Item 1. Condensed Financial
Statements
American Bio Medica Corporation
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ASSETS
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Current
assets
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Cash and cash
equivalents
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$63,000
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$98,000
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Accounts
receivable, net of allowance for doubtful accounts of $5,000 at
March 31, 2021 and $22,000 at December 31, 2020
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337,000
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407,000
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Inventory, net of
allowance of $300,000 at March 31, 2021 and $279,000 at December
31, 2020
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507,000
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536,000
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Prepaid expenses
and other current assets
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106,000
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104,000
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Right of use asset
– operating leases
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35,000
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35,000
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Total current
assets
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1,048,000
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1,180,000
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Property, plant and
equipment, net
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560,000
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576,000
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Patents,
net
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106,000
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108,000
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Right of use asset
– operating leases
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32,000
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41,000
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Other
assets
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21,000
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21,000
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Total
assets
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$1,767,000
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$1,926,000
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LIABILITIES
AND STOCKHOLDERS’ DEFICIT
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Current
liabilities
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Accounts
payable
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$629,000
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$577,000
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Accrued expenses
and other current liabilities
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526,000
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620,000
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Right of use
liability – operating leases
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34,000
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33,000
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Wages
payable
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111,000
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107,000
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Line of
credit
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245,000
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277,000
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PPP
Loan
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332,000
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332,000
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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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Total current
liabilities
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3,167,000
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2,021,000
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Long-term
debt/other liabilities , net of current portion and deferred
finance costs
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0
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1,120,000
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Right of use
liability – operating leases
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31,000
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41,000
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Total
liabilities
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3,198,000
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3,182,000
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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 March 31, 2021 and December 31,
2020
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0
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0
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Common stock; par
value $.01 per share; 50,000,000 shares authorized; 39,803,476
issued and outstanding at March 31, 2021 and 37,703,476 issued and
outstanding as of December 31, 2020
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398,000
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377,000
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Additional paid-in
capital
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22,077,000
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21,717,000
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Accumulated
deficit
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(23,906,000)
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(23,350,000)
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Total
stockholders’ (deficit)
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(1,431,000)
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(1,256,000)
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Total liabilities
and stockholders’ (deficit)
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$1,767,000
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$1,926,000
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The accompanying notes are an integral part of the condensed
financial statements
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American Bio Medica Corporation
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Condensed Statements of
Operations
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For The
Three Months Ended
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Net
sales
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$566,000
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$729,000
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Cost of goods
sold
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461,000
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539,000
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Gross
profit
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105,000
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190,000
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Operating
expenses:
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Research and
development
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20,000
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34,000
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Selling and
marketing
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83,000
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88,000
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General and
administrative
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511,000
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339,000
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614,000
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461,000
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Operating
loss
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(509,000)
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(271,000)
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Other income /
(expense):
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Interest
expense
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(47,000)
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(53,000)
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Interest
income
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0
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(1,000)
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(47,000)
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(54,000)
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Net
loss before tax
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(556,000)
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(325,000)
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Income tax
expense
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0
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0
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Net
loss
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$(556,000)
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$(325,000)
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Basic
and diluted loss per common share
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$(0.01)
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$(0.01)
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Weighted average
number of shares outstanding – basic &
diluted
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38,859,032
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33,968,523
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The accompanying notes are an integral part of the condensed
financial statements
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American Bio Medica Corporation
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Condensed Statements of Cash
Flows
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For The
Three Months Ended
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Cash flows from operating activities:
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Net
loss
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$(556,000)
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$(325,000)
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Adjustments
to reconcile net loss to net cash (used in) / provided by operating
activities:
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Depreciation
and amortization
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18,000
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20,000
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Amortization
of debt issuance costs
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0
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37,000
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Penalty
added to Cherokee loan balance
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120,000
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0
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Provision
for bad debt
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(17,000)
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0
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Provision
for slow moving and obsolete inventory
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21,000
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21,000
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Share-based
payment expense
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0
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1,000
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Director
fee paid with restricted stock
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0
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5,000
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Refinance
fee paid with restricted stock
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0
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21,000
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Changes
in:
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Accounts
receivable
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87,000
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(26,000)
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Inventory
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8,000
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66,000
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Prepaid
expenses and other current assets
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7,000
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(257,000)
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Accounts
payable
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52,000
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43,000
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Accrued
expenses and other current liabilities
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(103,000)
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790,000
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Wages
payable
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4,000
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35,000
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Net
cash (used in) / provided by operating activities
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(359,000)
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431,000
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Cash flows from investing activities:
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Patent
application costs
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0
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0
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Net
cash provided by / (used in) investing activities
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0
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0
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Cash flows from financing activities:
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Payments
on debt financing
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(25,000)
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(3,000)
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Proceeds
from Private Placement
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0
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164,000
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Proceeds
from Lincoln Park financing
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381,000
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0
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Proceeds
from lines of credit
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595,000
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1,155,000
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Payments
on lines of credit
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(627,000)
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(1,170,000)
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Net
cash provided by financing activities
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324,000
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146,000
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Net change in cash and cash equivalents
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(35,000)
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577,000
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Cash
and cash equivalents - beginning of period
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98,000
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4,000
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Cash and cash equivalents - end of period
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$63,000
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$581,000
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Supplemental disclosures of cash flow information
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Non-Cash
transactions:
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Loans
converted to stock
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$0
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$35,000
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Cash
paid during period for interest
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$41,000
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$36,000
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The accompanying notes are an integral part of the condensed
financial statements
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Notes to condensed financial statements
(unaudited)
March 31, 2021
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. 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 March 31, 2021, and the
results of operations and cash flows for the three month periods
ended March 31, 2021 (the “First Quarter 2021”) and
March 31, 2020 (the “First Quarter 2020”).
Operating results
for the First Quarter 2021 are not necessarily indicative of
results that may be expected for the year ending December 31, 2021.
Amounts at December 31, 2020 are derived from audited financial
statements included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2020.
During the First
Quarter 2021, there were no significant changes to the
Company’s critical accounting policies, which are included in
the Company’s Annual Report on Form 10-K for the year ended
December 31, 2020.
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, 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 May
2022.
Through
the First Quarter of 2021, the Company had a line of credit with
Crestmark Bank. The maximum availability on the Company’s
line of credit was $1,000,000 beginning June 22, 2020 when the
facility was amended and extended. However, because the amount
available under the line of credit is based upon the
Company’s accounts receivable, the amounts actually available
under our line of credit (historically) have been significantly
less than the maximum availability. As of March 31, 2021, based on
the Company’s availability calculation, there were no
additional amounts available under the Company’s line of
credit because the Company draws any balance available on a daily
basis.
In
February 2021, our credit facilities with Cherokee Financial, LLC
were extended for another 12 months, or until February 15, 2022,
which is less than 12 months from the date of this report. Our
total debt at March 31, 2021 with Cherokee Financial, LLC is
$1,240,000. We do not expect cash from operations within the next
12 months to be sufficient to pay the amounts due under these
credit facilities, which is due in full on February 15, 2022. We
are currently looking at alternatives to 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 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 are not
sufficient to satisfy our working capital and capital expenditure
requirements, we will be required to obtain additional credit
facilities or sell additional equity securities, or delay capital
expenditures, which could have a material adverse effect on 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
There
are not any new accounting standards issued but, not yet adopted in
the First Quarter 2021.
Any
other new accounting pronouncements recently issued, but not yet
effective, have been reviewed and determined to be not applicable
or were related to technical amendments or codification. As a
result, the adoption of such new accounting pronouncements, when
effective, is not expected to have a material effect on the
Company’s financial position or results of
operations.
Reclassifications
Certain
items have been reclassified from the prior year to conform to the
current year presentation.
Note B – Inventory
Inventory is
comprised of the following:
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Raw
Materials
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$559,000
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$534,000
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Work In
Process
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103,000
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127,000
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Finished
Goods
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145,000
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154,000
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Allowance for slow
moving and obsolete inventory
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(300,000)
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(279,000)
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$507,000
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$536,000
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Note C – Net Loss Per Common Share
Basic net loss per
common share is calculated by dividing the net loss by the weighted
average number of outstanding common shares during the period.
Diluted net loss per common share includes the weighted average
dilutive effect of stock options and warrants. Potential common
shares outstanding as of March 31, 2021 and 2020:
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Warrants
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0
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0
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Options
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1,987,000
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2,192,000
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Total
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1,987,000
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2,192,000
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The
number of securities not included in the diluted net loss per share
for the First Quarter 2021 and the First Quarter 2020 was 1,987,000
and 2,192,000, respectively, as their effect would have been
anti-dilutive due to the net loss in the First Quarter 2021 and
First Quarter 2020.
Note D – Litigation/Legal Matters
From
time to time, the Company may be named in legal proceedings in
connection with matters that arose during the normal course of
business. While the ultimate outcome of any such litigation cannot
be predicted, if the Company is unsuccessful in defending any such
litigation, the resulting financial losses are not expected to have
a material adverse effect on the financial position, results of
operations and cash flows of the Company.
Note E – Line of Credit and Debt
The
Company’s Line of Credit and Debt consisted of the following
as of March 31, 2021 and December 31, 2020:
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March
31, 2021
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December
31, 2020
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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 $100,000 was added to the loan
principal and the annual interest rate was increased to
10% on February 15, 2021 in connection with the
extension. Loan is collateralized by a first security interest in
building, land and property.
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$
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1,000,000
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$
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900,000
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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 12.03%.
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245,000
|
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277,000
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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.
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240,000
|
|
220,000
|
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April 2020 PPP Loan with Crestmark: 2 year SBA loan at 1%
interest with first payment due October 2020. Company intends to
apply for forgiveness of loan under PPP guidelines after 24 weeks,
or after October 2020.
|
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332,000
|
|
332,000
|
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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
|
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November 2020 Shareholder Note: 6 month 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 May 4, 2021. Loan was extended on May 4, 2021 (See
Note H – Subsequent Event)
|
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50,000
|
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50,000
|
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Total
Debt
|
$
|
1,867,000
|
$
|
1,804,000
|
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Current
portion
|
$
|
1,867,000
|
$
|
684,000
|
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Long-term
portion, net of current portion
|
$
|
0
|
$
|
1,120,000
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LOAN AND SECURITY AGREEMENT WITH CHEROKEE FINANCIAL, LLC
(“CHEROKEE”)
On
March 26, 2015, the Company entered into a LSA with Cherokee (the
“Cherokee LSA”). The debt with Cherokee is
collateralized by a first security interest in real estate and
machinery and equipment. Under the Cherokee LSA, the Company was
provided the sum of $1,200,000 in the form of a 5-year Note at a
fixed annual interest rate of 8%; paid quarterly in arrears. In
addition to the 8% interest, the Company is required to pay
Cherokee a 1% annual fee for oversight and administration of the
loan. This oversight fee is paid in cash and is paid
contemporaneously with the quarterly interest payments. The Company
received net proceeds of $80,000 after $1,015,000 of debt payments,
and $105,000 in other expenses and fees. The expenses and fees
(with the exception of the interest expense) were deducted from the
balance on the Cherokee LSA and were amortized over the initial
term of the debt (in accordance with ASU No. 2015-03). The Company
was required to make annual principal reduction payments of $75,000
on each anniversary of the date of the closing; with the first
principal reduction payment being made on February 15, 2016 and the
last principal reduction payment being made on February 15, 2019;
partially with proceeds received from a term loan with Cherokee
(See 2019 Term Loan with Cherokee within this Note E).
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 Cherokee LSA (with a balance
of $900,000) to February 15, 2021. No terms of the facility were
changed under the Extension Agreement. For consideration of the
Extension Agreement, the Company issued 2% of the $900,000
principal, or $18,000, in 257,143 restricted shares of the
Company’s common stock to Cherokee on behalf of their
investors.
On
February 24, 2021, the Company completed a transaction related to
another one-year Extension Agreement dated February 14, 2021 (the
“Second Extension Agreement”) with Cherokee under which
Cherokee extended the due date of the Cherokee LSA to February 15,
2022.
Under
the terms of the 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. The annual interest rate
on the 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). Interest and the oversight fee are paid
quarterly with the first 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.
Cantone
Research, Inc. earned a 3% fee on the extended principal of
$900,000 (or $27,000) for their services related to securing the
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 agreed to pay
Cherokee’s legal fees in the amount of $1,000.
In the
event of default, this includes, but is not limited to; the
Company’s inability to make any payments due under the
Cherokee LSA (as amended) Cherokee has the right to increase the
interest rate on the financing to 18%. The Company will continue to
make interest payments and administrative fees quarterly on the
Cherokee LSA. The Company can pay off the Cherokee loan at any time
with no penalty; except that a 1% administration fee would be
required to be paid to Cherokee to close out all
participations.
The
Company recognized $23,000 in interest expense related to the
Cherokee LSA in the First Quarter 2021. The Company recognized
$35,000 in interest expense related to the Cherokee LSA in the
First Quarter 2020 (of which $17,000 is debt issuance cost
amortization recorded as interest expense.
The
Company had $17,000 in accrued interest expense at March 31, 2021
and $15,000 in accrued interest expense at March 31, 2020 related
to the Cherokee LSA.
As of
March 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 on the Cherokee LSA was $900,000; however, the
discounted balance was $884,000.
LINE OF CREDIT WITH CRESTMARK BANK
(“CRESTMARK”)
On June
29, 2015 (the “Closing Date”), the Company entered into
a Loan and Security Agreement (“LSA”) with Crestmark
related to a revolving line of credit (the “Crestmark
LOC”). The Crestmark LOC is used for working capital and
general corporate purposes. 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 has not provided Crestmark
with a notice of non-renewal and therefore, the Crestmark LOC will
automatically renew on June 22, 2021 for another one year term, or
until June 22, 2022.
The
Company amended the Crestmark LOC on June 22, 2020 and, until this
amendment, the maximum amount available under the Crestmark LOC was
$1,500,000 (“Maximum Amount”). The Maximum Amount was
subject to an Advance Formula comprised of: 1) 90% of Eligible
Accounts Receivables (excluding, receivables remaining unpaid for
more than 90 days from the date of invoice and sales made to
entities outside of the United States), and 2) up to 40% of
eligible inventory plus up to 10% of Eligible Generic Packaging
Components not to exceed the lesser of $350,000, or 100% of
Eligible Accounts Receivable. However, as a result of an amendment
executed on June 25, 2018, the amount available under the inventory
component of the line of credit was changed to 40% of eligible
inventory plus up to 10% of Eligible Generic Packaging Components
not to exceed the lesser of $250,000 (“Inventory Sub-Cap
Limit”) or 100% of Eligible Accounts Receivable. In addition,
the Inventory Sub-Cap Limit was reduced by $10,000 per month as of
July 1, 2018 and thereafter on the first day of the month until the
Inventory Sub-Cap Limit was reduced to $0, (making the Crestmark
LOC an accounts-receivable based line only). This means that as of
June 30, 2020, there was no inventory sub-cap. Upon execution of
the June 2020 amendment, the Maximum Amount was reduced to
$1,000,000 and with the Inventory Sub-Cap Limit gone as of July 1,
2020; the Crestmark LOC became a receivables-based only line of
credit.
The
Crestmark LOC has a minimum loan balance requirement of $500,000.
At March 31, 2021, the Company did not meet the minimum loan
balance requirement as our balance was $245,000. 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).
Prior
to the amendment on June 22, 2020, the Crestmark LOC contained a
minimum Tangible Net Worth (“TNW”) covenant (previously
defined in other periodic reports). With the exception of the
quarter ended June 30, 2019, the Company did not historically
comply with the TNW covenant and Crestmark previously provided a
number of waivers (for which the Company was charged $5,000 each).
The TNW covenant was removed effective with the quarter ended June
30, 2020.
In the
event of a default 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 March 31, 2021 and as of the date of
this report, the interest only rate on the Crestmark LOC is 6.25%.
As of the date of this report, with all fees considered (the
interest rate + an Annual Loan Fee of $7,500 + a monthly
maintenance fee of 0.30% of the actual average monthly balance from
the prior month), the interest rate on the Crestmark LOC is
12.03%.
The
Company recognized $12,000 in interest expense in the First Quarter
2021 and $9,000 in interest expense in the First Quarter 2020
related to the Crestmark LOC. Given the nature of the
administration of the Crestmark LOC, at March 31, 2021, 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
March 31, 2021, the balance on the Crestmark LOC was $245,000 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. 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.
On
February 24, 2020, the Company completed a transaction related to a
one-year Extension Agreement dated February 14, 2020 (the
“Extension Agreement”) with Cherokee under which
Cherokee extended the due date of the 2019 Term Loan to February
15, 2021. No terms of the facility were changed under the Extension
Agreement. For consideration of the Extension Agreement, the
Company issued 1.5% of the $200,000 principal, or $3,000, in 42,857
restricted shares of the Company’s common stock to Cherokee.
The Company also incurred a penalty in the amount of $20,000 which
was added to the principal balance of the Cherokee Term
Loan.
A final
balloon payment was due on February 15, 2021; however the Company
further extended the 2019 Cherokee Term Loan on February 24, 2021
to February 15, 2022. Under the terms of the extension, the 2019
Cherokee Term Loan was increased to $240,000 to include a $20,000
penalty that was due as a result of the Company being unable to pay
back the principal balance to Cherokee on February 15, 2021. The
annual interest rate under the 2019 Cherokee Term Loan remains
fixed at 18% paid quarterly in arrears with the first interest
payment being due on May 15, 2021. If the Company doesn’t pay
off the principal on or before February 15, 2022, there will be an
8% delinquent fee charged. This delinquent fee will only apply to
whatever the principal balance is on February 15, 2022. If the
Company pays any portion (or all) of the principal back, the 8% fee
will not be due on the prepaid amounts. The Company can prepay all
of part of the facility back prior to February 15, 2022 with no
penalty.
In the
event of default, this includes, but is not limited to, the
Company’s inability to make any payments due under the
Agreement; Cherokee has the right to increase the interest rate on
the financing to 20%.
The
Company recognized $10,000 in interest expense related to the 2019
Cherokee Term Loan in the First Quarter 2021 and $11,000 in
interest expense in the First Quarter 2020 (of which $1,000 is debt
issuance cost amortization recorded as interest expense). The
Company had $7,000 in accrued interest expense at March 31, 2021
and $5,000 in accrued interest expense at March 31, 2020 related to
the 2019 Cherokee Term Loan.
The
balance on the 2019 Cherokee Term Loan was $240,000 at March 31,
2021 and $220,000 at December 31, 2020.
SBA PAYCHECK PROTECTION LOAN (PPP LOAN)
On
April 22, 2020, we entered into a Promissory Note (“PPP
Note”) for $332,000 with Crestmark Bank, pursuant to the U.S.
Small Business Administration Paycheck Protection Program under
Title I of the Coronavirus Aid, Relief, and Economic Security
(“CARES”) Act passed by Congress and signed into law on
March 27, 2020. The PPP Note is unsecured, bears interest at 1.00%
per annum, with principal and interest payments deferred for the
first six months, and matures in two years. The principal is
payable in equal monthly installments, with interest, beginning on
the first business day after the end of the deferment period. The
PPP Note may be forgiven subject to the terms of the Paycheck
Protection Program. Additionally, certain acts of the Company,
including but not limited to: (i) the failure to pay any taxes when
due, (ii) becoming the subject of a proceeding under any bankruptcy
or insolvency law, (iii) making an assignment for the benefit of
creditors, or (iv) reorganizing, merging, consolidating or
otherwise changing ownership or business structure without PPP
Lender’s prior written consent, are considered events of
default which grant Lender the right to seek immediate payment of
all amounts owing under the PPP Note. The Company intends to apply
for forgiveness of loan in the amount of $332,000 under PPP
guidelines after 24 weeks, or after October 2020. As of April 2021,
the online application with Crestmark has been started and we are
reconciling data with our payroll provider.
The
Company recognized $1,000 in interest expense related to the PPP
Loan in the First Quarter 2021 and $0 in interest expense in the
First Quarter 2020 (as the PPP Loan was not in place until April
2020). The Company had $3,000 in accrued interest expense at March
31, 2021 and $2,000 in accrued interest expense at December 31,
2020 related to the PPP Loan. This accrued interest is eligible for
forgiveness under PPP loan guidelines. The balance on the PPP Loan
was $332,000 at March 31, 2021 and at December 31,
2020.
NOVEMBER 2020 LOAN WITH CHAIM DAVIS
On
November 6, 2020, the Company entered into a loan agreement with
our (now former) Chairman of the Board Chaim Davis, under which
Davis provided the Company the sum of $25,000 (the “November
2020 Loan”). There were no expenses or interest related to
the November 2020 loan. The Company incurred $0 in interest expense
in the First Quarter 2021 and $0 in the First Quarter 2020 (as the
facility was not in place until November 2020). The balance on the
November 2020 Term Loan was $25,000 at December 31, 2020, and $0 at
December 31, 2019 (as the facility was not in place at December 31,
2019). The principal in the amount of $25,000 was paid on February
24, 2021 with proceeds from the Lincoln Park equity
line.
NOVEMBER 2020 TERM LOAN
On
November 4, 2020, the Company entered into a loan agreement with an
individual 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. See Note H, Subsequent Event for
more information on the extension.
The
company recognized and accrued less than $1,000 of interest expense
related to the term loan in the First Quarter 2021 and $0 in
interest expense in the First Quarter 2020 (as the loan was not in
place until November 4, 2020). The balance on the 2020 Term Loan
was $50,000 at March 31, 2021 and $50,000 at December 31,
2020.
OTHER DEBT INFORMATION
In
addition to the debt indicated previously, previous debt facilities
(paid in full via refinance or conversion into equity) had
financial impact on the First Quarter 2020. More
specifically:
EQUIPMENT LOAN WITH CRESTMARK
On May
1, 2017, the Company entered into term loan with Crestmark in the
amount of $38,000 related to the purchase of manufacturing
equipment. The equipment loan was collateralized by a first
security interest in a specific piece of manufacturing equipment.
The Company executed an amendment to its LSA and Promissory Note
with Crestmark. The amendments addressed the inclusion of the term
loan into the LSA and an extension of the Crestmark LOC. No terms
of the Crestmark LOC were changed in the amendment. The interest
rate on the term loan is the WSJ Prime Rate plus 3%; or 6.25% as of
the date of this report.
The
Company did not incur any interest expense in the First Quarter
2021 as the Equipment Loan was satisfied in full in the quarter
ended September 30, 2020. The Company incurred minimal interest
expense in the First Quarter 2020 related to the Equipment Loan.
The balance on the Equipment Loan was $0 at March 31, 2021 and $0
at December 31, 2020.
NOTE F – Stock Options and Warrants
The
Company currently has two non-statutory stock option plans, the
Fiscal 2001 Non-statutory Stock Option Plan (the “2001
Plan”) and the 2013 Equity Compensation Plan (the “2013
Plan”). Both plans have been adopted by our Board of
Directors and approved by our shareholders. Both the 2001 Plan and
the 2013 Plan have options available for future issuance. Any
common shares issued as a result of the exercise of stock options
would be new common shares issued from our authorized issued
shares.
During
the First Quarter 2021 and the First Quarter 2020, the Company
issued 0 options to purchase shares of common stock.
Stock
option activity for the First Quarter 2021 and the First Quarter
2020 is summarized as follows (the figures contained within the
tables below have been rounded to the nearest
thousand):
|
|
|
|
|
|
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value as
of
March 31,
2021
|
|
Weighted Average
Exercise Price
|
Aggregate Intrinsic
Value as of
March 31,
2020
|
|
Options outstanding
at beginning of year
|
1,987,000
|
$0.13
|
|
2,252,000
|
$0.14
|
|
|
Granted
|
0
|
|
|
0
|
|
|
|
Exercised
|
0
|
|
|
0
|
|
|
|
Cancelled/expired
|
0
|
|
|
(60,000)
|
$0.13
|
|
|
Options outstanding
at end of quarter
|
1,987,000
|
$0.13
|
$107,000
|
2,192,000
|
$0.12
|
$2,000
|
|
Options exercisable
at end of quarter
|
1,987,000
|
$0.13
|
|
2,112,000
|
$0.13
|
|
The
Company recognized $0 in share based payment expense in the First
Quarter 2021 and $1,000 in share based payment expense in the First
Quarter 2020. At March 31, 2021, there was approximately $0 of
unrecognized share based payment expense related to stock
options.
Warrants
Warrant
activity for the First Quarter 2021 and the First Quarter 2020 is
summarized as follows:
|
|
|
|
First Quarter
2021
|
|
|
|
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic
Value as of March 31, 2021
|
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value as of March 31, 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)
|
NA
|
|
|
Warrants
outstanding at end of quarter
|
0
|
NA
|
|
0
|
NA
|
None
|
|
Warrants
exercisable at end of quarter
|
0
|
NA
|
|
0
|
NA
|
|
In the
First Quarter 2021 and First Quarter 2020, the Company recognized
$0 in debt issuance and deferred finance costs related to the
issuance of the above warrants outstanding. As of March 31, 2021,
there was $0 of total unrecognized expense.
NOTE G – Changes in Stockholders’ Deficit
The
following table summarizes the changes in stockholders’
deficit for the three month periods ending March 31, 2021 and March
31, 2020:
|
|
|
|
|
|
|
|
|
|
Additional Paid in
Capital
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
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
|
|
|
1,000
|
|
1,000
|
|
Shares issued for
board meeting attendance in lieu of cash
|
23,253
|
*
|
5,000
|
|
5,000
|
|
Net
loss
|
|
|
|
(325,000)
|
(325,000)
|
|
Balance
– March 31, 2020
|
35,847,093
|
$358,000
|
$21,632,000
|
$(22,879,000)
|
$(889,000)
|
|
*indicates
less than $1,000
|
|
|
|
|
|
LINCOLN PARK EQUITY LINE OF CREDIT – DECEMBER
2020
On
December 9, 2020, the Company entered into a Purchase Agreement and
a Registration Rights Agreement with Lincoln Park under which
Lincoln Park agreed to purchase from the Company, from time to
time, up to $10,250,000 of our shares of common stock, par value
$0.01 per share, subject to certain limitations set forth in the
Purchase Agreement, during the term of the Purchase Agreement (two
years). Pursuant to the terms of the Registration Rights Agreement,
the Company was required to file with the U.S. Securities and
Exchange Commission (the “SEC”) a registration
statement on Form S-1 (the “Registration Statement”) to
register for resale under the Securities Act of 1933, as amended
(the “Securities Act”), the shares of common stock
issued and sold as well as the shares of common stock that the
Company may elect in the future to issue and sell to Lincoln Park
from time to time under the Purchase Agreement.
On
December 9, 2020, the Company sold 500,000 shares of common stock
to Lincoln Park in an initial purchase under the Purchase Agreement
for a purchase price of $125,000. As consideration for Lincoln
Park’s irrevocable commitment to purchase common shares upon
the terms of and subject to satisfaction of the conditions set
forth in the Purchase Agreement, on December 9, 2020, the Company
also issued 1,250,000 shares of common stock to Lincoln Park as
commitment shares. The commitment shares were valued at $138,000
and recorded as an addition to equity for the issuance of common
stock and treated as a reduction to equity as a cost of capital to
be raised under the Lincoln Park facility. While this commitment
fee relates to the entire offering and the purchases of common
shares that will occur over time, the Company has recorded the
entire commitment fee as issuance costs in additional paid-in
capital at the time the commitment fee was paid because the
offering has been consummated, and there is no guaranteed future
economic benefit from this payment.
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-1 effective on
January 11, 2021. The SEC granted the Company’s request. On
January 11, 2021, the Company sold the remaining 500,000 shares of
common stock to Lincoln Park required as an initial purchase under
the Purchase Agreement for a purchase price of
$125,000.
From
and after the Commencement, under the Purchase Agreement, on any
business day selected by the Company on which the closing sale
price of its common stock exceeds $0.05, the Company may direct
Lincoln Park to purchase up to 200,000 common shares on the
applicable purchase date (a “Regular Purchase”), which
maximum number of shares may be increased to certain higher amounts
up to a maximum of 250,000 common shares, if the market price of
the Company’s common stock at the time of the Regular
Purchase equals or exceeds $0.20 and which maximum number of shares
may be further increased to certain higher amounts up to a maximum
of 500,000 common shares, if the market price of the
Company’s common stock at the time of the Regular Purchase
equals or exceeds $0.50 (such share and dollar amounts subject to
proportionate adjustments for stock splits, recapitalizations and
other similar transactions as set forth in the Purchase Agreement),
provided that Lincoln Park’s purchase obligation under any
single Regular Purchase may not exceed $500,000. The purchase price
of the shares of common stock the Company may elect to sell to
Lincoln Park under the Purchase Agreement in a Regular Purchase, if
any, will be based on 95% of the lower of: (i) the lowest sale
price on the purchase date for such Regular Purchase and (ii) the
arithmetic average of the three lowest closing sale prices for the
Company’s common shares during the 15 consecutive business
days ending on the business day immediately preceding the purchase
date for a Regular Purchase (in each case, to be appropriately
adjusted for any reorganization, recapitalization, non-cash
dividend, stock split or other similar transaction.) In addition to
Regular Purchases, the Company may also direct Lincoln Park to
purchase other amounts of the Company’s common shares in
“accelerated purchases” and in “additional
accelerated purchases” under the terms set forth in the
Purchase Agreement.
Lincoln
Park cannot require the Company to sell any common stock to Lincoln
Park, but Lincoln Park is obligated to make purchases as the
Company directs, subject to certain conditions. There are no upper
limits on the price per share that Lincoln Park must pay for the
Company’s common shares that the Company may elect to sell to
Lincoln Park pursuant to the Purchase Agreement. In all instances,
the Company may not sell common shares to Lincoln Park under the
Purchase Agreement to the extent that the sale of shares would
result in Lincoln Park beneficially owning more than 9.99% of our
common shares. There are no restrictions on future financings,
rights of first refusal, participation rights, penalties or
liquidated damages in the Purchase Agreement or Registration Rights
Agreement, other than the Company’s agreement not to enter
into any “variable rate” transactions (as defined in
the Purchase Agreement) with any third party, subject to certain
exceptions set forth in the Purchase Agreement, for the period set
forth in the Purchase Agreement. Lincoln Park has covenanted not to
cause or engage in any direct or indirect short selling or hedging
of the Company’s common stock.
Actual
sales of common stock, if any, to Lincoln Park under the Purchase
Agreement will depend on a variety of factors to be determined by
the Company from time to time, including, among others, market
conditions, the trading price of the Company’s common stock
and determinations by the Company as to the appropriate sources of
funding for the Company and its operations. The net proceeds to the
Company from sales of common stock to Lincoln Park under the
Purchase Agreement, if any, will depend on the frequency and prices
at which the Company sells common stock to Lincoln Park under the
Purchase Agreement. Any proceeds that the Company receives from
sales of common stock to Lincoln Park under the Purchase Agreement
will be used at the sole discretion of Company management and will
be used for general corporate purposes, capital expenditures and
working capital.
The
Purchase Agreement and the Registration Rights Agreement contain
customary representations, warranties, conditions and
indemnification obligations of the parties. During any “event
of default” under the Purchase Agreement, Lincoln Park does
not have the right to terminate the Purchase Agreement; however,
the Company may not initiate any Regular Purchase or any other
purchase of common shares by Lincoln Park, until such event of
default is cured. The Company has the right to terminate the
Purchase Agreement at any time, at no cost or penalty. In addition,
in the event of bankruptcy proceedings by or against the Company,
the Purchase Agreement will automatically terminate. The
representations, warranties and covenants contained in such
agreements were made only for purposes of such agreements and as of
specific dates, were solely for the benefit of the parties to such
agreements, and may be subject to limitations agreed upon by the
contracting parties.
In the
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.
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 consists 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.
The
July 2019 Term Loan with Chaim Davis, Et Al and the December 2019
Convertible Note (See Note E); totaling $39,000, were both
converted into equity as part of a private placement closed in
February 2020. Any interest that was incurred under the July 2019
Term Loan with Chaim Davis, Et in 2019 and up to the conversion in
February 2020 was forgiven by the holders and the December 2019
Convertible Note did not bear any interest.
We
do not intend to register the Units issued under the Private
Placement; rather the Units issued will be subject to the holding
period requirements and other conditions of Rule 144.
The
Purchase Agreement contains customary representations, warranties
and covenants made solely for the benefit of the parties to the
Purchase Agreement. Although our Chairman of the Board was an
investor in the Private Placement, the pricing of the Units was
determined by the non-affiliate investors.
NOTE H – SUBSEQUENT EVENTS
November 2020 Shareholder Note
On May
4, 2021, we entered into a six-month Extension Agreement (the
“Extension”) with the shareholder. Under the Extension,
the principal in the amount of $50,000 is now due on November 4,
2021. The interest rate and all other terms of the note remain
unchanged under the Extension. The interest payment due to the
shareholder on May 4, 2021 was paid as required with the next
interest payment being due on August 4, 2021.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
General
The following discussion and analysis provides information, which
we believe is relevant to an assessment and understanding of our
financial condition and results of operations. The discussion
should be read in conjunction with the Interim Condensed Financial
Statements contained herein and the notes thereto appearing
elsewhere in this Quarterly Report on Form 10-Q. Certain statements
contained in this Quarterly Report on Form 10-Q, including, without
limitation, statements containing the words “believes”,
“anticipates”, “estimates”,
“expects”, “intends”,
“projects”, and words of similar import, are
forward-looking as that term is defined by the Private Securities
Litigation Reform Act of 1995 (“1995 Act”), and in
releases issued by the United State Securities and Exchange
Commission (the “Commission”). These statements are
being made pursuant to the provisions of the 1995 Act and with the
intention of obtaining the benefits of the “Safe
Harbor” provisions of the 1995 Act. We caution that any
forward-looking statements made herein are not guarantees of future
performance and that actual results may differ materially from
those in such forward-looking statements as a result of various
factors, including, but not limited to, any risks detailed herein,
in our “Risk Factors” section of our Form 10-K for the
year ended December 31, 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
Sales
of drug tests continued to be negatively impacted by the price
competitiveness in our core markets (government, employment and
clinical) and by the Covid-19 pandemic. Sales related to Covid-19
testing also declined in the First Quarter 2021 compared to sales
in the middle and latter part of the year ended December 31, 2020.
In addition to the marketing of our drug tests, in the First
Quarter 2021 we continued to market the Covid-19 IgG/IgM Rapid Test
Cassette to detect Covid-19 antibodies in whole blood, serum or
plasma (via a distribution agreement with Healgen Scientific, LLC,
and we continued to market (via distribution) the Co-Diagnostics
Logix Smart Covid-19 test. In December 2020, we announced that we
were distributing a Rapid Covid-19 Antigen Test Cassette. In the
middle of the 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
addition to the Covid-19 tests, we continued to offer additional
products and services to diversify our revenue stream through third
party 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
offering have yet to materially positively impact sales. In the
year ended December 31, 2019, we expanded our contract
manufacturing operations with two (2) new customers. Unfortunately,
the Covid-19 pandemic halted sales to these new customers in the
year ended December 31, 2020. In the First Quarter 2021, we began
discussions with these customers to resume sales given the
introduction of Covid-19 vaccines and the belief that the need for
their products will resume. We have open purchase orders (from
2020) with both customers and we expect to ship those orders
starting the second quarter of 2021. One of the customers also
placed an additional (new) order in April 2021.
Due to
the Covid-19 pandemic, we are 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 the
First Quarter 2021, we also began the process of securing another
Covid-19 antigen test and in late April 2021, we did secure the
ability to offer a Covid-19 antigen/Influenza combination test
(from an unrelated third party) along with another rapid Covid-19
antibody test (as an alternative to the Healgen antibody test as it
has expanded use under the Emergency Use Authorization
(“EUA”) policy set forth by the United States Food and
Drug Administration (FDA). As with the other Covid-19 tests we are
offering, the tests will be marketed in full compliance with the
EUA policy.
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 in the early
stages of planning with a firm that would provide services related
to public relations/social media to effectively communicate our
manufacturing capabilities.
Operating expenses
increased $153,000 in the First Quarter 2021 compared to the First
Quarter 2020. This increase was solely in general and
administrative and was due to increased fees associated with debt
and accounting fees for the 2020 audit. We continuously make
efforts to control operational expenses to ensure they are in line
with sales. We have consolidated job responsibilities in certain
areas of the Company as a result of employee retirement and other
departures resulting in personnel reductions.
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, another member of senior management
participated in the program voluntarily. As of March 31, 2021, we
had total deferred compensation owed to these two individuals in
the amount of $125,000. We did not make any payments on deferred
compensation to Ms. Waterhouse in the First Quarter 2021 or the
First Quarter 2020; we have not made any payments on deferred
compensation to Melissa Waterhouse since August 2017. After the
member of senior management retired in November 2019, we agreed to
make payments on the deferred comp owed to this individual. In the
First Quarter 2021 and First Quarter 2020, we made payments
totaling $13,000 and $14,000, respectively, to this individual. We
will continue to make payments to the former member of senior
management until the deferred compensation is paid in full; which
is expected to be in May 2021. Once the payments cease to this
individual, we intend to repay/make payments on the deferred
compensation owed to Melissa Waterhouse considering the length of
time the amount has been owed and the length of time since any
payments were made to Ms. Waterhouse.
Our
continued existence is dependent upon several factors, including
our ability to: 1) raise revenue levels even though the drug
testing market continues to be infiltrated by product manufactured
outside of the United States as well as being impacted by the
global health crisis caused by Covid-19, 2) further penetrate the
markets (in and outside of the United States) for Covid-19 tests,
3) secure new contract manufacturing customers, 4) control
operational costs to generate positive cash flows, 5) maintain our
current credit facilities or refinance our current credit
facilities if necessary, and 6) if needed, obtain working capital
by selling additional shares of our common stock either to Lincoln
Park or through an alternative method if necessary.
Results
of operations for the First Quarter 2021 compared to the First
Quarter 2020
NET SALES: Net sales for the First
Quarter 2021 decreased 22.4% when compared to net sales in the
First Quarter 2020. Sales of drug tests continue to be negatively
impacted by the Covid-19 pandemic along with the price competitive
nature of our core markets (government, employment and
clinical). All of
these markets are still requiring a lower amount of testing due to
lingering stay at home orders, reduced workforce, telecommuting and
reduced budgets (especially in the government market as financial
resources are used for Covid-19 testing and vaccination. In the
latter part of Fiscal 2020, we started to see some rebound in our
drug testing markets, however, this rebound has not been consistent
and we are unsure at this time when our drug testing markets will
get back to normal. Sales in the Clinical markets improved slightly
in the First Quarter 2021 when compared to the First Quarter 2020;
this is a good sign for the Clinical market as they were not yet
significantly impacted in the First Quarter 2020. This indicates we
may be seeing a return to normalcy in the Clinical market. Our
international drug testing sales were relatively flat when
comparing the First Quarter 2021 with the First Quarter 2020. This
indicates that while we are seeing some improvement in sales
outside the United States, foreign markets are still being
negatively impacted by the Covid-19 pandemic. Contract
manufacturing sales improved in the First Quarter 2021 compared to
the First Quarter 2020. This is primarily a result of orders of RSV
(Respiratory Syncytial Virus) diagnostic tests in the First Quarter
2021. As indicated earlier in this document, the Covid-19 pandemic
halted sales to two customers we secured in the year ended December
31, 2019. We have open purchase orders (from 2020) with both
customers and we expect to ship those orders starting the second
quarter of 2021. One of the customers also placed an additional
(new) order in April 2021.
Sales
of Covid-19 testing products also decreased in the First Quarter
2021 compared to the levels we were experiencing in the middle and
latter part of the year ended December 31, 2020. 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. Prior to this notification, from December 2020 (when
we began offering the test) and the middle of the First Quarter
2021, we were able to sell $135,000 of this product. In May 2021,
we secured the ability to offer an EUA-issued Covid-19
antigen/Influenza combination test (from an unrelated third party)
along with another EUA issued rapid Covid-19 antibody test (as an
alternative to the Healgen antibody test). This additional antibody
test is CLIA waived using fingerstick blood versus whole
blood/serum or plasma via venipuncture. We are hopeful that this
expanded and more convenient use enables us to garner a larger
share of the antibody testing market. We are still offering the
Healgen Covid-19 IgG/IgM Rapid Test Cassette in the First Quarter
2021; however due to a supply issue on the part of Healgen, sales
of this test were minimal in the First Quarter 2021. We are also
continuing to market (via distribution) the Co-Diagnostics Logix
Smart Covid-19 test. Unfortunately, due to a large backorder of
high-throughput machines that has continued through the First
Quarter 2021, we still have not recorded any sales of the Logix
Smart Covid-19 test. We are hopeful that the machine backorder will
subside soon and we would then be able to provide this testing
resource to customers. When
infection surges occur, there is a higher demand for diagnostic
tests (i.e. PCR’s or antigen tests) versus antibody tests (as
antibody tests are not diagnostic tests). Now that vaccines are
available in much higher quantities, the need for diagnostic tests
has decreased. We still believe there is a need for Covid-19
antibody tests as a means to monitor the efficacy of vaccines or to
determine the length of time that antibodies remain in the body
but, as the pandemic endures, we now believe that need is lower
than originally expected. In addition, quantitative antibody tests
are in higher demand (i.e. tests that will determine the level of
antibodies) versus a qualitative test that indicates that
antibodies are present above a certain cut-off level, which are the
tests we are offering. From a Covid-19 testing perspective, there
are other new products available, such as tests for home/consumer
use, and we are still exploring distribution opportunities of these
products.
In
addition to the negative sales impact from the customer side, we
continue to experience delays in materials from vendors due to
decreased production levels resulting from stay at home orders and
reduced workforce numbers. While our staff continued to work due to
the essential nature of our manufacturing, delays in materials
resulted in customer backorders for specific products that required
the materials in question.
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. Depending on
the timing of commencement and volume under the contract, we would
expect this to have a positive impact on our revenue in the year
ending December 31, 2021. We are also in the early stages of
planning with a firm to provide services related to public
relations/social media to effectively communicate our manufacturing
capabilities in the United States.
GROSS PROFIT: Gross profit decreased to
18.6% of net sales in the First Quarter 2021 from 26.1% of net
sales in the First Quarter 2020. Sales of products that we
manufacture (primarily drug tests) decreased and this resulted in
greater inefficiencies in manufacturing. Manufacturing
inefficiencies occur when revenues decline (from manufacturing)
because certain overhead costs are fixed and cannot be reduced; if
fewer testing strips are produced and fewer products are assembled
this results in higher costs being expensed through cost of goods.
Lower product pricing to customers also negatively impacts gross
profit. We are taking steps to reduce manufacturing costs,
including but not limited to, costs associated with labor to
mitigate these inefficiencies. Given the price sensitivity in our
markets and the commoditized nature of drug testing products (as a
result of competitive products manufactured outside the United
States), increasing customer pricing is challenging; however, we
are in the process of advising our customers of pricing increases.
We are hopeful that customers realize the value of US-based
manufacturing from both a supply and quality
perspective.
OPERATING EXPENSES: Operating expenses
increased in the First Quarter 2021 compared to the First Quarter
2020. Research and Development and Selling and Marketing expenses
decreased while general and administrative expenses increased. More
specifically:
Research and development (“R&D”)
R&D
expense decreased 41.2%, when comparing the First Quarter 2021 with
the First Quarter 2020. Decreased FDA compliance costs (solely due
to a timing issue related to our facility registrations) and
supplies and materials costs (due to the validation of a new
material for one of our drug testing products components in the
First Quarter 2020; that did not recur in the First Quarter 2021)
were the primary reason for the decrease in expenses. All other
expenses in the First Quarter 2021 remained relatively consistent
with expenses in the First Quarter 2020. In the First Quarter 2021,
our R&D department primarily focused their efforts on the
enhancement of our current products and the validations related to
drug testing product components.
Selling and marketing
Selling
and marketing expense in the First Quarter 2021 decreased 5.7% when
compared to the First Quarter 2020. Reductions in sales salary
expense and benefits (due to the termination of personnel) and car
allowance expense (due to the same terminations), were partially
offset by increased commission expense (as a result of the Covid-19
sales in the First Quarter 2021 that did not occur in the First
Quarter 2020). All other expenses, including but not limited to
marketing expenses, were relatively unchanged when comparing the
quarters.
In the
First Quarter 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.
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 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 50.7% in the First Quarter 2021 compared to the
First Quarter 2020. The primary reasons for the increase were fees
incurred in connection with the extension of the Cherokee loans,
which totaled $148,000 and, $15,000 in increased accounting fees
(related to the Fiscal 2020 audit). In addition, increased costs
associated with quality assurance salaries (due to increased rate
of pay), general and administrative salaries (due to one additional
employee), warehouse supplies (due to timing of purchases), repairs
and maintenance associated with production, the timing of
maintenance fee payments, and ISO audit fees, were partially offset
by decreased director fees (due to telephonic meeting fees versus
in person meeting fees), accounting fees (due to timing of fees)
and repairs and maintenance of the Kinderhook facility (due to
repairs needed in the First Quarter 2020 that did not recur in the
First Quarter 2021). Share based payment expense remained
relatively unchanged to $0 in the First Quarter 2021 from $1,000 in
the First Quarter 2020.
Other income and expense:
Other
expense in the First Quarter 2021 and the First Quarter 2020
consisted of interest expense associated with our credit facilities
(our line of credit and equipment loan with Crestmark Bank and our
loans with Cherokee Financial, LLC).
Liquidity and Capital Resources as of March 31, 2021
Our
cash requirements depend on numerous factors, including but not
limited to manufacturing costs (such as raw materials, equipment,
etc.), selling and marketing initiatives, product development
activities, regulatory costs, legal costs, and effective management
of inventory levels and production levels in response to sales
history and forecasts. We expect to devote capital resources
related to selling and marketing initiatives. We are examining
other growth opportunities including strategic alliances and
contract manufacturing. Given our current and historical cash
position, such activities would need to be funded from the issuance
of additional equity or additional credit borrowings, subject to
market and other conditions.
On
December 9, 2020, the Company 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 our shares of common stock, par value
$0.01 per share, subject to certain limitations set forth in the
Purchase Agreement, during the term of the Purchase Agreement (two
years). Pursuant to the terms of the Registration Rights Agreement,
the Company was required to file with the U.S. Securities and
Exchange Commission (the “SEC”) a registration
statement on Form S-1 (the “Registration Statement”) to
register for resale under the Securities Act of 1933, as amended
(the “Securities Act”), the shares of common stock
issued and sold as well as the shares of common stock that the
Company may elect in the future to issue and sell to Lincoln Park
from time to time under the Purchase Agreement.
On
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-1 effective on
January 11, 2021. The SEC granted the Company’s request. In
the First Quarter 2021, the Company sold 2,100,000 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 $381,000.
Our
financial statements for the year ended December 31, 2020 were
prepared assuming we will continue as a going concern, which
assumes the realization of assets and the satisfaction of
liabilities in the normal course of business. Our current cash
balances, together with cash generated from future operations and
amounts available under our credit facilities (including the
Lincoln Park equity facility) may not be sufficient to fund
operations through May 2022. At March 31, 2021, we have
Stockholders’ Deficit of $1,431,000.
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 Company completed a transaction
related to one-year Extension Agreements dated February 14, 2021
with Cherokee under which Cherokee extended the due date of the
Cherokee LSA ($900,000) and the 2019 Term Loan with Cherokee
($220,000). Under the terms of the 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 February
15, 2021. The annual interest rate on the extended Cherokee LSA was
increased to a fixed rate of 10% (the prior fixed rate was 8%) plus
a 1% annual oversight fee (that remained unchanged). In addition,
the 2019 Cherokee Term Loan was increased to $240,000 to include a
$20,000 penalty that was due as a result of the Company being
unable to pay back the principal balance to Cherokee on February
15, 2021. Our total debt at March 31, 2021 with Cherokee Financial,
LLC was $1,240,000. We do not expect cash from operations within
the next 12 months to be sufficient to pay the amounts due under
these credit facilities, which is due in full on February 15, 2022.
We may be able to utilize the Lincoln Park equity facility to pay
down a portion (or all) of the debt owed to Cherokee prior to the
maturity date of February 15, 2022; however, as of the date of this
report, that is not a certainty.
Through
the First Quarter of 2021, 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 March 31, 2021, based on our
availability calculation, there were no additional amounts
available under the line of credit because we draw any balance
available on a daily basis. 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
Company has not provided Crestmark with a notice of non-renewal and
therefore, the Crestmark line of credit will automatically renew on
June 22, 2021 for another one year term, or until June 22,
2022.
If
availability under our line of credit and cash received from equity
sales under the Lincoln Park Purchase Agreement are not sufficient
to satisfy our working capital and capital expenditure
requirements, we will be required to obtain additional credit
facilities or sell additional equity securities, or delay capital
expenditures which could have a material adverse effect on our
business. There is no assurance that such financing will be
available or that we will be able to complete financing on
satisfactory terms, if at all.
As of
March 31, 2021, we had the following debt/credit
facilities:
|
Facility
|
Debtor
|
Balance as
of
March 31,
2021
|
Due
Date
|
|
Loan and Security
Agreement
|
Cherokee Financial,
LLC
|
$1,000,000
|
February 15,
2022
|
|
Revolving Line of
Credit
|
Crestmark
Bank
|
245,000
|
June 22,
2022
|
|
Term
Loan
|
Cherokee Financial,
LLC
|
240,000
|
February 15,
2022
|
|
PPP
Loan
|
Crestmark Bank,
SBA
|
332,000
|
April 22,
2022
|
|
Term
Loan
|
Individual
|
50,000
|
November 4,
2021
|
|
Total
Debt
|
|
$1,867,000
|
|
Working Capital Deficit
At the
end of the First Quarter 2021, we were operating at a working
capital deficit of $2,119,000. This compares to a working capital
deficit of $1,650,000 at the end of the First Quarter 2020 and a
working capital deficit of $841,000 at December 31, 2020. This
increase in working capital deficit is primarily a result of
decreased sales and, from December 31, 2020 to March 31, 2021, a
change in classification of our debt with Cherokee from long-term
to short-term. 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
First Quarter 2021, we had a net loss of $556,000 and net cash used
by operating activities of $359,000. Our cash position decreased
from $581,000 in the First Quarter 2020 to $63,000 in the First
Quarter 2021. This decrease stems from prepayments received from
presales of Covid-19 tests in 2020 and $199,000 from the February
2020 equity private placement in the First Quarter 2020, which did
not recur in the First Quarter 2021.
In
March 2020, the World Health Organization declared Covid-19 to be a
pandemic. Covid-19 has spread throughout the globe, including in
the State of New York where our headquarters are located, and in
the State of New Jersey where our strip manufacturing facility is
located. In response to the outbreak, we have followed the
guidelines of the U.S. Centers for Disease Control and Prevention
(“CDC”) and applicable state government authorities to
protect the health and safety of our employees, families,
suppliers, customers and communities. While these existing measures
and, Covid-19 generally, have not materially disrupted our business
operations to date, any future actions necessitated by the Covid-19
pandemic may result in disruption to our business. While we have
not seen a disruption in our business operations to date, our drug
testing sales have been negatively impacted by the
pandemic.
While
the Covid-19 pandemic continues to evolve, we continue to assess
the impact of the Covid-19 pandemic to best mitigate risk and
continue the operations of our business. The extent to which the
outbreak impacts our business, liquidity, results of operations and
financial condition will depend on future developments, which are
uncertain and cannot be predicted with confidence, including new
information that may emerge concerning the severity or longevity of
the Covid-19 pandemic and actions that may be taken to contain it
or treat its impact, among others. If we, our customers or
suppliers experience (or in some cases continue to experience)
prolonged shutdowns or other business disruptions, our business,
liquidity, results of operations and financial condition are likely
to be materially adversely affected, and our ability to access the
capital markets may be limited.
On
December 9, 2020, we entered into a Purchase Agreement (the
“Purchase Agreement”) and a Registration Rights
Agreement (the “Registration Rights Agreement”) with
Lincoln Park under which Lincoln Park agreed to purchase from the
Company, from time to time, up to $10,250,000 of our shares of
common stock, par value $0.01 per share, subject to certain
limitations set forth in the Purchase Agreement, during the term of
the Purchase Agreement. We registered 9,750,000 shares of common
stock under a Registration Statement on Form S-1 (as amended) and
the Form S-1 was declared effective by the SEC on January 11, 2021
and going forward we are able to utilize the Lincoln Park equity
facility to fund operations (if necessary), pay down other debt
(whenever possible) and fund our growth initiatives. In the First
Quarter 2021, we sold 2,100,000 shares of common stock to Lincoln
Park as Regular Purchases and received proceeds of
$381,000.
Our
ability to repay our current debt may also be affected by general
economic, financial, competitive, regulatory, legal, business and
other factors beyond our control, including those discussed herein.
If we are unable to meet our credit facility obligations and we are
unable to facilitate purchases under our Purchase Agreement with
Lincoln Park, we would be required to raise money through new
equity and/or debt financing(s) and, there is no assurance that we
would be able to find new financing, or that any new financing
would be at favorable terms.
We will
continue to take steps to ensure that operating expenses and
manufacturing costs remain in line with sales levels. We have
consolidated job responsibilities in certain areas of the Company
and this enabled us to implement personnel reductions. Sales
declines result in lower cash balances and lower availability on
our line of credit at times. We are promoting new products and
service offerings to diversify our revenue stream, including
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 utilize equity as a form of payment in lieu of cash, or
4) our credit facilities are insufficient or not available, we may
be required to further reduce expenses or take other steps which
could have a material adverse effect on our future
performance.
