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 |
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For the quarterly period ended |
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the transition period from |
Commission File Number: 0-28666
AMERICAN BIO MEDICA CORPORATION |
(Exact name of registrant as specified in its charter) |
New York |
| 14-1702188 |
incorporation or organization) |
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Identification No.) |
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122 Smith Road, Kinderhook, New York |
| 12106 |
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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 | ☐ | 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’s classes of common stock, as of the latest practicable date:
43,803,47648,098,476 Common Shares as of August 18, 2021May 16, 2022
American Bio Medica Corporation
Index to Quarterly Report on Form 10-Q
For the quarter ended June 30, 2021March 31, 2022
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| Condensed Balance Sheets as of |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2 |
Table of Contents |
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
American Bio Medica Corporation | American Bio Medica Corporation | American Bio Medica Corporation | ||||||||||||||
Condensed Balance Sheets | Condensed Balance Sheets | Condensed Balance Sheets | ||||||||||||||
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| June 30, |
| December 31, |
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| March 31, |
| December 31, |
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| 2021 |
| 2020 |
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| 2022 |
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| 2021 |
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ASSETS |
| (Unaudited) |
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| (Unaudited) |
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Current assets |
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Cash and cash equivalents |
| $ | 30,000 |
| $ | 98,000 |
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| $ | 17,000 |
| $ | 115,000 |
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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 |
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Inventory, net of allowance of $321,000 at June 30, 2021 and $279,000 at December 31, 2020 |
| 475,000 |
| 536,000 |
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Accounts receivable, net of allowance for doubtful accounts of $2,000 at March 31, 2022 and $3,000 at December 31, 2021 |
| 138,000 |
| 323,000 |
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Inventory, net of allowance of $260,000 at March 31, 2022 and $278,000 at December 31, 2021 |
| 419,000 |
| 443,000 |
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Employee retention credit receivable |
| 400,000 |
| 400,000 |
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Prepaid expenses and other current assets |
| 25,000 |
| 104,000 |
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| 35,000 |
| 24,000 |
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Right of use asset – operating leases |
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| 36,000 |
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| 35,000 |
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| 29,000 |
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| 35,000 |
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Total current assets |
| 953,000 |
| 1,180,000 |
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| 1,038,000 |
| 1,340,000 |
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Property, plant and equipment, net |
| 544,000 |
| 576,000 |
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| 504,000 |
| 517,000 |
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Patents, net |
| 104,000 |
| 108,000 |
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Right of use asset – operating leases |
| 22,000 |
| 41,000 |
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| 2,000 |
| 5,000 |
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Other assets |
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| 21,000 |
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| 21,000 |
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| 21,000 |
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| 21,000 |
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Total assets |
| $ | 1,644,000 |
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| $ | 1,926,000 |
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| $ | 1,565,000 |
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| $ | 1,883,000 |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities |
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Accounts payable |
| $ | 593,000 |
| $ | 577,000 |
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| $ | 843,000 |
| $ | 682,000 |
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Accrued expenses and other current liabilities |
| 487,000 |
| 620,000 |
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| 450,000 |
| 467,000 |
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Right of use liability – operating leases |
| 26,000 |
| 33,000 |
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| 27,000 |
| 35,000 |
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Wages payable |
| 92,000 |
| 107,000 |
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| 93,000 |
| 97,000 |
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Line of credit |
| 287,000 |
| 277,000 |
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| 93,000 |
| 178,000 |
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PPP Loan |
| 332,000 |
| 332,000 |
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Cherokee notes payable, past due |
| 1,240,000 |
| 0 |
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Current portion of long-term debt, net of deferred finance costs |
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| 1,290,000 |
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| 75,000 |
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| 125,000 |
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| 1,365,000 |
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Total current liabilities |
| 3,107,000 |
| 2,021,000 |
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| 2,871,000 |
| 2,824,000 |
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Long-term debt/other liabilities , net of current portion and deferred finance costs |
| 0 |
| 1,120,000 |
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Right of use liability – operating leases |
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| 30,000 |
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| 41,000 |
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| 2,000 |
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| 3,000 |
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Total liabilities |
| 3,137,000 |
| 3,182,000 |
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| 2,873,000 |
| 2,827,000 |
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COMMITMENTS AND CONTINGENCIES |
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Stockholders’ deficit: |
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Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at June 30, 2021 and December 31, 2020 |
| 0 |
| 0 |
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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 |
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Preferred stock; par value $0.01 per share; 5,000,000 shares authorized, none issued and outstanding at March 31, 2022 and December 31, 2021 |
| 0 |
| 0 |
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Common stock; par value $0.01 per share; 75,000,000 shares authorized; 48,098,476 issued and outstanding at March 31, 2022 and 47,598,476 issued and outstanding as of December 31, 2021 |
| 481,000 |
| 476,000 |
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Additional paid-in capital |
| 22,232,000 |
| 21,717,000 |
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| 22,403,000 |
| 23,393,000 |
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Accumulated deficit |
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| (24,151,000 | ) |
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| (23,350,000 | ) |
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| (24,192,000 | ) |
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| (23,813,000 | ) |
Total stockholders’ deficit |
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| (1,493,000 | ) |
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| (1,256,000 | ) | ||||||||
Total stockholders’ (deficit) |
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| (1,308,000 | ) |
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| (944,000 | ) | ||||||||
Total liabilities and stockholders’ deficit |
| $ | 1,644,000 |
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| $ | 1,926,000 |
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| $ | 1,565,000 |
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| $ | 1,883,000 |
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The accompanying notes are an integral part of the condensed financial statements
3 |
Table of Contents |
American Bio Medica Corporation | American Bio Medica Corporation | |||||||||||||||
Condensed Statements of Operations | Condensed Statements of Operations | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
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| For The Six Months Ended |
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| For The Three Months Ended |
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| June 30, |
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| March 31, |
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| 2021 |
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| 2020 |
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| 2022 |
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| 2021 |
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Net sales |
| $ | 1,095,000 |
| $ | 2,486,000 |
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| $ | 351,000 |
| $ | 566,000 |
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Cost of goods sold |
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| 854,000 |
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| 1,714,000 |
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| 323,000 |
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| 461,000 |
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Gross profit |
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| 241,000 |
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| 772,000 |
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| 28,000 |
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| 105,000 |
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Operating expenses: |
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Research and development |
| 41,000 |
| 52,000 |
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| 22,000 |
| 20,000 |
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Selling and marketing |
| 155,000 |
| 319,000 |
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| 42,000 |
| 83,000 |
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General and administrative |
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| 798,000 |
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| 656,000 |
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| 295,000 |
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| 511,000 |
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Total Operating expenses |
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| 994,000 |
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| 1,027,000 |
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| 359,000 |
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| 614,000 |
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Operating loss |
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| (753,000 | ) |
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| (255,000 | ) |
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| (331,000 | ) |
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| (509,000 | ) |
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Other (expense) / income : |
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Other expense: |
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Interest expense |
| (96,000 | ) |
| (91,000 | ) |
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| (48,000 | ) |
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| (47,000 | ) | ||
Other income, net |
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| 50,000 |
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| 0 |
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Total Other (expense) / income |
| (46,000 | ) |
| (91,000 | ) | ||||||||||
|
| (48,000 | ) |
| (47,000 | ) | ||||||||||
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Net loss before tax |
| (799,000 | ) |
| (346,000 | ) |
| (379,000 | ) |
| (556,000 | ) | ||||
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Income tax expense |
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| (2,000 | ) |
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| 0 |
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| 0 |
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| 0 |
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Net loss |
| $ | (801,000 | ) |
| $ | (346,000 | ) |
| $ | (379,000 | ) |
| $ | (556,000 | ) |
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Basic and diluted loss per common share |
| $ | (0.02 | ) |
| $ | (0.01 | ) |
| $ | (0.01 | ) |
| $ | (0.01 | ) |
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Weighted average number of shares outstanding – basic & diluted |
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| 39,910,658 |
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| 34,937,236 |
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| 47,770,698 |
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| 38,859,032 |
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The accompanying notes are an integral part of the condensed financial statements
4 |
Table of Contents |
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| For The Three Months Ended |
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| June 30, |
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| 2021 |
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| 2020 |
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Net sales |
| $ | 529,000 |
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| $ | 1,758,000 |
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Cost of goods sold |
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| 393,000 |
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| 1,176,000 |
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Gross profit |
|
| 136,000 |
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| 582,000 |
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Operating expenses: |
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Research and development |
|
| 21,000 |
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| 19,000 |
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Selling and marketing |
|
| 72,000 |
|
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| 230,000 |
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General and administrative |
|
| 287,000 |
|
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| 317,000 |
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Total Operating expenses |
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| 380,000 |
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| 566,000 |
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Operating (loss) / income |
|
| (244,000 | ) |
|
| 16,000 |
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Other income / (expense): |
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Interest expense |
|
| (49,000 | ) |
|
| (37,000 | ) |
Other income, net |
|
| 50,000 |
|
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| 0 |
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Total Other (expense) / income |
|
| 1,000 |
|
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| (37,000 | ) |
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Net loss before tax |
|
| (243,000 | ) |
|
| (21,000 | ) |
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Income tax expense |
|
| (2,000 | ) |
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| 0 |
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Net loss |
| $ | (245,000 | ) |
| $ | (21,000 | ) |
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Basic and diluted loss per common share |
| $ | (0.01 | ) |
| $ | (0.00 | ) |
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Weighted average number of shares outstanding – basic & diluted |
|
| 40,950,729 |
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| 35,905,948 |
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American Bio Medica Corporation | ||||||||
Condensed Statements of Cash Flows | ||||||||
(Unaudited) | ||||||||
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| For The Three Months Ended |
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| March 31, |
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| 2022 |
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| 2021 |
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Cash flows from operating activities: |
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Net loss |
| $ | (379,000 | ) |
| $ | (556,000 | ) |
Adjustments to reconcile net loss to bet cash used in operating activities: |
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Depreciation and amortization |
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| 13,000 |
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| 18,000 |
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Penalty added to Cherokee loan balance |
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| 0 |
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| 120,000 |
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Provision for bad debt |
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| (1,000 | ) |
|
| (17,000 | ) |
Provision for slow moving and obsolete inventory |
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| 0 |
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| 21,000 |
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Consulting fee paid with restricted stock |
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| 15,000 |
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| 0 |
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Changes in: |
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Accounts receivable |
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| 186,000 |
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| 87,000 |
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Inventory |
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| 24,000 |
|
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| 8,000 |
|
Prepaid expenses and other current assets |
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| (11,000 | ) |
|
| 7,000 |
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Right of use asset |
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| 9,000 |
|
|
| 9,000 |
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Accounts payable |
|
| 161,000 |
|
|
| 52,000 |
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Accrued expenses and other current liabilities |
|
| (17,000 | ) |
|
| (103,000 | ) |
Right of use liability |
|
| (9,000 | ) |
|
| (9,000 | ) |
Wages payable |
|
| (4,000 | ) |
|
| 4,000 |
|
Net cash used in operating activities |
|
| (13,000 | ) |
|
| (359,000 | ) |
Cash flows from financing activities: |
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Payments on debt financing |
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| 0 |
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| (25,000 | ) |
Proceeds from Lincoln Park financing |
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| 0 |
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|
| 381,000 |
|
Proceeds from lines of credit |
|
| 462,000 |
|
|
| 595,000 |
|
Payments on lines of credit |
|
| (547,000 | ) |
|
| (627,000 | ) |
Net cash (used in) / provided by financing activities |
|
| (85,000 | ) |
|
| 323,000 |
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Net change in cash and cash equivalents |
|
| (98,000 | ) |
|
| (35,000 | ) |
Cash and cash equivalents - beginning of period |
|
| 115,000 |
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|
| 98,000 |
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Cash and cash equivalents - end of period |
| $ | 17,000 |
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| $ | 63,000 |
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Supplemental disclosures of cash flow information |
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Non-Cash transactions: |
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Consulting fee paid with restricted stock |
| $ | 15,000 |
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| $ | 0 |
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Cash paid for interest |
| $ | 46,000 |
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| $ | 41,000 |
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The accompanying notes are an integral part of the condensed financial statements
5 |
Table of Contents |
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| For The Six Months Ended June 30, |
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| 2021 |
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| 2020 |
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Cash flows from operating activities: |
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Net loss |
| $ | (801,000 | ) |
| $ | (346,000 | ) |
Adjustments to reconcile net loss to net cash (used in) operating activities: |
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Depreciation and amortization |
|
| 36,000 |
|
|
| 41,000 |
|
Amortization of debt issuance costs |
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| 0 |
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|
| 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
Notes to condensed financial statements (unaudited)
June 30, 2021March 31, 2022
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, 2020.2021. In the opinion of management, the interim condensed financial statements include all normal, recurring adjustments which are considered necessary for a fair presentation of the financial position of the Company at June 30, 2021,March 31, 2022, and the results of operations for the three and six month periods ended June 30, 2021 and June 30, 2020 and cash flows for the sixthree month periods ended June 30,March 31, 2022 (the “First Quarter 2022”) and March 31, 2021 and June 30, 2020.(the “First Quarter 2021”).
Operating results for the six months ended June 30, 2021First Quarter 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2021.2022. Amounts at December 31, 20202021 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.2021.
During the six months ended June 30, 2021,First Quarter 2022, 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, 2020. 2021.
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, 2020,2021, contained an explanatory paragraph regarding the Company’s ability to continue as a going concern. As of the date of this report, the Company’s current cash balances, together with cash generated from future operations and amounts available under the Company’s credit facilities may not be sufficient to fund operations through August 2022.May 2023.
Through the six months ended June 30, 2021,First Quarter of 2022, 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.$1,000,000. 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 ourthe line of credit (historically) have been significantly less than the maximum availability. As of June 30, 2021,March 31, 2022, 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 2021, ourThe Company’s credit facilities with Cherokee Financial, LLC were extended for another 12 months, or until(“Cherokee”) matured/expired on February 15, 2022 with a final balloon payment of $1,240,000 which has not been paid and is less than 12 months fromnow past due. The Company is currently in discussions with Cherokee related to the maturity and loan payoff, including, but not limited to, methods to pay off the two credit facilities, restructuring of the credit facilities and/or further extension of the facilities. Considering these discussions, as of the date of this report. Ourreport, Cherokee has not called a default under either facility nor have they imposed default interest under either facility. The Company is hoping to conclude these discussions with Cherokee shortly and expects to file a Current Report on Form 8-K when required.
6 |
Table of Contents |
The Company’s total debt at June 30, 2021March 31, 2022 with Cherokee Financial, LLC is $1,240,000. We doThe Company does not expect cash from operations within the next 12 months to be sufficient to pay the amounts due under these credit facilities whichso, the Company is due in full on February 15, 2022. We are currently looking at alternatives to pay off or refinance these facilities.
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 further reduced availability on its line of credit due to decreased accounts receivable balances. If availability under the Company’s line of credit and the Lincoln Park Security Agreement areis not sufficient to satisfy our working capital and capital expenditure requirements, wethe Company will be required to obtain additional credit facilities or sell additional equity securities, or delay capital expenditures, which could have a material adverse effect on the business. There is no assurance that such financing will be available or that the Company will be able to complete financing on satisfactory terms, if at all.
Recently Adopted Accounting Standards
ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, issued in December 2019 reduces the complexity by removing exemptions and simplifying the accounting for franchise taxes, deferred taxes and taxes related to employee’s stock ownership plan. The requirements in ASU 2019-12 are effective for public companies for fiscal years beginning after December 15, 2020, including interim periods. The Company adopted ASU 2019-02 on January 1, 2021 and the adoption did not have an impact on the Company’s financial condition or results of operation.
ASU 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 ASU 2021-01 are effective for public companies for fiscal years beginning after December 15, 2020, including interim periods within the fiscal year. The Company adopted ASU 2020-01 on January 1, 2021 and the adoption did not have an impact on the Company’s financial condition or results of operation.
ASU 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.
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 effective 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 evaluateadopted ASU 2021-04 on January 1, 2022 and the adoption did not have an impact on the Company’s financial condition or results of operations.
ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, issued in November 2021 requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the pronouncement closerassistance, the related accounting policies used to account for government assistance, the effective dateeffect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The Company adopted ASU 2021-10 on January 1, 2022 and the adoption did not have an impact on our financial condition or results of operations as ASU-2021-10 only impacts annual financial statement footnote disclosures.
Accounting Standards Issued; Not Yet Adopted
There are not any new accounting standards issued but, not yet adopted in the First Quarter 2022.
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:
|
| June 30, 2021 |
| December 31, 2020 |
|
| March 31, 2022 |
|
| December 31, 2021 |
| |||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Raw Materials |
| $ | 536,000 |
| $ | 534,000 |
|
| $ | 448,000 |
| $ | 462,000 |
| ||
Work In Process |
| 122,000 |
| 127,000 |
|
| 94,000 |
| 109,000 |
| ||||||
Finished Goods |
| 138,000 |
| 154,000 |
|
| 137,000 |
| 150,000 |
| ||||||
Allowance for slow moving and obsolete inventory |
|
| (321,000 | ) |
|
| (279,000 | ) |
|
| (260,000 | ) |
|
| (278,000 | ) |
|
| $ | 475,000 |
|
| $ | 536,000 |
|
| $ | 419,000 |
|
| $ | 443,000 |
|
NoteN ote 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 lossincome per common share includes the weighted average dilutive effect of stock options and warrants. When the Company has a loss, option and warrants are not included as they would be anti-dilutive. Potential common shares outstanding as of June 30, 2021March 31, 2022 and 2020:2021:
|
| June 30, 2021 |
|
| June 30, 2020 |
|
| March 31, 2022 |
|
| March 31, 2021 |
| ||||
|
|
|
|
|
| |||||||||||
Warrants |
| 0 |
| 0 |
| |||||||||||
Options |
|
| 1,987,000 |
|
|
| 2,192,000 |
|
|
| 1,937,000 |
|
|
| 1,987,000 |
|
|
|
| 1,987,000 |
|
|
| 2,192,000 |
| ||||||||
Total |
|
| 1,937,000 |
|
|
| 1,987,000 |
|
7 |
|
Table of Contents |
Note D – Litigation/Legal Matters
From time to time, the Company may be named in immaterial legal proceedings in connection with matters that arosearise 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 immaterial 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.
Note E – Line of Credit and Debt
The Company’s Line of Credit and Debt consisted of the following as of June 30, 2021March 31, 2022 and December 31, 2020:2021:
|
| 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 |
|
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
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 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 with $100,000 added to the loan principal as a penalty and the annual interest rate increased to 10%. Loan is collateralized by a first security interest in building, land and machinery & equipment. See Note I – Subsequent Events |
| $ | 1,000,000 |
|
| $ | 1,000,000 |
|
Crestmark Line of Credit: Line of credit maturing on June 22, 2023 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, inventory and all other assets. The all-in interest rate as of the date of this report is 12.58%. |
|
| 93,000 |
|
|
| 178,000 |
|
2019 Term Loan with Cherokee Financial, LLC: Note at an annual fixed interest rate of 18% paid quarterly in arrears and a balloon payment due on February 15, 2020. Loan was extended in February 2020, until February 15, 2021 with a penalty of $20,000 added to the loan principal. Loan was further extended in February 2021 to February 15, 2022 with another penalty of $20,000 added to the loan principal. See Note I – Subsequent Events |
|
| 240,000 |
|
|
| 240,000 |
|
November 2020 Shareholder Note: Term loan at 7% interest (Prime + 3.75%) with the first interest only payment being made on February 4, 2021 and the final interest and $50,000 principal due on November 4, 2022. |
|
| 50,000 |
|
|
| 50,000 |
|
December 2021 Shareholder Notes: Two term loans with two non-affiliated shareholders at 7% interest until principal and interest are both due in full, or until June 15, 2022. The first interest payments were due on March 15, 2022 and payment of final interest and principal are due June 15, 2022, or earlier as we receive further ERC refunds |
|
| 75,000 |
|
|
| 75,000 |
|
Total Debt |
| $ | 1,458,000 |
|
| $ | 1,543,000 |
|
Current portion |
| $ | 1,458,000 |
|
| $ | 1,543,000 |
|
Table of Contents |
LOAN AND SECURITY AGREEMENT ("LSA")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)which, 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 term loan with Cherokee (See 2019 Term Loan with Cherokee within this Note E).
OnIn 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 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,in February 2020. In connection with this extension, the Company issuedwas required to issue 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.Cherokee.
On February 24, 2021, the Company completed a transaction related to another one-year Extension Agreement dated February 14, 2021 (the “Second Extension Agreement”Extension”) with Cherokee under which Cherokee extended the due date of the Cherokee LSA to February 15, 2022.
Under the terms of the Second 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.quarterly.
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%. TheA final balloon payment was due on February 15, 2022. Under the terms of the Second Extension Agreement, if the Company will continue to make interest payments and administrative fees quarterly on the Cherokee LSA. The Company candoesn’t pay off the principal on or before February 15, 2022, Cherokee loan at any timemay impose an 8% delinquent fee. This delinquent fee applies to the principal balance due on February 15, 2022. Although the facility was not paid off on February 15, 2022, Cherokee has not imposed this delinquent fee or increased the interest rate.
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 no penalty; except that a 1% administration fee would be required to beCherokee investors. The Company also paid Cherokee’s legal fees in the amount of $1,000.
On August 18, 2021, we issued 625,000 restricted shares of common stock to Cherokee to close out all participations.in lieu of paying the $25,000 August 2021 interest payment in cash. The closing price of the Company’s common shares on the date of the payment in lieu of cash was $0.04.
The Company recognized $48,000 in interest expense related to the Cherokee LSA in the six months ended June 30, 2021 (of which $0 is debt issuance cost amortization recorded as interest expense) and $53,000 in interest expense related to the Cherokee LSA in the six months ended June 30, 2020 (of which $17,000 is debt issuance cost amortization recorded as interest expense). The Company recognized $25,000 in interest expense related to the Cherokee LSA in the three months ended June 30, 2021 (of which of which $0 is debt issuance cost amortization recorded as interest expense)First Quarter 2022 and $18,000$23,000 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).First Quarter 2021.
The Company had $17,000$8,000 in accrued interest expense at June 30, 2021 and $14,000 in accrued interest expense at June 30, 2020March 31, 2022 related to the Cherokee LSA.
As of June 30,March 31, 2022 and December 31, 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$1,000,000. See Note I – Subsequent Events for more information on the status of the Cherokee LSA was $900,000.LSA.
9 |
Table of Contents |
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. Upon 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 noticecurrent maturity date of non-renewal and therefore, the Crestmark LOC automatically renewed onis June 22, 2021 for another one year term, or until June 22, 2022.2023.
Originally, availability underAlthough secured by inventory and other assets, the Crestmark LOC was based on certain inventory components (under a specific formula previously defined in prior periodic reports) and receivables. The maximum available under the Crestmark LOC was $1,500,000. However on June 25, 2018, the facility was amended to decrease the amounts available under the inventory component until availability under the inventory component was zero; making the Crestmark LOCis a receivables-based only line of credit as of July 1, 2020. The facility was further amended on June 22, 2020 to decreaseand the maximum availability (“Maximum Amount”) under the Crestmark LOC tois $1,000,000.
The Crestmark LOC has a minimum loan balance requirement of $500,000. At June 30, 2021,March 31, 2022, the Company did not meet the minimum loan balance requirement as our balance was $287,000.$93,000. 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 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).
In the event of a default of the LSA, which includes but is not limited to, failure of the Company to make any payment when due, 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, 2021March 31, 2022 and as of the date of this report, the interest only rate on the Crestmark LOC is 6.25%6.50%. 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 is 11.99%12.58%.
The Company recognized $24,000 in interest expense related to the Crestmark LOC in the six months ended June 30, 2021 and $17,000 in interest expense related to the Crestmark LOC in the six months ended June 30, 2020. The Company recognized $11,000incurred $10,000 in interest expense in the three months ended June 30, 2021First Quarter 2022 and $9,000$12,000 in interest expense in the three months ended June 30, 2020.First Quarter 2021 related to the Crestmark LOC. Given the nature of the administration of the Crestmark LOC, at June 30, 2021,March 31, 2022, the Company had $0 in accrued interest expense related to the Crestmark LOC, and there is $0 in additional availability under the Crestmark LOC.
At June 30 2021, the balance on the Crestmark LOC was $287,000 and as of December 31, 2020, the balance on the Crestmark LOC was $277,000.
2019 TERM LOAN WITH CHEROKEE
On February 25, 2019, the Company entered into an agreement dated (and effective) February 13, 2019 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.$200,000. The annual interest rate under the 2019 Cherokee Term Loan is 18% (fixed) paid quarterly in arrears with the first interest payment being made on May 15, 2019.arrears.
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 Cherokee 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 thethis additional 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.arrears.
In the event of default, this includes, but is not limited to, the Company’s inability to make any payments due under the Agreement; Cherokee has the right to increase the interest rate on the financing to 20%. A final balloon payment was due on February 15, 2022. If the Company didn’t pay off the principal on or before February 15, 2022, Cherokee could impose an 8% delinquent fee. This delinquent fee applies to the principal balance due on February 15, 2022. Although the facility was not paid off on February 15, 2022, Cherokee has not imposed this delinquent fee or increased the interest rate.
The Company recognized $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 six months ended June 30, 2020. The Company recognized $11,000 in interest expense in the First Quarter 2022 and $10,000 in interest expense in the First Quarter 2021 related to the 2019 Cherokee Term Loan in the three months ended June 30, 2021 and $10,000Loan. The Company had $4,000 in interest expense related to the 2019 Cherokee Term Loan in the three months ended June 30, 2020. The Company had $7,000 in accrued interest expense at June 30, 2021 and $14,000 in accrued interest expense at June 30, 2020.
March 31, 2022. The balance on the 2019 Cherokee Term Loan wasis $240,000 at June 30, 2021March 31, 2022 and $220,000 at December 31, 2020.
SBA PAYCHECK PROTECTION LOAN (PPP LOAN)
On April 22, 2020, we entered into a Promissory2021. See Note (“PPP Note”)I – Subsequent Events for $332,000 with Crestmark Bank, pursuant tomore information on the U.S. Small Business Administration Paycheck Protection Program under Title Istatus 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. On June 5, 2021, the Company applied for forgiveness of loan in the amount of $332,000 under PPP guidelines. As of the date of this report, our forgiveness application has been reviewed by the SBA and the final forgiveness amount has been set to $332,000; the total amount of the loan.
The Company recognized $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 PPP2019 Cherokee Term Loan. This accrued interest is eligible for forgiveness under PPP loan guidelines. The balance on the PPP Loan was $332,000 at June 30, 2021 and at December 31, 2020.
NOVEMBER 2020 TERM LOAN
On November 4, 2020, the Company entered into a loan agreement with an unaffiliated, 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 remained unchanged under the Extension.
10 |
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On November 4, 2021, the Company entered into a twelve-month Extension Agreement (the “Extension”) with the shareholder. Under the Extension, the principal is now due on November 4, 2022. The interest rate and all other terms of the note remain unchanged under the Extension. TheAll interest paymentpayments due to the shareholder on May 4, 2021 washave been paid as required with the next interest payment being due on AugustMay 4, 2021.2022.
The companyCompany recognized $2,000 of$1,000 in interest expense related to the November 2020 term loan in the six months endedFirst Quarter 2022 and the First Quarter 2021. The Company had less than $1,000 of interest expense accrued related to the November 2020 Term Loan in the First Quarter 2022. The balance on the November 2020 Term Loan was $50,000 at March 31, 2022 and at December 31, 2021.
DECEMBER 2021 SHAREHOLDER LOANS
On December 14, 2021, the Company entered into Loan Agreements with two non-affiliated investors resulting in gross (and net) proceeds of $75,000 as there were no costs associated with the loans. The loans bear interest of 7% per annum until principal and interest are both due in full, or until June 30, 202115, 2022. The first interest payments were due on March 15, 2022 and payment of final interest and principal are due June 15, 2022, or earlier as we receive further ERC refunds.
The Company incurred $1,000 in interest expense related to these loans in the First Quarter 2022 and $0 in interest expense in the six months ended June 30, 2020First Quarter 2021 (as the loan wasfacilities were not in place until November 4, 2020)December 2021). 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).at March 31, 2022. The balance on the November 2020 Term Loanthese loans was $50,000$75,000 at June 30, 2021March 31, 2022 and at December 31, 2020.2021.
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 three and/or six months ended June 30, 2020.First Quarter 2021. More specifically:
EQUIPMENTSBA PAYCHECK PROTECTION LOAN WITH CRESTMARK(PPP LOAN)
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. The balance on the Equipment Loan was $0 at June 30, 2021 and at December 31, 2020.
NOVEMBER 2020 LOAN WITH CHAIM DAVIS
On November 6,April 22, 2020, the Company entered into a loan agreementPromissory Note (“PPP Note”) for $332,000 with our (now former) ChairmanCrestmark Bank, pursuant to the U.S. Small Business Administration Paycheck Protection Program under Title I of the Board Chaim Davis, under which Davis providedCoronavirus Aid, Relief, and Economic Security (“CARES”) Act passed by Congress and signed into law on March 27, 2020. The PPP Note was unsecured, with an interest rate of 1.00% per annum, with principal and interest payments deferred for the first six months, and would mature in two years. On June 15, 2021, the Company applied for forgiveness of the sumPPP loan in the amount of $25,000 (the “November 2020 Loan”). There were no expenses or$332,000 under PPP guidelines. Our forgiveness application was reviewed by the SBA and on August 3, 2021, the Small Business Administration remitted payment to Crestmark Bank for the balance of the PPP Loan principal and all interest due on the PPP Loan.
The Company recognized $1,000 in interest expense related to the November 2020 loan.PPP Loan in the First Quarter 2021. The Company incurred $0had $3,000 in accrued interest expense inat March 31, 2021.
NOTE F – Employee Retention Credit
The employee retention credit (“ERC”), as originally enacted on March 27, 2020 by the threeCARES Act, is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees. On March 1, 2021, the IRS released Notice 2021-20 to provide guidance on the original ERC, as modified by the Relief Act. The Relief Act extended and six months endedenhanced the ERC for qualified wages paid after December 31, 2020 through June 30, 2021. Under the Relief Act, eligible employers may claim a refundable tax credit against certain employment taxes equal to 70% of the qualified wages an eligible employer pays to employees after December 31, 2020 through June 30, 2021. Under the American Rescue Plan Act and previously under the Consolidated Appropriations Act, 2021, the ERC was extended and expanded allowing claims through December 31, 2021 by eligible employers who retained employees during the Covid-19 pandemic. However, on November 5, 2021, the House of Representatives passed the Infrastructure Investment and Jobs Act (“Infrastructure Bill”) under which the ERC would terminate as of September 20, 2021 instead of December 31, 2021 and, $0 inPresident Biden signed the three and six months ended June 30, 2020 (as the facility was not in place untilbill on November 2020). The balance on the November 2020 Term Loan was $0 at June 30, 2021 (as the facility was paid in full on February 24, 2021 with proceeds from the Lincoln Park equity line) and $25,000 at December 31, 2020.15, 2021.
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The maximum qualified wages for each employee under the current ERC is $10,000 per quarter. Also, because we have 100 or fewer full-time employees, health plan expenses borne by the Company can also be included as qualified wages in addition to salary. To qualify for the ERC in 2021, an employer must have experienced at least a 20% reduction in gross receipts when compared to the same quarter in either 2020 or 2019. During the first quarter of 2021, the second quarter of 2021 and the third quarter of 2021, the Company qualified for the ERC when comparing its 2021 quarters with both 2020 and 2019 quarters. In August 2021, the Company’s payroll service provider processed and mailed a Form 941-X to claim a refund in the amount of $202,000 on qualified wages paid in the first quarter of 2021. Due to a change in the Form 941-X, the Company’s payroll service provider did not process and mail its Form 941-X to claim a refund in the amount of $198,000 on qualified wages paid in the second quarter of 2021 until October 28, 2021. In the middle of the third quarter of 2021, the Company began taking the ERC in our current payroll; which reduced payroll by approximately $44,000 in the third quarter of 2021. Given this, the Company did not have to amend its Form 941 for the third quarter of 2021; however the Form 941 claiming a refund in the amount of $137,000 was filed electronically with the IRS on November 1, 2021 by the Company’s payroll service provider. Upon passing of the Infrastructure Bill, the Company ceased taking the ERC in its current payroll.
On December 28, 2021, the Company received its refund for the third quarter of Fiscal 2021 in the amount of $137,000. Shortly before receiving the first refund, the Company spoke with the Internal Revenue Service (“IRS”) to obtain statuses of our filings. The Company was informed that the IRS did not have record of receiving the Company’s Form 941-X for the first quarter of Fiscal 2021 (which was mailed by the Company’s service provider in August 2021). The Company re-sent the Form 941-X for the first quarter of Fiscal 2021 via overnight service on December 31, 2021 and the IRS received it on January 5, 2022. This lack of receipt will result in a delay in receiving the expected refund in the amount of $202,000. Based on our discussion with the IRS, we were expecting the refund for the second quarter of Fiscal 2020 sometime in February 2022; however, as of the date of this report, we have not received any further refund payments. The Company’s expected refunds; totaling $400,000, are included on the Condensed Balance Sheets under current assets, as well as on the Company’s Condensed Statements of Operations under other income.
Laws and regulations concerning government programs, including the Employee Retention Credit are complex and subject to varying interpretations. Claims made under the CARES Act may also be subject to retroactive audit and review. There can be no assurance that regulatory authorities will not challenge the Company’s claim to the ERC, and it is not possible to determine the impact (if any) this would have upon the Company. Although the Company has recorded $400,000 under other long term liabilities on our Condensed Balance Sheets at March 31, 2022, even if the Company’s refund claim was challenged and ultimately denied, the Company would not actually have to remit $400,000 to the IRS as that amount has already been remitted to the IRS.
NOTE FG – Stock Options and Warrants
The Company currently has two non-statutory stock option plans, the Fiscal 2001 Non-statutory Stock Option Plan (the “2001 Plan”) and the 2013 Equity Compensation Plan (the “2013 Plan”). Both plans have been adopted by our Board of Directors and approved by our shareholders. Both the 2001 Plan and the 2013 Plan have options available for future issuance. Any common shares issued as a result of the exercise of stock options would be new common shares issued from our authorized issued shares.
During the three months ended June 30, 2021First Quarter 2022 and the three months ended June 30, 2020,First Quarter 2021, the Company issued 0 options to purchase shares of common stock.
12 |
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Stock option activity for the six months ended June 30, 2021First Quarter 2022 and the six months ended June 30, 2020First Quarter 2021 is summarized as follows (the figures contained within the tables below have been rounded to the nearest thousand):
|
| Six months ended June 30, 2021 |
| Six months ended June 30, 2020 |
|
| First Quarter 2022 |
|
| First Quarter 2021 |
| |||||||||||||||||||||||||||||||||||||
|
| 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 |
|
| Shares |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value as of March 31, 2022 |
|
| Shares |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value as of March 31, 2021 |
| ||||||||||||
Options outstanding at beginning of year |
| 1,987,000 |
| $ | 0.13 |
|
|
| 2,252,000 |
| $ | 0.14 |
|
|
|
| 1,937,000 |
| $ | 0.13 |
|
|
|
| 1,987,000 |
| $ | 0.13 |
|
|
| |||||||||||||||||
Granted |
| 0 |
| NA |
|
|
| 0 |
| NA |
|
|
|
| 0 |
| NA |
|
|
|
| 0 |
| NA |
|
|
| |||||||||||||||||||||
Exercised |
| 0 |
| NA |
|
|
| 0 |
| NA |
|
|
|
| 0 |
| NA |
|
|
|
| 0 |
| NA |
|
|
| |||||||||||||||||||||
Cancelled/expired |
|
| 0 |
|
| NA |
|
|
|
|
| (60,000 | ) |
| $ | 0.13 |
|
|
|
|
|
| 0 |
|
| NA |
|
|
|
|
| 0 |
|
| NA |
|
|
| ||||||||||
Options outstanding at end of quarter |
|
| 1,987,000 |
|
| $ | 0.13 |
|
|
| 25,000 |
|
|
| 2,192,000 |
|
| $ | 0.12 |
|
| $ | 177,000 |
|
|
| 1,937,000 |
|
| $ | 0.13 |
|
| $ | 0 |
|
|
| 1,987,000 |
|
| $ | 0.13 |
|
| $ | 107,000 |
|
Options exercisable at end of quarter |
|
| 1,987,000 |
|
| $ | 0.13 |
|
|
|
|
|
|
| 2,192,000 |
|
| $ | 0.12 |
|
|
|
|
|
|
| 1,937,000 |
|
| $ | 0.13 |
|
|
|
|
|
| 1,987,000 |
|
| $ | 0.13 |
|
|
|
|
The Company recognized $0 in share based payment expense in the six months ended June 30, 2021First Quarter 2022 and $2,000 in share based payment expense in the six months ended June 30, 2020. The Company recognized $0 in share based payment expense in the three months ended June 30, 2021 and $1,000 in the three months ended June 30, 2020.First Quarter 2021. At June 30, 2021,March 31, 2022, there was $0 of unrecognized share based payment expense related to stock options.
Warrants
WarrantThere was no warrant activity in the First Quarter 2022 or the First Quarter 2021.
NOTE H – Changes in Stockholders’ Deficit
The following table summarizes the changes in stockholders’ deficit for the six months ended June 30, 2020three month periods ending March 31, 2022 and the six months ended June 30, 2019 is summarized as follows:March 31, 2021:
|
| 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 six months ended June 30, 2021 and June 30, 2020, the Company recognized $0 in debt issuance and deferred finance costs related to the issuance of the above warrants outstanding. In the three months ended June 30, 2021 and June 30, 2020, the Company recognized $0 in debt issuance and deferred finance costs related to the issuance of the above warrants. The warrants expired in January 2021 and as of June 30, 2021; there was $0 of total unrecognized expense.
|
| Common Stock |
|
| Additional Paid in |
|
| Accumulated |
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital | Deficit | Total |
| |||||||||
Balance – January 1, 2022 |
|
| 47,598,476 |
|
|
| 476,000 |
|
|
| 22,393,000 |
|
|
| (22,813,000 | ) |
|
| (944,000 | ) |
Shares issued in connection with Landmark consulting agreement |
|
| 500,000 |
|
|
| 5,000 |
|
|
| 10,000 |
|
|
|
|
|
|
| 15,000 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (379,000 | ) |
|
| (379,000 | ) |
Balance – March 31, 2022 |
|
| 48,098,476 |
|
|
| 481,000 |
|
|
| 22,403,000 |
|
|
| (24,192,000 | ) |
|
| (1,308,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Pak Equity Line |
|
| 1,600,000 |
|
|
| 16,000 |
|
|
| 240,000 |
|
|
|
|
|
|
| 256,000 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (556,000 | ) |
|
| (556,000 | ) |
Balance – March 31, 2021 |
|
| 39,803,476 |
|
| $ | 398,000 |
|
| $ | 22,077,000 |
|
| $ | (23,906,000 | ) |
| $ | (1,431,000 | ) |
*indicates less than $1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents |
NOTE G – ChangesLANDMARK CONSULTING AGREEMENT
On March 7, 2022, the Company entered into a Financial Advisory Agreement (the “Agreement”) with Landmark Pegasus, Inc. (‘Landmark”). The Agreement provides that Landmark will provide certain financial advisory services for a minimum period of 3 months (which period commenced on February 28, 2022), and as consideration for these services, the Company will pay Landmark (a) a retainer fee consisting of 500,000 restricted shares of common stock and a warrant to purchase 2.75 million shares of the Company’s common stock at a strike price equal to the average closing price of the Company’s common shares for the 30 days preceding the Agreement, or $0.035 per share, resulting in Stockholders’ Deficitgross proceeds to the Company in the amount of $96,250. The warrant would vest upon the closing of a transaction involving Landmark or upon the invocation of a “Breakup Fee”.
In a subsequent amendment, the terms of the warrant were changed to reflect that the warrant would be issued immediately preceding the closing of a transaction involving Landmark or immediately upon the invocation of the Breakup Fee. In each case, the warrant would vest immediately (i.e. the warrant would be 100% immediately exercisable).
The following table summarizesBreakup Fee will be invoked upon the changes in stockholders’ deficitgeneration of a specific transaction to ABMC which meets certain criteria agreed upon by both the Company and Landmark; which transaction is then rejected by the Company. The Company will also pay to Landmark a “Success Fee” for the six month periods ending June 30, 2021consummation of a transaction closing during the term of the Agreement and June 30, 2020:for 12 months thereafter, between the Company and any party first introduced to the Company by Landmark, or with any party the Company has specifically requested Landmark’s assistance with the transaction.
|
| 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 | ) |
Upon invocation of the Breakup Fee or payment of the Success Fee, the Company will also issue an additional 250,000 restricted shares of the Company’s common stock.
In the event that the Company consummates a transaction involving the provision of services to any party introduced to the Company by Landmark or with any party the Company has specifically requested Landmark’s assistance with, the Company will pay Landmark 10% of any revenues received from the transaction, unless this percentage is modified by both the Company and Landmark in writing. There is no material relationship between the Company and Landmark, other than with respect to the Agreement.
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 ourits 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, on December 29, 2020, the Company was required to filefiled a registration statement on Form S-1 (the “Registration Statement”) 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 underPark. The SEC declared 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.
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 December 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-1as amended, 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, underUnder 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 forthoutlined in the Purchase Agreement), provided thatAgreement. However, 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.
14 |
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Lincoln Park cannot require the Company to sell them any common stock, to Lincoln Park, but Lincoln Park is obligated to make purchases as the Company directs, subject to certain conditions.conditions outlined under the Purchase Agreement. 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 Parkthem 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, and the timing of the same, 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 bytime. Proceeds the Company as to the appropriate sources of funding for the Company and its operations. The net proceeds to the Companyreceived 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 beare used at the sole discretion of Company management and will beare used for general corporate purposes, capital expenditures and working capital.
The Company did not sell any shares of common stock to Lincoln Park in the First Quarter 2022 as the closing price of the Company’s shares of common stock did not exceed $0.05. In fact, the last sale to Lincoln Park was in October 2021. In the First Quarter 2021, the Company sold a total of 2,100,000 shares of common stock to Lincoln Park (including the balance of the required initial purchase) as Regular Purchases and received proceeds of $381,000.
NOTE I – SUBSEQUENT EVENTS
Amendment to December 2021 Shareholder Loan
On April 6, 2022, we amended a loan with one of the non-affiliated shareholders. This amendment (No.1; hereinafter referred to in this paragraph as Amendment No. 1) increasing the principal due to the shareholder by $25,000; bringing their total principal to $75,000. No other terms of the loan were changed under Amendment No. 1.
On April 14, 2022, the loan was amended again (under Amendment No. 2; hereinafter referred to in this paragraph as Amendment No. 2) increasing the principal again by $50,000; bringing their total principal to $125,000. No other terms of the loan were changed under Amendment No. 2.
On May 11, 2022, the loan was amended again (under Amendment No. 3; hereinafter referred to in this paragraph as Amendment No. 3) increasing the principal again by $75,000; bringing their total principal to $200,000. The loan was further amended to include a specific payment schedule based on receipt of anticipated ERC refunds. More specifically, $75,000 will be repaid to the shareholder upon receipt of the next ERC refund (anticipated to be $198,000), $100,000 will be repaid to the shareholder upon receipt of the final ERC refund (anticipated to be $202,000) and the final $25,000 and any accrued interest due under the loan will be paid prior to December 31, 2022.
Cherokee LSA and 2019 Term Loan
As of the date of this report, we are still in discussions with Cherokee about our inability to pay off these credit facilities. These discussions involve possible payoff of the loans (via a refinance or other means), modification of the terms of the facilities and/or further extension of the due date of the credit facilities.
NOTE J- INCOME TAXES
The Company follows ASC 740 “Income Taxes” (“ASC 740”) which prescribes the asset and liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted laws and tax rates that will be in effect when the differences are expected to reverse. The measurement of net, deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are not expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. Under ASC 740, tax benefits are recorded only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. With regards to the use of net losses incurred for 2018 and later, such net operating losses have no expiration date, while net operating loss carryforwards can only be used to offset up to 80% of taxable income. Net operating losses incurred prior to 2018 may be fully utilized to offset taxable income, but expire in 20 years.
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The Purchase AgreementA reconciliation of the U.S. Federal statutory income tax rate to the effective income tax rate is as follows:
|
| Quarter Ended March 31, 2022 |
|
| Quarter Ended March 31, 2021 |
| ||
Tax expense at federal statutory rate |
|
| (21 | )% |
|
| (21 | )% |
State tax expense, net of federal tax effect |
|
| 0 | % |
|
| 0 | % |
Increase in valuation allowance |
|
| 21 | % |
|
| 21 | % |
Effective income tax rate |
|
| (0 | )% |
|
| (0 | )% |
Deferred income taxes reflect the temporary differences between the financial statement carrying amounts of assets and liabilities for financial reporting purposes and the Registration Rights Agreement contain customary representations, warranties, conditionsamounts used for income tax purposes, adjusted by the relevant tax rate. The components of deferred tax assets and indemnification obligationsliabilities are as follows:
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
|
|
|
|
|
|
| ||
Inventory capitalization |
| $ | 8,000 |
|
| $ | 8,000 |
|
Inventory allowance |
|
| 68,000 |
|
|
| 72,000 |
|
Allowance for doubtful accounts |
|
| 1,000 |
|
|
| 1,000 |
|
Accrued compensation |
|
| 18,000 |
|
|
| 18,000 |
|
Stock based compensation |
|
| 159,000 |
|
|
| 160,000 |
|
Deferred wages payable |
|
| 18,000 |
|
|
| 21,000 |
|
Depreciation – Property, Plant & Equipment |
|
| (24,000 | ) |
|
| (24,000 | ) |
Research and development credits |
|
| 24,000 |
|
|
| 24,000 |
|
Net operating loss carry-forwards |
|
| 2,730,000 |
|
|
| 2,631,000 |
|
Total deferred income tax assets, net |
|
| 3,002,000 |
|
|
| 2,911,000 |
|
Less: valuation allowance |
|
| (3,002,000 | ) |
|
| (2,911,000 | ) |
Net deferred income tax assets |
| $ | 0 |
|
|
| 0 |
|
The valuation allowance for deferred income tax assets was $3,002,000 as of March 31, 2022 and $2,911,000 as of December 31, 2021. The net change in the parties. During any “event of default” underdeferred income tax assets valuation allowance was $91,000 for 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.three month ended March 31, 2022. The Company hasbelieves that it is more likely than not that the right to terminatedeferred tax assets will not be realized.
As of March 31, 2022, the Purchase Agreement at any time, at no costprior full three years remain open for examination by the federal 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 onlystate regulatory agencies for purposes of such agreementsan audit for tax purposes.
At March 31, 2022, the Company had Federal and asstate net operating loss carry-forwards for income tax purposes of specific dates, were solely forapproximately $10,100,000 and research and development credits of $24,000. The Company’s net operating loss carry-forwards began to expire in 2022 and continue to expire through 2037. Net operating losses incurred from 2018 to date have no expiration date. In assessing the benefitreliability of deferred income tax assets, management considers whether or not it is more likely than not that some portion or all deferred income tax assets, net, will be realized. The ultimate realization of net deferred income tax assets is dependent upon the partiesgeneration of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment.
The Company’s ability to such agreements,utilize the operating loss carry-forwards and research and development credits 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 balancean annual limitation in future periods pursuant to Section 382 and Section 383 of the Initial Purchase and 4,400,000 sharesInternal Revenue Code of common stock to Lincoln Park1986, as Regular Purchases. The Company received proceeds of $564,000 from these purchases. There were no purchasesamended, if future changes in the six months ended June 30, 2020 as the Lincoln Park Agreements were not executed until December 2020.
PRIVATE PLACEMENT – FEBRUARY 2020
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 consisted 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.ownership occur.
The Purchase Agreement contains customary representations, warrantiesCompany recognizes potential interest and covenants made solely for the benefitpenalties related to income tax positions as a component of the parties to the Purchase Agreement. Although our Chairman of the Board was an investorprovision for income taxes on operations. The Company does not anticipate that total unrecognized tax benefits will materially change in the Private Placement, the pricing of the Units was determined by the non-affiliate investors.next twelve months.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationOperationss
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, 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.
Overview/Plan of Operations
In the six months ended June 30, 2021, salesSales of drug tests were still beingcontinue to be negatively impacted by the price competitiveness inas customer pricing continues to decrease as a result of our core markets (government, employment and clinical) and by the Covid-19 pandemic. Sales related to Covid-19 testing also declined dramatically in the six months ended June 30, 2021 compared to sales in the six months ended June 30, 2021 (when we were nearing the heightbeing saturated with products made outside of the pandemic and priorUnited States; primarily products made in China. This has resulted in a commoditization of the onsite drug testing market at a time when costs associated with labor, utilities, materials, insurance, etc. keep rising. In attempts to vaccine availability). retain current customers and/or attract new customers that require lower pricing, we are offering two drug test product lines that are manufactured in China.
In addition to the marketing of our drug tests, in the six months ended June 30, 2021 we have continued to market thevarious 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 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 distributing 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).rapid tests. 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.
The three new additional Covid-19 products have greater market applications than the tests we have been We are currently offering as we can offer them to a wider arraynumber of customers. Although the pandemic is no longer at its height, we believe the need for these Covid-19 diagnosticdifferent rapid antigen tests and the Covid-19rapid antibody tests still exist; albeit at lower levels.
We continue to offer other products via 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, these offerings have yet to materially positively impact sales.that can be used in various different settings, including home use; depending on their specific EUA issuance.
In addition to increased costs, the year ended December 31, 2019, we expanded our contract manufacturing operations with two (2) new customers. Unfortunately, the Covid-19 pandemic halted sales to these new customersmaterials used in the year ended December 31, 2020. We have open purchase orders (from 2020) with both customers and we started to ship against these purchase ordersmanufacture of our drug tests products are the same materials used in the three months ended June 30, 2021. Onemanufacture of the customers also placed an additional (new) orderlateral flow Covid-19 tests and this has resulted in April 2021, however this new order is not expected to ship until the sometime in the third quarter 2021.supply chain delays; some of which have negatively impacted our customer relationships.
Due to the Covid-19 pandemic, we are still not yet marketing our oral fluid drug tests (OralStat®) in the employment and insurance markets in the United States (under a limited exemption set forth by the FDA). We remain hopeful that we can effectively market our OralStat in the United States markets given its superior sensitivity and accuracy. Initially we may re-introduce the product in markets outside the United States via distribution relationships.
In 2019 we expanded our contract manufacturing operations with two new customers. Unfortunately, the Covid-19 pandemic halted sales to these customers throughout 2020 and into 2021 but, in the year ended December 31, 2021, we started to ship orders to them again as their business started to return to normal. We are hopeful that sales to these customers will improve as we get further outside of the pandemic.
In our current fiscal year and beyond, we are focusing our efforts on further penetration of our markets with bothour current products that we manufacture and newdistribute and we are looking into other products (drug testing, Covid-19 and other diagnostic tests). Weto offer via distribution relationships.
Although the cost of manufacturing drug tests in the United States is proving to be nearly cost prohibitive, we do believe there are also looking for avenuesopportunities to capitalize on our USUS-based lateral flow manufacturing operations. Tocapabilities; especially for small to mid-size diagnostic firms that end,require high quality manufacturing; especially given the current challenges with getting imports into the United States.
Gross profit margin has been declining due to the increased costs of manufacturing in the United States (many of which were previously mentioned). We continually take actions to adjust our production schedules to try to mitigate manufacturing inefficiencies, and take steps to obtain materials at the best available pricing. However, in many cases, we are still workingpurchasing at much lower volumes than the larger diagnostic companies and that results in higher per piece pricing. We also have certain overhead costs associated with a firmmanufacturing that would provide services relatedare fixed and as sales decline, these costs cannot be adjusted downward and this results in greater manufacturing inefficiencies. We are currently looking into possible production alternatives in attempts to public relations/social media to effectively communicate our manufacturing capabilities.address these fixed costs.
Operating expenses declined $33,000 in the six months ended June 30, 2021First Quarter 2022 when compared to the six months ended June 30, 2020. Declines in research and development and selling and marketing (as of result of lower commissions being paid due to much 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 Cherokee facilities in February 2021).First Quarter 2021. We continuously make efforts to control operational expenses to ensure they are in line with sales. We have continuedsales including, but not limited to, consolidateconsolidating job responsibilities in certain areas of the Company, as a resultsecuring more cost effective service providers and reduction of employee retirementfacility hours so they are more in line with production and other departures resulting in personnel reductions.administrative needs.
From August 2013 until June 2020, we maintained a 10% salary deferral program for our sole executive officer, our Chief Executive Officer/Principal Financial Officer Melissa Waterhouse. The salary deferral program was initiated by Ms. Waterhouse voluntarily. Until his departure in November 2019, anotherAnother member of senior management participated in the program voluntarily.voluntarily until his retirement in November 2019. After the member of senior management retired, in November 2019, we agreed to make payments on the deferred compcompensation owed to this individual. In the six months ended June 30,First Quarter 2021, and in the six months ended June 30, 2020, we made payments to this former member of senior management totaling $22,000 and $29,000, respectively. As of June 30, 2021, the deferred compensation owed$13,000 to this individual isand his deferred compensation was paid in full.full in May 2021. 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 hashad been owed (7 years) and that the last payment made to Ms. Waterhouse was inhad not received any payments on her deferred compensation since August 2017. In the six months ended June 30, 2021,First Quarter 2022, we made payments totaling $5,000$10,000 to Ms. Waterhouse. We did not make any payments on deferred compensation to Ms. Waterhouse in the First Quarter 2021. As of June 30, 2021,March 31, 2022, we had deferred compensation owed to Ms. Waterhouse in the amount of $101,000.$64,000 and $5,000 in payroll taxes that are due as payments are made to Ms. Waterhouse; for a total of $69,000 in deferred compensation owed 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,supply chain issues 2) further penetrate the markets (in and outside of the United States) for Covid-19 tests,the products we manufacture as well as products we offer via distribution, 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 either to Lincoln Park or through an alternative method if necessary.stock.
Results of operations for the six months ended June 30, 2021First Quarter 2022 compared to the six months ended June 30, 2020First Quarter 2021
NET SALES: Net sales for six months ended June 30, 2021the First Quarter 2022 decreased by $1,391,000, or 56%,38.0% when compared to net sales in the six months ended June 30, 2020. The primary reason for this decline is lower distribution salesFirst Quarter 2021 primarily as a result in the amount of $1,141,000; most of which is lower sales of Covid-19 tests. In the six months ended June 30, 2020, we recorded sales of Covid-19 rapid antibody tests in the amount of $1,105,000 while in the six months ended June 30, 2021, we recorded sales of Covid-19 tests in the amount of $38,000. Most of these Covid-19 test sales in 2021 were made in the early part of the first quarter ended March 31, 2021 and were rapid antigen tests (sales of rapid antibody tests were negligible). In the middle of the first quarter 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 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(“DOA") test that we offer via distribution.manufacture. The decline in DOA sales stems almost entirely from decreased sales to our largest customer who has historically been a significant portion of our revenues. This declinecustomer has two segments of their business for which we supply products. They informed us in February 2022 that sales to one of those segments (which we supplied exclusively) would decrease as a result of their desire to have multiple vendors supplying the segment. They indicated this was due to product availabilityensure uninterrupted supply as they had experienced periodic supply interruptions with us in 2021 (as a result of the supply chain issues we experienced in 2021 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 tests continue to be negatively impacted by the Covid-19 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;experience into 2022; particularly with plastics and other materials that are used to manufacture our drug tests; materials that are also used in the manufacture of lateral flow Covid-19 teststests. and plastic materials. The lead times for these materials are increasing significantlyother companies as well). They indicated that the other segment we supply would remain unchanged 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,that particular segment, 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 primarilyactually saw 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 the pandemic stage we are in (along with the seasonality of the test usage).
Over the last several months, we have been working toward finalizing an agreement that we signed in 2020 under which we would provide manufacturing services for another diagnostic company. Given certain regulatory events (affecting the diagnostic company), we are unsure if we will be moving forward with this agreement. We did expect this agreement to have a positive impact on our revenue in 2021; however, that is now uncertain.
From a sales perspective, we are focusing our efforts on further penetration of our markets with 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 public relations/social media to effectively communicate our manufacturing capabilities.
GROSS PROFIT: Gross profit decreased to 22.0% of sales in the six months ended June 30, 2021 compared to 31.0% of net sales in the six months ended June 30, 2020 due to greater manufacturing inefficiencies and increased material costs. In the latter part of the three months ended March 31, 2021, we began to utilize our New Jersey facility to supplement assembly production in New York to mitigate the inefficiencies. Personnel levels in our New York facility have declined recently and we have been unsuccessful with hiring new personnel although we have advertised for the positions. Supplementing NY production in this manner results in a wiser use of labor and overhead costs in our New Jersey facility and will help improve manufacturing inefficiencies. In addition, in the latter part of June 2021, we began implementing a priceslight increase in response to the increased costs related to labor and materials. To date, our customers appear to accept and understand the increase given our position as a 100% made in the United States manufacturer who is experiencing increased labor, material and site costs. Gross profit in the six months ended June 30, 2020 was also positively impacted by higher profit margins on Covid-19 products we were distributing (which almost entirely offset lower manufacturing margins in 2020.) We will continue to closely examine our gross profit margins on our manufactured products and take actions to adjust our production schedules and use manufacturing resources as wisely as possible to try to mitigate future inefficiencies.
Operating expenses decreased 3.2% in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Research & Development and Selling and Marketing expenses decreased while General and Administrative expenses increased. More specifically:
Research and development (“R&D”)
R&D expense decreased 21.2%sales when comparing the six months ended June 30, 2021First Quarter 2022 with the six months ended June 30, 2020. Decreased FDA compliance costs (associated with timing of facility registration fees) and supplies and materials costs were the primary reasons for the decreaseFirst Quarter 2021. Nominally offsetting this decline was an increase in expenses. All other expenses remained relatively consistent when comparing the two six-month periods. In the six months ended June 30, 2021, our R&D department primarily focused their efforts on the enhancementinternational sales as a few of our current products and required validations relateddistributors start to drug testing product components.see a rebound in business since the pandemic.
Selling and marketing
Selling and marketing expenseAlso partially offsetting the decline was an increase in the six months ended June 30, 2021 decreased 51.4% when compared to the six months ended June 30, 2020. The primary reason for the decrease in selling and marketing expense is significantly lower commissions paid related to sales of the Covid-19 rapid tests. In addition to commissions, reductions in sales salary expense and benefits (due to the termination of personnel) and car allowance expense (due to the same terminations), were nominally offset by increased promotional expense (i.e. the semi-annual fee to OTC Markets paid in the second quarter of 2021).
In the six months ended June 30, 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). We 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, 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, those reductions were made for performance reasons. We are still seeking new personnel to increase the size of our sales team to further penetrate our 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 21.6% in the six months ended June 30, 2021 when compared to G&A expense in the six months ended June 30, 2020. Increased costs associated with investor relations (primarily due to costs associated with our proxy and annual meeting of shareholders which was not held in June 2020 due to the pandemic), accounting fees (due to timing of invoices), administrative salaries (due to an additional employee in 2021), insurance costs, outside service fees (due to a higher cost of our ISO audit held in March 2021), and bank service fees (due to fees in the amount of $148,000 incurred in connection with the extension of the Cherokee loans), were partially offset by reductions in directors fees and expenses (due to less meetings held so far in 2021), legal fees (due to completion of the Lincoln Park financing in the early part of 2021), and repairs and maintenance. There was $0 in share based payment expense in the six months ended June 30, 2021 as all previously issued options have been completely amortized. There was $2,000 of share based payment expense in the six months ended June 30, 2020.
Other income and expense: Other expense of $46,000 in the six months ended June 30, 2021 consisted of interest expense associated with our credit facilities (our line of credit, our two loans with Cherokee Financial, LLC and a shareholder loan) which was offset by 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. Other expense of $91,000 in the six 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).
Results of operations for the three months ended June 30, 2021 compared to the three months ended June 30, 2020
NET SALES: Net sales for the three months ended June 30, 2021 decreased 69.9%, when compared to net sales in the three months ended June 30, 2020. The primary reason for this decline is lower distribution sales in the amount of $1,126,000;sales; most of which is lower sales of Covid-19 tests. In the three months ended June 30, 2020, we recorded sales of Covid-19 rapid antibody tests in the amount of $1,105,000 while in the three months ended June 30, 2021, we recorded sales of Covid-19 tests in the amount of $2,000. This even further decline from sales in the first three months of 2021 is due to the manufacturer informing the Company that we could no longer offer their Covid-19 antigen test for sale in the United States. We were able to source alternative tests to distribute but, not until late April/early May 2021 when we started to offer new Covid-19 tests via distribution. 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 inincreased sales of the lower cost drugsDOA tests we are selling along with a small increase in sales of abuse productsrapid Covid-19 tests we offer via distribution. This decline was due to product availability and overall lower need from our customers.
Drugs of abuseare distributing. Contract manufacturing sales also decreased by $112,000 in the three months ended June 30, 2021increased when comparedcomparing First Quarter 2022 to the three months ended June 30, 2020. Sales of drug tests continue to be negatively impacted by the Covid-19 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 inFirst Quarter 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.
Contract manufacturing sales increased by $5,000 in the three months ended June 30, 2021 compared to the three months ended June 30, 2020. This is primarily a result of orders shipped in the amountincreased sales of $36,000 in the second quarter 2021 from two customers whose orders halted in 2020our private labeled RSV test due to increased testing since the pandemic. We are expecting to ship more orders to these customers in 2021 as we fill open PO’s totaling $126,000. The increased orders shipped to these tow customers was mostly offset by decreased sales of RSV (Respiratory Syncytial Virus) diagnostic tests due to lower levels of testing due to the pandemic stage we are in (along with the seasonality of the test usage).
From a sales perspective, we are focusing our efforts on further penetration of our markets with 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 public relations/social media to effectively communicate our manufacturing capabilities.pandemic.
GROSS PROFIT: Gross profit decreased to 25.7%8% of net sales in the three months ended June 30, 2021 compared to 33.1%First Quarter 2022 from 18.6% of net sales in the three months ended June 30, 2020First Quarter 2021. This decline in gross profit is almost entirely due to decreased sales to our largest customer in one of their segments (previously discussed in net sales). The two segments we were supplying were comprised of one with low margin sales and one with higher margin sales. This allowed the Company to maintain an appropriate blended gross profit margin on the sales to the customer. The segment in which sales have decreased significantly is the segment in which products were sold at a higher profit margin and this has significantly reduced the blended gross profit margin on the account. At the same time, this decline in sales has resulted in greater inefficiencies in manufacturing. Manufacturing inefficiencies occur when production levels decrease but, not all costs can be reduced to be in line with production levels because they are fixed.
We have taken steps to reduce manufacturing inefficienciescosts, including but not limited to, costs associated with labor and increased material costs. In three months ended June 30, 2021, we utilized our New Jersey facility costs, to supplement assembly production in New York. Personnel levelsmitigate these inefficiencies. Given the price sensitivity in our New York facility have declined recentlymarkets and the commoditized nature of drug testing products increasing customer pricing is challenging; however, we have been unsuccessful with hiring new personnel although we have advertised for the positions. Supplementing NY production in this manner results in a wiser use of labor and overhead costs in our New Jersey facility and improves manufacturing inefficiencies. In addition, in the latter part of June 2021, we began implementingdid implement a price increase to non-contractual customers in response toJuly 2021 however, the increased costs related to labor and materials. To date, our customers appear to accept and understand the increase given our positioncustomer previously discussed has a contracted price in place that is not as a 100% made in the United States manufacturer who is experiencing increased labor, material and site costs. Gross profit in the three months ended June 30, 2020 was also positively impacted by higher profit margins on Covid-19 products we were distributing (which almost entirely offset lower manufacturing margins in 2020.) We will continue to closely examine our gross profit margins on our manufactured products and take actions to adjust our production schedules and use manufacturing resources as wisely as possible to try to mitigate future inefficiencies.easily increased.
OPERATING EXPENSES: Operating expenses decreased 32.9% in the three months ended June 30, 2021First Quarter 2022 compared to the three months ended June 30, 2020.First Quarter 2021. Selling and Marketing and General and Administrative expenseexpenses decreased while researchResearch and developmentDevelopment expenses increased slightly. More specifically:
Research and development (“R&D”)
R&D expense increased 10.5%decreased 10.0%, when comparing the three months ended June 30, 2021First Quarter 2022 with the three months ended June 30, 2020. The reason forFirst Quarter 2021. Although the slight increase (from a $ perspective) was 10.0%, the actual change in R&D expenses was only $2,000. Employment taxes increased slightly along with FDA compliance costs (as a result of timing ofand certain facility registration fees and the fact that the fees did increase slightly).costs. However, overall, expenses were relatively unchanged. In the three months ended June 30, 2021,First Quarter 2022, our R&D department primarily focused their efforts on the enhancement of our current products and required validations related to drug testing product components.
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Selling and marketing
Selling and marketing expense in the three months ended June 30, 2021First Quarter 2022 decreased 68.7%49.4% when compared to the three months ended June 30, 2020. The primary reason for the decrease in selling and marketing expense is significantly lower commissions paid related to sales of the Covid-19 rapid tests. In addition to commissions, reductionsFirst Quarter 2021. Reductions in sales salary expense and benefits (due to the termination of personnel)personnel for performance reasons) and car allowance expense (due toreductions in costs associated with shipping were the same terminations),primary reason for the decline in expenses. All other expenses were nominally offset by increased promotional expense (i.e.relatively unchanged when comparing the semi-annual fee to OTC Markets paid in the second quarter of 2021).quarters.
In the three months ended June 30, 2021,First Quarter 2022, we continued selling and marketing efforts related to ourthe drug tests and we continued to take actions to secure new contract manufacturing customers. We also secured distribution opportunities for additional Covid-19 testsmanufacture and began marketing these new tests. In addition, we promoted lower cost alternatives for onsite drug testing via distribution relationships. We also marketed and point of care products for infectious disease (through relationships with third parties).sold rapid Covid-19 tests via distribution relationships. These offerings did not result in increased selling and marketing expenses apart from increased commission costs inwhen comparing First Quarter 2022 with the six months ended June 30, 2020). Although we decreased the sizeFirst Quarter 2021. Terminations of our sales force, those reductions were made for performance reasons.personnel have been due to poor performance. We are still seeking new personneltaking steps to increase the size of our sales team to further penetrate our markets.markets; however, no new sales reps were hired in the First Quarter 2022. We will continue to take all steps necessary to ensure selling and marketing expenditures arelook for contract manufacturing opportunities or situations in line with sales.which we can leverage our U.S. based manufacturing operations.
General and administrative (“G&A”)
G&A expense decreased 9.5%42.3% in the three months ended June 30, 2021 whenFirst Quarter 2022 compared to G&A expense in the three months ended June 30, 2020. Decreased costsFirst Quarter 2021. The primary reason for the decrease was First Quarter 2022 did not include any fees associated with directors’our loans with Cherokee while the First Quarter 2021 includes a total of $148,000 in fees and expensesincurred in connection with a penalty related to extension of the Cherokee loans in February 2021 In addition, quality assurance salaries declined (due to less meetings held so far in 2021)retirement of an employee), general and administrative salaries and benefits declined due to fewer employees, accounting fees declined due to lower costs from our new accounting firm, and patent fees declined (due to timing of invoicing), legal fees, repairs andpatent maintenance and bank service feesfees) along with other smaller declines in other expense areas. These declines were partially offset by increased investor relations costs (primarily due to costs associated with our proxySEC filing fees and annual meeting expense (due to timing of shareholders which was not held in June 2020 duefees), increased consulting fees (due to the pandemic), administrative salaries (due to an additional employeeexecution of the Financial Advisory Agreement with Landmark Pegasus, Inc. in 2021),the First Quarter 2022) and insuranceincreased utility and repair costs. There was $0 inno expense related to share based payment expensepayments in either the three months ended June 30, 2021 as all previously issued options have been completely amortized. There was $1,000 of share based payment expense inFirst Quarter 2022 or the three months ended June 30, 2020.First Quarter 2021.
Other income and expense:/ (expense):
Other income of $1,000expense in the three months ended June 30,First Quarter 2022 and the First Quarter 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)LLC and our loans with two shareholders).
Liquidity and Capital Resources as of June 30, 2021March 31, 2022
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.
The following transactions materially impacted our liquidity and cash flow in the First Quarter 2022 and/or the First Quarter 2021 or are expected to have an impact on our cash flow in the year ending December 31, 2022:
Lincoln Park Equity Line
On December 9, 2020, we entered into a Purchase Agreement and a 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 shares of our 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 theover a two year period. On December 29, 2020 we filed a Form S-1 Registration Rights Agreement, we were required to file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1Statement (the “Registration Statement”) to register for resale under the Securities Act of 1933, as. We amended (the “Securities Act”), shares 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 Form S-1/A on January 7, 2021 and requested (through counsel) that the SEC declaredeclared the Form S-1Registration Statement effective on January 11, 2021. The SEC granted our request. In the six monthsFirst Quarter 2022, we were not able to sell any shares of common stock to Lincoln Park due to the market price of our common shares (i.e. they are not closing at or above $0.05 per share and have not closed at that price since the latter part of the year ended June 30,December 31, 2021). In the First Quarter 2021, the Company sold 4,900,0002,100,000 shares of common stock to Lincoln Park (including 500,000 shares required as an initial purchase under the Purchase Agreement) as Regular Purchases and received proceeds of $564,000.$381,000.
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Employee Retention Credit ("ERC")
As discussed in Note F to our financial statements for the First Quarter 2022, we are expecting to receive two ERC refunds totaling $400,000. The receipt of these two refunds will have a positive impact on our cash flow.
Going Concern
Our financial statements for the year ended December 31, 2020First Quarter 2022 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, ERC refunds and amounts available under our credit facilities (including the Lincoln Park equity facility) may not be sufficient to fund operations through August 2022.May 2023. At June 30, 2021,March 31, 2022, we have Stockholders’ Deficit of $1,493,000.$(1,308,000).
Debt |
Our loan and security agreement and 2019 Term Note with Cherokee for $900,000 and $220,000, respectively, expired on February 15, 2021; however, on February 24, 2021, the Companywe completed a transaction with Cherokee related to (second)another one-year Extension Agreementsof both facilities dated February 14, 2021 (the “Second Extension”) with Cherokee 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 inNote to February 2020). 15, 2022.
Under the terms of the (second) extensions,Second Extension, 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 balance to Cherokee on in February 2021;15, 2021 and the 2019 Term Note was increased to $240,000 to include a term that was included in$20,000 penalty. Under this Second Extension, 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 interest rate on the 2019 Tern More remained at 18%. Interest on both facilities and the oversight fee on the Cherokee Term Loan was increased to $240,000 to include a $20,000 penalty that wasLSA are due as a result ofquarterly. If the Company being unabledidn’t pay off the principal on the Cherokee LSA and the 2019 Term Note before February 15, 2022, Cherokee could impose an 8% delinquent fee. This delinquent fee applies to pay back the principal balance todue on each facility on February 15, 2022. Although the facilities were not paid off on February 15, 2022, Cherokee in February 2021; a term that was included inhas not imposed the February 2020 extension. Our total debt at June 30, 2021 with Cherokee Financial, LLC was $1,240,000. delinquent fees or increased the interest rates.
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 iswere due in full on February 15, 2022. We may bewere not able to utilizethese pay off the Lincoln Park equity facilitycredit facilities when they were due and we are currently in discussions with Cherokee related to pay down a portion (or all)possible payoff of the debt owedloans (via a refinance or other means) or to Cherokee priorextend the due date of the loans. See Note I – Subsequent Events for information related to the maturity date of February 15, 2022; however, asstatus of the date of this report and given the current closing sales prices of our shares of common stock, that is not a certainty.Cherokee loans.
Throughout the six months ended June 30, 2021,First Quarter 2022, we had a line of credit with Crestmark Bank. The maximum availability on 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 June 30, 2021,March 31, 2022, 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. Upon completion of the initial 5 year term, the Crestmark line of credit 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 CompanyWe did not provide Crestmark with a notice of non-renewal and therefore, the Crestmark line of credit will automatically renewedrenew on June 22, 20212022 for another one year term, or until June 22, 2022.2023.
If availability under our line of credit and(from sales) and/or cash received from equity salesas refunds under the Lincoln Park Purchase AgreementERC program are not sufficient to satisfy our working capital and capital expenditure requirements, we will be required to obtainseek 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.
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As of June 30, 2021,March 31, 2022, we had the following debt/credit facilities:
Facility |
| Debtor |
| Balance as of June 30, 2021 |
|
| Due Date |
| Debtor |
| Balance as of March 31, 2022 |
|
| Due Date | ||||
Loan and Security Agreement |
| Cherokee Financial, LLC |
| $ | 1,000,000 |
| February 15, 2022 |
| Cherokee Financial, LLC |
| $ | 1,000,000 |
| February 15, 2022(1) | ||||
Revolving Line of Credit |
| Crestmark Bank |
| 287,000 |
| June 22, 2022 |
| Crestmark Bank |
| $ | 93,000 |
| June 22, 2023 | |||||
Term Loan |
| Cherokee Financial, LLC |
| 240,000 |
| February 15, 2022 |
| Cherokee Financial, LLC |
| $ | 240,000 |
| February 15, 2022(1) | |||||
PPP Loan |
| Crestmark Bank, SBA |
| 332,000 |
| April 22, 2022 | ||||||||||||
Term Loan |
| Individual |
| $ | 50,000 |
| November 4, 2022 | |||||||||||
Term Loan |
| Individual |
|
| 50,000 |
|
| November 4, 2021 |
| Individuals |
| $ | 75,000 |
|
| June 15, 2022 | ||
Total Debt |
|
|
| $ | 1,909,000 |
|
|
|
|
|
| $ | 1,458,000 |
|
|
|
(1) Facility was not repaid on February 15, 2022 and we are currently in discussions with Cherokee related to possible payoff of the facility (via a refinanceor other means) or to extend the due date of the facility.
Working Capital Deficit
At June 30, 2021,the end of the First Quarter 2022, we were operating at a working capital deficit of $2,154,000.$1,833,000. This compares to a working capital deficit of $1,624,000$1,484,000 at June 30, 2020 and aDecember 31, 2021. The increase in the working capital deficit of $841,000 atbetween the First Quarter 2022 and the year ended December 31, 2020. This increase in working capital deficit2021 is primarily a result ofdue to decline in cash balances and accounts receivable (due to decreased sales and, from December 31, 2020 to June 30, 2021, a change in classification of our debt with Cherokee from long-term to short-term.sales). We have historically satisfied working capital requirements through cash from operations, bank debt and equity financings.
Dividends
We have never paid any dividends on our common shares and anticipate that all future earnings, if any, will be retained for use in our business, and therefore, we do not anticipate paying any cash dividends.
Cash Flow, Outlook/Risk
In the six months ended,First Quarter 2022, we had a net loss of $801,000$379,000 and net cash used in operating activities of $616,000. $13,000.
Our cash position decreased to $17,000 at March 31, 2022 from $225,000$115,000 at June 30, 2020 to $30,000December 31, 2021 and $63,000 at June 30,March 31, 2021. This decrease stems from prepaymentsCash at December 31, 2021 was positively impacted by an ERC refund in December 2021 (in the amount of $137,000) and cash at March 31, 2021 was positively impacted by $381,000 received from presalessales of Covid-19 tests and $199,000 from the February 2020 equity private placementshares of our common stock to Lincoln Park. There were no similar cash infusions in the six months ended June 30, 2020, which did not recur in the six months ended June 30, 2021.First Quarter 2022 and sales continued to decline.
In March 2020,February 2022 we were informed by our largest customer that sales to one of their segments (which we supplied exclusively) would decrease as a result of their desire to have multiple vendors supplying the World Health Organization declared Covid-19 to be a pandemic. Covid-19 has spread throughout the globe, includingsegment. This decrease 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 responsesales to the outbreak, we followedone segment of their business also negatively impacts gross profit as this segment is the guidelines ofmore profitable segment from a margin perspective. This has resulted in less profit to 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 the Covid-19 pandemic did not materially disrupt our daily business operations to date, our drug testing sales have beenCompany which is negatively impacted by the pandemic.
impacting cash flows. While the Covid-19 pandemic is seemingly winding down, we continue to be impacted by it in the form of material delays and cost increases (in both manufacturing and other business costs); as evidenced by the one customer’s decision to decrease sales to the Company in one of their market segments.
The extent to which the pandemic mayand the commoditized nature of our markets will continue to impact our business, liquidity, results of operations and financial condition will depend on future developments, which are still uncertain and cannot be predicted, including new information that may emerge concerning new strainspredicted. Current levels 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,sales declines are already impacting 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 also 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 Prior 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 termfourth quarter 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,year ended December 31, 2021, and going forward we arewere able to utilize the Lincoln Park equity facilityEquity Line; however, the downturn of our common stock starting in the third quarter of 2021 has prevented any further sales to fund operations (if necessary), pay down other debt (whenever possible) and fundbe initiated.
In December 2021, we received one of our growth initiatives.ERC refunds (in the amount of $137,000) from the IRS. In the six months ended June 30, 2021,year ending December 31, 2022, we sold 4,900,000 shares of common stock to Lincoln Park as Regular Purchases and received proceeds of $564,000.are expecting two more refunds; totaling $400,000.
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Our ability to repay our current debt and other liabilities 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 arecontinue to be unable to facilitate purchases under our Purchase Agreement with Lincoln Park, we wouldwill 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.levels and make every effort to control manufacturing costs. We have consolidated job responsibilities in certain areas of the Company and this has 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 also promoting new products and service offerings to diversify our revenue stream, including new Covid-19 tests.
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 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.
Item 3. Quantitative 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. Controls 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 – OTHER INFORMATION
Item 1. Legal 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. Risk 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, 2020.2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.None that have not been previously disclosed in a Current Report on Form 8-K.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer/Chief Financial Officer | ||
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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 | ||
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| Melissa A. Waterhouse Chief Executive Officer (Principal Executive Officer) Principal Financial Officer Principal Accounting Officer | |
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Dated: May 16, 2022 |
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