 30, 2020 and September 30, 2019:
Common Stock | |||||
Shares | Amount | Additional Paid in Capital | Accumulated Deficit | Total | |
| Balance – December 31, 2019 | 32,680,984 | $327,000 | $21,437,000 | (22,554,000) | $(790,000) |
| Shares issued in connection with private placement | 2,842,856 | 28,000 | 171,000 | 199,000 | |
| Shares issued to Cherokee in connection with loan | 300,000 | 3,000 | 18,000 | 21,000 | |
| Share based payment expense | 2,000 | 2,000 | |||
| Shares issued for board meeting attendance in lieu of cash | 129,636 | 1,000 | 30,000 | 31,000 | |
| Net loss | (563,000) | (563,000) | |||
Balance – September 30, 2020 | 35,953,476 | $359,000 | $21,658,000 | $(23,117,000) | $(1,100,000) |
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 | 66,408 | 5,000 | 5,000 | ||
| Share based payment expense | 4,000 | 4,000 | |||
| Net loss | (440,000) | (440,000) | |||
Balance-September 30, 2019 | 32,545,776 | $325,000 | $21,425,000 | $(22,313,000) | $(563,000) |
PRIVATE PLACEMENT
On February 20, 2020, 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 (the “Investors”), pursuant to which we agreed to issue and sell to the Investors in a private placement (the “Private Placement”), 2,842,857 Units (the “Units”).
Each Unit consistsconsisted of one (1) share of our 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. We received net proceeds of $199,000 from the Private Placement as expenses related to the Private Placement were minimal. We did not utilize a placement agent for the Private Placement. We used the net proceeds for working capital and general corporate purposes.
We do 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.
The Purchase Agreement contains customary representations, warranties and covenants made solely for the benefit of the parties to the Purchase Agreement. Although our Chairman of the Board was an investor in the Private Placement, the pricing of the Units was determined by the non-affiliate investors.
Item 2. Management’sManagement’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, 2019,2020, 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.
In the ninesix months ended SeptemberJune 30, 2020 were positively impacted by the sales and marketing of a Rapid Test to detect Covid-19 antibodies in whole blood, serum or plasma (that we are selling via a distribution agreement with Healgen Scientific, LLC; hereinafter referred to as the Covid-19 rapid antibody test) while2021, sales of our drugs of abuse testing products continued to bedrug tests were still being negatively impacted by the price competitiveness in our core markets (government, employment and clinical) and by the Covid-19 pandemic, although it does appear that drug test sales are startingpandemic. Sales related to reboundCovid-19 testing also declined dramatically in the six months ended June 30, 2021 compared to earliersales in 2020.the six months ended June 30, 2021 (when we were nearing the height of the pandemic and prior to vaccine availability). In addition to the marketing of our drug tests, in the six months ended June 30, 2021 we continued to market the Covid-19 IgG/IgM Rapid Test Cassette to detect Covid-19 antibodies in whole blood, serum or plasma (via a distribution agreement with Healgen Scientific, LLC), and we continued to market (via distribution) the Co-Diagnostics Logix Smart Covid-19 test. In December 2020, we announced that we were distributing a Rapid Covid-19 Antigen Test Cassette. In the middle of the three months ended March 31, 2021, we were informed by the manufacturer that we could no longer offer the Covid-19 antigen test for sale in the United States. In the three months ended June 30, 2020, we were able to find alternative tests to offer via distribution given this lack of marketing ability with the Covid-19 antigen test. In late March 2020,April, 2021, we started to market a Covid-19-Influenza A/B combination test that is EUA issued and CLIA waived. In addition, in May 2021, we began marketingdistributing a new Covid-19 Antigen Rapid Test that is EUA issued and CLIA waived along with a new Covid-19 Antibody Rapid Test that is EUA issued and CLIA waived and which can also be performed with finger stick blood at the Point of Care (i.e. patient care settings). All of the Covid-19 rapid antibody test, manufactured by Healgen Scientific, LLC,tests we are offering are being marketed in full complianceaccordance with the March 16, 2020 Emergency Use Authorization (“EUA”) policy set forth by the United States Food and Drug Administration (FDA) and in accordance with an EUAthe individual EUAs issued by FDA on May 29, 2020. Duefor the products.
The three new additional Covid-19 products have greater market applications than the tests we have been offering as we can offer them to specific regulatory events that occurred from March 2020 until May 2020,a wider array of customers. Although the pandemic is no longer at its height, we did not record any sales ofbelieve the need for these Covid-19 diagnostic tests until later in May 2020, although we did take pre-orders (with payments) forand the Covid-19 antibody tests prior to shipping product.
We continue to offer a wide range of testing options for Covid-19. We believe there are a number of additional applications for Covid-19 antibody testing, but diagnostic testing is still in high demand in the US. The Co-Diagnostic RT-PCR test is a great complement to the Covid-19 rapid antibody test we distribute. In addition to the Covid-19 rapid antibody tests and RT-PCR tests, additionalother products and services are being offered to diversify our revenue stream through third partyvia distribution relationships. We currently offer a lower-cost alternative for onsite drug testing, point of care products for certain infectious diseases and alternative drug testing sample methods. With the exception of the lower-cost drug test alternative, and Covid-19 rapid antibody tests, these offerings have yet to materially positively impact sales.
In the year ended December 31, 2019, we expanded our contract manufacturing operations with two (2) new customers. BeginningUnfortunately, the Covid-19 pandemic halted sales to these new customers in mid-2019,the year ended December 31, 2020. We have open purchase orders (from 2020) with both customers and we can sellstarted to ship against these purchase orders in the three months ended June 30, 2021. One of the customers also placed an additional (new) order in April 2021, however this new order is not expected to ship until the sometime in the third quarter 2021.
Due to the Covid-19 pandemic, we are not yet marketing our oral fluid drugsdrug tests (OralStat®) in the employment and insurance markets underin the United States (under a limited exemption set forth by the FDA. Prior to this point,FDA). We remain hopeful that we could only sellcan effectively market our oral fluid drug tests in the forensic marketOralStat in the United States markets given its superior sensitivity and toaccuracy. Initially we may re-introduce the product in markets outside the United States. We are hopeful that gaining access to this market again will enable us to see revenue growth for our oral fluid drug tests in the future; however, we are uncertain when/if in the year ended December 31, 2020 we will see significant sales oral fluid drug testing in the employment market given the current global health crises and Covid-19.
We are focusing our efforts on further penetration of our markets with both current and new products including, but not limited to, the(drug testing, Covid-19 rapid antibody and the RT PCR test for Covid-19 we are distributing as well as other infectious disease products we are offering.diagnostic tests). We are also looking for avenues to capitalize on our US manufacturing operations; especially during this time of high demand for diagnostic products for Covid-19. operations. To that end, we are still working with a firm that would provide services related to public relations/social media to effectively communicate our manufacturing capabilities.
Operating expenses increased $56,000declined $33,000 in the ninesix months ended SeptemberJune 30, 2020 versus2021 compared to the ninesix months ended SeptemberJune 30, 20192020. Declines in research and development and selling and marketing (as of result of lower commissions being paid due to commissions paid on salesmuch lower levels of Covid-19 test sales) were partially offset by increased general and administrative costs (most of which is associated with costs associated with the refinancing of the Covid-19 rapid antibody tests.Cherokee facilities in February 2021). We continuously make efforts to control operational expenses to ensure they are in line with sales. We have consolidatedcontinued to consolidate job responsibilities in certain areas of the Company as a result of employee retirement and other departures and this has enabled us to implementresulting in personnel reductions. Throughout most of the six months ended
From August 2013 until June 30, 2020, we also maintained a 10% salary deferral program for our sole executive officer, our Chief Executive Officer/Principal Financial Officer Melissa Waterhouse. The 10%salary deferral program ceased in early June 2020 considering the length of time the deferral was in place forinitiated by Ms. Waterhouse (almost 7 years) and the balance owed.voluntarily. Until his departure in November 2019, another member of senior management participated in the program. As of September 30, 2020, we had total deferred compensation owed to these two individuals in the amount of $154,000. We did not make any payments on deferred compensation to Melissa Waterhouse in the nine months ended September 30, 2020 or in the nine months ended September 30, 2019.program voluntarily. After the member of senior management retired in November 2019, we agreed to make payments foron the deferred comp owed to this individual. In the ninesix months ended SeptemberJune 30, 2021 and in the six months ended June 30, 2020, we made payments totaling $45,000 to this individual; we did not make any payment to this individual in the nine month ended September 30, 2019. We will continue to make payments to the former member of senior management throughout the year ending December 31, 2020totaling $22,000 and when/if cash flow from operations allows, we intend to repay/make payments on$29,000, respectively. As of June 30, 2021, the deferred compensation owed to Melissathis individual is paid in full. Once the deferred compensation was paid in full to this individual in late May 2021, we began to make payments at the same rate to Ms. Waterhouse given the length of time the amount has been owed (7 years) and that the last payment made to Ms. Waterhouse was in August 2017. In the six months ended June 30, 2021, we made payments totaling $5,000 to Ms. Waterhouse.
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Our continued existence is dependent upon several factors, including our ability to: 1) raise revenue levels even though the drug testing market continues to be infiltrated by product manufactured outside of the United States as well as being impacted by the global health crisis caused by Covid-19, 2) further penetrate the markets (in and outside of the United States) for Covid-19 rapid antibody tests, 3) secure new contract manufacturing customers, 4) control operational costs to generate positive cash flows, 5) maintain our current credit facilities or refinance our current credit facilities if necessary, and 6) if needed, obtain working capital by selling additional shares of our common stock.
Results of operations for the ninesix months ended SeptemberJune 30, 20202021 compared to the ninesix months ended SeptemberJune 30, 2019
NET SALES:
Net sales forIn late April/early May 2021, we were able to find alternative Covid-19 tests to offer via distribution given this lack of marketing ability with the Covid-19 antigen test. More specifically, we started to market a Covid-19-Influenza A/B combination test that is EUA issued and CLIA waived, a new Covid-19 Antigen Rapid Test that is EUA issued and CLIA waived and a new Covid-19 Antibody Rapid Test that is EUA issued and CLIA waived and which can also be performed with finger stick blood at the Point of Care (i.e. patient care settings). All of the Covid-19 tests we are offering are being marketed in accordance with the March 2020 Emergency Use Authorization (“EUA”) policy set forth by the United States Food and Drug Administration (FDA) and in accordance with the individual EUAs issued for the products. We also saw a decline in sales of the lower cost drugs of abuse products we offer via distribution. This decline was due to product availability and overall lower need from our customers.
Drugs of abuse manufacturing sales also decreased by $276,000 in the six months ended June 30, 2021 when compared to the six months ended June 30, 2020. Sales of drug test product sales which weretests continue to be negatively impacted by the Covid-19 pandemic. Contract manufacturing sales remained relatively flat; salespandemic along with the price competitive nature of RSV tests increased in the nine months ended September 30, 2020 dueour markets. Our markets do appear to increased diagnostic testing for respiratory viruses during the pandemic, while salesbe returning to some sense of malaria tests decreased due to decreased demand as a result of a shift in focus to Covid-19 tests in areas outside the US.
In the six months ended June 30, 2021, we also experienced supply chain issues; particularly with materials that are used in the manufacture of lateral flow Covid-19 tests and plastic materials. The lead times for these materials are increasing significantly and in most cases without notice. This has caused the Company to have an increased level of backorders at times. As of June 30, 2021, we had open sales orders for drug tests that we manufacture in the amount of $128,000.
Contract manufacturing sales increased by $21,000 in the six months ended June 30, 2021 comparted to the six months ended June 30, 2020. This is primarily a result of orders shipped in the second quarter 2021 from two customers whose orders halted in 2020 due to the pandemic. We are expecting to ship more orders to these customers in 2021 as we fill open PO’s totaling $126,000. Sales of RSV (Respiratory Syncytial Virus) diagnostic tests declined due to lower levels of testing due to stay at home orders, reduced workforce and reduced budgets. In the ninepandemic stage we are in (along with the seasonality of the test usage).
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Over the last several months, ended September 30, 2020, we have started to see some reboundbeen working toward finalizing an agreement that we signed in our drug testing markets, however, given2020 under which we would provide manufacturing services for another diagnostic company. Given certain regulatory events (affecting the uncertainty of the markets (as they related to the pandemic)diagnostic company), we are unsure atif we will be moving forward with this time whetheragreement. We did expect this rebound will continue.
From a sales impact from the customer side,perspective, we also experienced delays in materials from vendors due to decreased production levels resulting from stay at home orders and reduced workforce numbers. Whileare focusing our staff continues to work due to the essential natureefforts on further penetration of our manufacturing, delays in materials resulted in customer backordersmarkets with both current and new products (drug testing, Covid-19 and other diagnostic tests). We are also looking for specific products that required the materials in question.
GROSS PROFIT:
Gross profit decreased toOperating expenses increased 4.0%decreased 3.2% in the ninesix months ended SeptemberJune 30, 20202021 compared to the ninesix months ended SeptemberJune 30, 2019.2020. Research & Development and Selling and Marketing expenses increaseddecreased while General and Administrative expenses decreased.increased. More specifically:
Research and development (“R&D”)
R&D expense increased 24.2%decreased 21.2% when comparing the ninesix months ended SeptemberJune 30, 20202021 with the ninesix months ended SeptemberJune 30, 2019. Increased2020. Decreased FDA compliance costs (associated with timing of facility registration fees) and increased costs related to supplies and materials costs were the primary reasons for the increasedecrease in expenses. All other expenses remained relatively consistent when comparing the two nine-monthsix-month periods. In the ninesix months ended SeptemberJune 30, 2020,2021, our R&D department primarily focused their efforts on the enhancement of our current products and the validation of new materials for ourrequired validations related to drug testing products.
Selling and marketing
Selling and marketing expense in the ninesix months ended SeptemberJune 30, 2020 increased 16.6%2021 decreased 51.4% when compared to the ninesix months ended SeptemberJune 30, 2019.2020. The primary reason for the increasedecrease in selling and marketing expense is significantly lower commissions paid related to sales of the Covid-19 rapid antibody test.tests. In addition to commissions, employeereductions in sales salary expense and benefits costs contributed(due to the increase. These increasestermination of personnel) and car allowance expense (due to the same terminations), were partiallynominally offset by decreased sales travel (as a resultincreased promotional expense (i.e. the semi-annual fee to OTC Markets paid in the second quarter of the Covid-19 pandemic) and lower auto allowance costs.
In the ninesix months ended SeptemberJune 30, 2020,2021, we continued selling and marketing efforts related to our drug tests and we continued to take actions to secure new contract manufacturing customers. In addition, we promoted lower cost alternatives for onsite drug testing and point of care products for infectious disease (through relationships with third parties). The addition of theseWe also marketed and sold antibody tests and diagnostic tests related to Covid-19 via distribution relationships. These offerings did not result in increased selling and marketing expenses. In late Marchexpenses, apart from increased commission costs in the six months ended June 30, 2020). Although we decreased the size of our sales force in the year ended December 31, 2020, we also started selling a Covid-19 rapid antibody test from Healgen Scientific, LLC via a distribution relationship. As of result of this new product offering, we recorded increased sales commission rates.those reductions were made for performance reasons. We are also taking effortsstill seeking new personnel to increase the size of our sales team to further penetrate the Covid-19 market and drug testour markets. We will continue to take all steps necessary to ensure selling and marketing expenditures are in line with sales.
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General and administrative (“G&A”)
G&A expense decreased 1.8%increased 21.6% in the ninesix months ended SeptemberJune 30, 20202021 when compared to G&A expense in the ninesix months ended SeptemberJune 30, 2019. Decreased2020. Increased costs associated with administrativeinvestor relations (primarily due to costs associated with our proxy and quality assurance employeesannual meeting of shareholders which was not held in June 2020 due to the pandemic), accounting fees (due to fewer employees and/or the consolidationtiming of job responsibilities)invoices), administrative salaries (due to an additional employee in 2021), insurance costs, legaloutside service fees (due to settlementa higher cost of the ABMC v. Bailey litigation) were almost entirely offset by increased non-cash costs related to meetings of the Board of Directorsour ISO audit held in March 2021), and bank service fees (due to increased costs related tofees in the amount of $148,000 incurred in connection with the extension of credit facilities).
Other Incomeincome and Expense:
Results of operations for the three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 2019
NET SALES:
Net sales for the three months endedDrugs of abuse manufacturing sales also decreased by $112,000 in the three months ended June 30, 2021 when compared to the three months ended June 30, 2020. Sales of drug test product sales which weretests continue to be negatively impacted by the Covid-19 pandemic. pandemic along with the price competitive nature of our markets. Our markets do appear to be returning to some sense of normalcy; however, they are still requiring a lower amount of tests due to reduced workforce, telecommuting and reduced budgets (especially in the government market as financial resources are still being used for Covid-19 testing and vaccinations). Also contributing to the decline in drugs of abuse manufacturing sales is the loss of a government account in the middle of 2020 due to pricing and sales declines in the international market due to two orders received in 2020 that have not yet been received in 2021. The clinical market continues to show signs of improvement with sales staying relatively flat.
In the six months ended June 30, 2021, we also experienced supply chain issues; particularly with materials that are used in the manufacture of lateral flow Covid-19 tests and plastic materials. The lead times for these materials are increasing significantly and in most cases without notice. This has caused the Company to have an increased level of backorders at times. As of June 30, 2021, we had open sales orders for drug tests that we manufacture in the amount of $128,000. The majority of this amount was for orders received within the three months ended June 30, 2021.
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Contract manufacturing sales increased by $5,000 in the three months ended SeptemberJune 30, 2020 due2021 compared to increased sales of RSV tests as a result of increased diagnostic testing for respiratory viruses during the pandemic and increased sales of malaria tests due to the fact that we secured the malaria manufacturing customer in mid-2019.
From a sales perspective, we are focusing our efforts on further penetration of our markets (as theywith both current and new products (drug testing, Covid-19 and other diagnostic tests). We are also looking for avenues to capitalize on our US manufacturing operations. To that end, we are still working with a firm that would provide services related to the pandemic), we are unsure at this time whether this rebound will continue.
GROSS PROFIT:
Gross profit decreased toOPERATING EXPENSES:
Operating expenses decreasedResearch and development (“R&D”)
R&D expense was relatively unchangedincreased 10.5% when comparing the three months ended SeptemberJune 30, 20202021 with the three months ended SeptemberJune 30, 2019 as all expenses remained consistent with2020. The reason for the prior year.slight increase (from a $ perspective) was FDA compliance costs (as a result of timing of facility registration fees and the fact that the fees did increase slightly). In the three months ended SeptemberJune 30, 2020,2021, our R&D department primarily focused their efforts on the enhancement of our current products and the validation of new materials for ourrequired validations related to drug testing products.
Selling and marketing
Selling and marketing expense in the three months ended SeptemberJune 30, 20202021 decreased 32.1%68.7% when compared to the three months ended SeptemberJune 30, 2019.2020. The primary reason for the decrease in selling and marketing expense is reduced employee expenses (salaries, benefits and auto expense) due to turnover and reduced net shipping/freight costs. These decreases were offset by increasedsignificantly lower commissions paid related to sales of the Covid-19 rapid antibody test.
In the three months ended SeptemberJune 30, 2020,2021, we continued selling and marketing efforts related to our drug tests and we continued to take actions to secure new contract manufacturing customers. We also secured distribution opportunities for additional Covid-19 tests and began marketing these new tests. In addition, we promoted lower cost alternatives for onsite drug testing and point of care products for infectious disease (through relationships with third parties). The addition of theseThese offerings did not result in increased selling and marketing expenses. In late March 2020,expenses, apart from increased commission costs in the six months ended June 30, 2020). Although we also started selling a Covid-19 rapid antibody test from Healgen Scientific, LLC via a distribution relationship. Asdecreased the size of result of this new product offering, we recorded increasedour sales commission rates.force, those reductions were made for performance reasons. We are also taking effortsstill seeking new personnel to increase the size of our sales team to further penetrate the Covid-19 market and drug testour markets. 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 increased 2.8%decreased 9.5% in the three months ended SeptemberJune 30, 20202021 when compared to G&A expense in the three months ended SeptemberJune 30, 2019.2020. Decreased annual meeting costs (as we have not yet had our annual meeting of shareholders due to the pandemic), decreased costs related to insurance, fees associated with our ISO auditdirectors’ fees and expenses (due to less meetings held so far in 2021), accounting fees (due to timing of audit) and lowerinvoicing), legal fees, (as a result of the settlement of the ABMC v. Bailey litigation)repairs and maintenance and bank service fees were partially offset by increased bank service feesinvestor relations costs (primarily due to costs associated with our proxy and annual meeting of shareholders which was not held in June 2020 due to the pandemic), administrative salaries (due to increased costs related to extension of credit facilities).
Other income and expense:
Other income of $1,000 in the three months ended June 30, 2021 consisted of other income of $50,000 related to certain non-refundable prepayments (customer deposits) that were forfeited when the customer did not remit the remaining amounts due on the order which was almost entirely offset by interest expense associated with our credit facilities (our line of credit, our two loans with Cherokee Financial, LLC and a shareholder loan). Other expense of $37,000 in the three months ended June 30, 2020 consisted of interest expense associated with our credit facilities (our line of credit, equipment loan with Crestmark Bank and our two loans with Cherokee Financial, LLC). Other expense of $63,000 in the three months ended September 30, 2019 consisted of interest expense associated with our credit facilities (our line of credit, equipment loan with Crestmark Bank, and our two loans with Cherokee Financial, LLC), offset by other income related to gains on certain liabilities.
Liquidity and Capital Resources as of SeptemberJune 30, 2020
Our cash requirements depend on numerous factors, including but not limited to manufacturing costs (such as raw materials, labor, 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 and contract manufacturing. 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.
On February 20,December 9, 2020, we entered into a Securities Purchase Agreement (the “Purchase Agreement”)and a Registration Rights Agreement with Chaim Davis (the Chairman of our Board of Directors) and certain other accredited investors (the “Investors”), pursuant toLincoln Park under which weLincoln Park agreed to issue and sellpurchase from the Company, from time to the Investors in a private placement (the “Private Placement”), 2,842,856 Units (the “Units”). Each Unit consistedtime, up to $10,250,000 of one (1) shareshares of our common stock, par value $0.01 per share, (“Common Share”subject to certain limitations set forth in the Purchase Agreement, during the term of the Purchase Agreement (two years). Pursuant to the terms of the Registration Rights Agreement, we were required to file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1 (the “Registration Statement”) to register for resale under the Securities Act of 1933, as amended (the “Securities Act”), atshares of common stock issued and sold as well as the shares of common stock that we may elect in the future to issue and sell to Lincoln Park from time to time under the Purchase Agreement.
On January 4, 2021, we were notified by the SEC that they would not review the Registration Statement on Form S-1 filed on December 29, 2020. We were subsequently instructed by the SEC (through counsel) to amend the originally filed Form S-1 to include certain information for the fiscal year ended December 31, 2020 in place of the information in the original filing that was for the fiscal year ended December 31, 2019. We filed a price per UnitForm S-1/A on January 7, 2021 and requested (through counsel) that the SEC declare the Form S-1 effective on January 11, 2021. The SEC granted our request. In the six months ended June 30, 2021, the Company sold 4,900,000 shares of $0.07 (the “Purchase Price”) for aggregate grosscommon stock to Lincoln Park (including 500,000 shares required as an initial purchase under the Purchase Agreement) as Regular Purchases and received proceeds of approximately $199,000. We received net proceeds of $199,000 from the Private Placement as expenses related to the Private Placement were minimal. We did not utilize a placement agent for the Private Placement. We 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.
Our financial statements for the year ended December 31, 20192020 were prepared assuming we will continue as a going concern, which assumes the realization of assets and the satisfaction of liabilities in the normal course of business. Our current cash balances, together with cash generated from future operations and amounts available under our credit facilities (including the Lincoln Park equity facility) may not be sufficient to fund operations through November 2021.August 2022. At SeptemberJune 30, 2020,2021, we have Stockholders’ Deficit of $1,100,000.
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Our loan and security agreement and 2019 Term Note with Cherokee for $900,000 and $200,000,$220,000, respectively, expired on February 15, 2020;2021; however, on February 24, 2021, the creditCompany completed a transaction with Cherokee related to (second) one-year Extension Agreements dated February 14, 2021 under which Cherokee extended the due date of the Cherokee LSA ($900,000) and the 2019 Term Loan with Cherokee ($220,000) again; the facilities were previously extended for another 12 months, or untilin February 15, 2021 (which is less than 12 months from2020). Under the dateterms of this report)the (second) extensions, the $900,000 (secured) Cherokee LSA was increased to $1,000,000 to include a $100,000 penalty that was due as a result of the Company being unable to pay back the principal on in February 2021; a term that was included in the February 2020 extension. The annual interest rate on the (further) extended Cherokee LSA was increased to a fixed rate of 10% (the prior fixed rate was 8%) plus a 1% annual oversight fee (that remained unchanged). In addition, the 2019 Cherokee Term Loan was increased to $240,000 to include a $20,000 penalty that was due as a result of the Company being unable to pay back the principal balance to Cherokee in February 2021; a term that was included in the February 2020 extension. Our total debt at SeptemberJune 30, 20202021 with Cherokee Financial, LLC is $1,120,000.was $1,240,000. 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, 2021.2022. We are currently looking at alternativesmay be able to further extend or refinance these facilities.
Throughout the ninesix months ended SeptemberJune 30, 2020,2021, we had a line of credit with Crestmark Bank. The maximum availability on the line of credit through most of the nine months ended September 30, 2020 was $1,500,000 but, it was reduced on June 22, 2020 to $1,000,000 under the amendment and extension of the line of credit.is $1,000,000. However, because the amount available under the line of credit is based upon our accounts receivable, the amounts actually available under our line of credit (historically) have been significantly less than the maximum availability. When sales levels decline, we have reduced availability on our line of credit due to decreased accounts receivable balances. As of SeptemberJune 30, 2020,2021, based on our availability calculation, there were no additional amounts available under the line of credit because we draw any balance available on a daily basis.
If availability under our line of credit and cash received from prepaid orders of Covid-19 rapid antibody testequity sales isunder the Lincoln Park Purchase Agreement are 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 SeptemberJune 30, 2020,2021, we had the following debt/credit facilities:
Facility |
| Debtor |
| Balance as of June 30, 2021 |
|
| Due Date | ||
Loan and Security Agreement |
| Cherokee Financial, LLC |
| $ | 1,000,000 |
|
| February 15, 2022 | |
Revolving Line of Credit |
| Crestmark Bank |
|
| 287,000 |
|
| June 22, 2022 | |
Term Loan |
| Cherokee Financial, LLC |
|
| 240,000 |
|
| February 15, 2022 | |
PPP Loan |
| Crestmark Bank, SBA |
|
| 332,000 |
|
| April 22, 2022 | |
Term Loan |
| Individual |
|
| 50,000 |
|
| November 4, 2021 | |
Total Debt |
|
|
| $ | 1,909,000 |
|
|
| |
Working Capital Deficit
At SeptemberJune 30, 2020,2021, we were operating at a working capital deficit of $1,825,000.$2,154,000. This compares to a working capital deficit of $1,365,000$1,624,000 at SeptemberJune 30, 2019.2020 and a working capital deficit of $841,000 at December 31, 2020. This increase in our working capital deficit wasis primarily a result of additional financing, including the $332,000 PPP Loan,decreased sales and, from December 31, 2020 to June 30, 2021, a decreasechange in accounts receivables (dueclassification of our debt with Cherokee from long-term to lower drug test sales), and a decrease in inventory (due to less purchasing of materials used in our drug test manufacturing).short-term. We have historically satisfied working capital requirements through cash from operations, bank debt 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.
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Cash Flow, Outlook/Risk
In the ninesix months ended, September 30, 2020, we had a net loss of $563,000$801,000 and net cash used byin operating activities of $299,000.$616,000. Our cash position increaseddecreased from $15,000$225,000 at September 30, 2019 to $61,000 at SeptemberJune 30, 2020 as a resultto $30,000 at June 30, 2021. This decrease stems from prepayments received from presales of prepayments for Covid-19 rapid antibody tests the private placement in the amount ofand $199,000 closed infrom the February 2020 and proceeds from the PPP loan.
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 our headquarters are located, and in the State of New Jersey where our strip manufacturing facility is located. In response to the outbreak, we have 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 our employees, families, suppliers, customers and communities. While these existing measures and, Covid-19 generally, have not materially disrupted our business operations to date, any future actions necessitated by the Covid-19 pandemic may result in disruption todid not materially disrupt our business. While we have not seen a disruption in ourdaily business operations to date, our drug testing sales have been negatively impacted by the pandemic.
While the Covid-19 pandemic continues to rapidly evolve and as surges continue to occur, we continue to assessis seemingly winding down, the impact of the Covid-19 pandemic to best mitigate risk and continue the operations of our business. The extent to which the outbreak impactspandemic may continue to impact our 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 new strains of Covid-19 (such as the Delta variant that has been dominating the headlines recently), the severity or longevity of the Covid-19 pandemic and actions that may be taken to contain it or treat its impact, among others. If we, our customers or suppliers experience (or in some cases continue to experience) prolonged shutdowns or other business disruptions, our business, liquidity, results of operations and financial condition are likely to be materially adversely affected, and our ability to access the capital markets may be limited.
On December 9, 2020, we entered into a Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with Lincoln Park under which Lincoln Park agreed to purchase from the Company, from time to time, up to $10,250,000 of our shares of common stock, par value $0.01 per share, subject to certain limitations set forth in the Purchase Agreement, during the term of the Purchase Agreement. We registered 9,750,000 shares of common stock under a Registration Statement on Form S-1 (as amended). The Form S-1 was declared effective by the SEC on January 11, 2021 and going forward we are able to utilize the Lincoln Park equity facility to fund operations (if necessary), pay down other debt (whenever possible) and fund our growth initiatives. In the six months ended June 30, 2021, we sold 4,900,000 shares of common stock to Lincoln Park as Regular Purchases and received proceeds of $564,000.
Our ability to repay our current debt 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 and we are unable to facilitate purchases under our Purchase Agreement with Lincoln Park, 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 will continue to take steps to ensure that operating expenses and manufacturing costs remain in line with sales levels. We have consolidated job responsibilities in certain areas of the Company and this enabled us to implement personnel reductions. Sales declines result in lower cash balances and lower availability on our line of credit at times. We are promoting new products and service offerings to diversify our revenue stream, including anew Covid-19 rapid antibody test and a RT PCR test to detect Covid-19. We also secured the business of two (2) new contract manufacturing customers in the year ended December 31, 2019. As the market for Covid-19 testing continues to develop over time, we are also reviewing alternative products to offer our customers; products such as antigen tests and tests that use new (alternative) samples (such as saliva or breath).
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.
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 effect sales under the Lincoln Park Equity Line, 4) we are unable to utilize equity as a form of payment in lieu of cash or 4)5) 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.
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Item 3. QuantitativeQuantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this item.
Item 4. ControlsControls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer (Principal Executive Officer)/Chief Financial Officer (Principal Financial Officer), together with other members of management, has reviewed and evaluated the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this review and evaluation, our Principal Executive Officer/Principal Financial Officer concluded that our disclosure controls and procedures are effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported in a timely manner.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the last quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHEROTHER INFORMATION
Item 1. LegalLegal Proceedings
See Part I, Item 1, Note D in the Notes to interim condensed Financial Statements included in this report for a description of pending legal proceedings in which we may be a party.
Item 1A. RiskRisk Factors
There have been no material changes to our risk factors set forth in Part I, Item 1A, in our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 2. UnregisteredUnregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. DefaultsDefaults Upon Senior Securities
None.
Item 4. MineMine Safety Disclosures
Not applicable.
Item 5. OtherOther Information
None.
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Item 6. Exhibits
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer/Chief Financial Officer | |
101 | The following materials from our Quarterly Report on Form 10-Q for the quarter ended |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN BIO MEDICA CORPORATION (Registrant) | |||
| By: | /s/ Melissa A. Waterhouse | ||
Melissa A. Waterhouse | |||
Chief Executive Officer (Principal Executive Officer) | |||
| Principal Financial Officer Principal Accounting Officer | |||
Dated: August 18, 2021 | |||
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