UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period endedSeptember 30, 2011
¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number:0-28666
AMERICAN BIO MEDICA CORPORATION
(Exact name of registrant as specified in its charter)
| New York | 14-1702188 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| 122 Smith Road, Kinderhook, New York | 12106 | |
| (Address of principal executive offices) | (Zip Code) |
518-758-8158
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 daysx Yes¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)x Yes¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
| Large accelerated filer | Accelerated filer | ||
| Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ Yesx No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
21,744,768 Common Shares as of NovemberMay 14 2011
American Bio Medica Corporation
Index to Quarterly Report on Form 10-Q
For the quarter ended September 30, 2011
| PAGE | ||
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | |
| Balance Sheets as of | 3 | |
| Unaudited Statements of Operations for the three months ended | ||
| Unaudited Statements of Cash Flows for the | ||
| Notes to Financial Statements (unaudited) | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 4. | Controls and Procedures | 17 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 17 |
| Item 1A. | Risk Factors | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
| Item 3. | Defaults Upon Senior Securities | 18 |
| Item 4. | 18 | |
| Item 5. | Other Information | 18 |
| Item 6. | Exhibits | 18 |
| Signatures | 19 | |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
American Bio Medica Corporation
Balance Sheets
| September 30, | December 31, | |||||||
| 2011 | 2010 | |||||||
| (Unaudited) | ||||||||
ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 22,000 | $ | 37,000 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $66,000 at September 30, 2011, and $76,000 at December 31, 2010 | 1,138,000 | 743,000 | ||||||
| Inventory, net of allowance for slow moving and obsolete inventory of $207,000 at September 30, 2011 and $213,000 at December 31, 2010 | 3,176,000 | 3,604,000 | ||||||
| Prepaid expenses and other current assets | 149,000 | 121,000 | ||||||
| Total current assets | 4,485,000 | 4,505,000 | ||||||
| Property, plant and equipment, net | 1,341,000 | 1,409,000 | ||||||
| Debt issuance costs, net | 37,000 | 72,000 | ||||||
| Other assets | 29,000 | 29,000 | ||||||
| Total assets | $ | 5,892,000 | $ | 6,015,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 684,000 | $ | 432,000 | ||||
| Accrued expenses and other current liabilities | 224,000 | 287,000 | ||||||
| Wages payable | 288,000 | 252,000 | ||||||
| Line of credit | 520,000 | 493,000 | ||||||
| Current portion of long-term debt | 879,000 | 130,000 | ||||||
| Current portion of unearned grant | 10,000 | 10,000 | ||||||
| Total current liabilities | 2,605,000 | 1,604,000 | ||||||
| Other liabilities | 142,000 | 140,000 | ||||||
| Long-term debt | 639,000 | 1,480,000 | ||||||
| Related party note | 124,000 | 124,000 | ||||||
| Unearned grant | 10,000 | 10,000 | ||||||
| Total liabilities | 3,520,000 | 3,358,000 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at September 30, 2011 and December 31, 2010 | ||||||||
| Common stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768 issued and outstanding at September 30, 2011 and December 31, 2010 | 217,000 | 217,000 | ||||||
| Additional paid-in capital | 19,374,000 | 19,328,000 | ||||||
| Accumulated deficit | (17,219,000 | ) | (16,888,000 | ) | ||||
| Total stockholders’ equity | 2,372,000 | 2,657,000 | ||||||
| Total liabilities and stockholders’ equity | $ | 5,892,000 | $ | 6,015,000 | ||||
| March 31, | December 31, | |||||||
| 2012 | 2011 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 6,000 | $ | 93,000 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $66,000 at both March 31, 2012 and December 31, 2011 | 940,000 | 883,000 | ||||||
| Inventory, net of allowance for slow moving and obsolete inventory of $425,000 at March 31, 2012 and $401,000 at December 31, 2011 | 3,313,000 | 3,239,000 | ||||||
| Prepaid expenses and other current assets | 96,000 | 61,000 | ||||||
| Total current assets | 4,355,000 | 4,276,000 | ||||||
| Property, plant and equipment, net | 1,276,000 | 1,304,000 | ||||||
| Debt issuance costs, net | 14,000 | 26,000 | ||||||
| Patents | 20,000 | 0 | ||||||
| Other assets | 29,000 | 30,000 | ||||||
| Total assets | $ | 5,694,000 | $ | 5,636,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 877,000 | $ | 631,000 | ||||
| Accrued expenses and other current liabilities | 175,000 | 217,000 | ||||||
| Wages payable | 223,000 | 264,000 | ||||||
| Line of credit | 518,000 | 397,000 | ||||||
| Current portion of long-term debt | 1,453,000 | 872,000 | ||||||
| Current portion of unearned grant | 10,000 | 10,000 | ||||||
| Total current liabilities | 3,256,000 | 2,391,000 | ||||||
| Other liabilities | 143,000 | 143,000 | ||||||
| Long-term debt | 0 | 608,000 | ||||||
| Related party note | 124,000 | 124,000 | ||||||
| Total liabilities | 3,523,000 | 3,266,000 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at March 31, 2012 and December 31, 2011 | ||||||||
| Common stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768 issued and outstanding at March 31, 2012 and December 31, 2011 | 217,000 | 217,000 | ||||||
| Additional paid-in capital | 19,393,000 | 19,386,000 | ||||||
| Accumulated deficit | (17,439,000 | ) | (17,233,000 | ) | ||||
| Total stockholders’ equity | 2,171,000 | 2,370,000 | ||||||
| Total liabilities and stockholders’ equity | $ | 5,694,000 | $ | 5,636,000 | ||||
The accompanying notes are an integral part of the financial statements
American Bio Medica Corporation
Statements of Operations
(Unaudited)
| For The Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2011 | 2010 | |||||||
| Net sales | $ | 6,898,000 | $ | 8,082,000 | ||||
| Cost of goods sold | 4,019,000 | 4,793,000 | ||||||
| Gross profit | 2,879,000 | 3,289,000 | ||||||
| Operating expenses: | ||||||||
| Research and development | 170,000 | 244,000 | ||||||
| Selling and marketing | 1,319,000 | 1,532,000 | ||||||
| General and administrative | 1,563,000 | 1,757,000 | ||||||
| 3,052,000 | 3,533,000 | |||||||
| Operating loss | (173,000 | ) | (244,000 | ) | ||||
| Other expense: | ||||||||
| Loss on disposal of property, plant and equipment | (1,000 | ) | ||||||
| Interest expense | (150,000 | ) | (160,000 | ) | ||||
| (151,000 | ) | (160,000 | ) | |||||
| Net loss before tax | (324,000 | ) | (404,000 | ) | ||||
| Income tax expense | (6,000 | ) | (4,000 | ) | ||||
| Net loss | $ | (330,000 | ) | $ | (408,000 | ) | ||
| Basic and diluted loss per common share | $ | (0.02 | ) | $ | (0.02 | ) | ||
| Weighted average number of shares outstanding – basic and diluted | 21,744,768 | 21,744,768 | ||||||
| For The Three Months Ended | ||||||||
| March 31, | ||||||||
| 2012 | 2011 | |||||||
| Net sales | $ | 2,296,000 | $ | 2,047,000 | ||||
| Cost of goods sold | 1,334,000 | 1,285,000 | ||||||
| Gross profit | 962,000 | 762,000 | ||||||
| Operating expenses: | ||||||||
| Research and development | 52,000 | 52,000 | ||||||
| Selling and marketing | 521,000 | 457,000 | ||||||
| General and administrative | 558,000 | 627,000 | ||||||
| 1,131,000 | 1,136,000 | |||||||
| Operating loss | (169,000 | ) | (374,000 | ) | ||||
| Other expense: | ||||||||
| Interest income | 4,000 | 0 | ||||||
| Interest expense | (46,000 | ) | (51,000 | ) | ||||
| (42,000 | ) | (51,000 | ) | |||||
| Net loss before tax | (211,000 | ) | (425,000 | ) | ||||
| Income tax expense | 5,000 | 0 | ||||||
| Net loss | $ | (206,000 | ) | $ | (425,000 | ) | ||
| Basic and diluted loss per common share | $ | (0.01 | ) | $ | (0.02 | ) | ||
| Weighted average number of shares outstanding – basic & diluted | 21,744,768 | 21,744,768 | ||||||
The accompanying notes are an integral part of the financial statements
American Bio Medica Corporation
Statements of Operations
(Unaudited)
| For The Three Months Ended | ||||||||
| September 30, | ||||||||
| 2011 | 2010 | |||||||
| Net sales | $ | 2,365,000 | $ | 2,530,000 | ||||
| Cost of goods sold | 1,399,000 | 1,653,000 | ||||||
| Gross profit | 966,000 | 877,000 | ||||||
| Operating expenses: | ||||||||
| Research and development | 61,000 | 28,000 | ||||||
| Selling and marketing | 417,000 | 511,000 | ||||||
| General and administrative | 462,000 | 585,000 | ||||||
| 940,000 | 1,124,000 | |||||||
| Operating income /(loss) | 26,000 | (247,000 | ) | |||||
| Other expense: | ||||||||
| Interest expense | (49,000 | ) | (52,000 | ) | ||||
| (49,000 | ) | (52,000 | ) | |||||
| Net loss before tax | (23,000 | ) | (299,000 | ) | ||||
| Income tax expense | (5,000 | ) | (1,000 | ) | ||||
| Net loss | $ | (28,000 | ) | $ | (300,000 | ) | ||
| Basic and diluted loss per common share | $ | (0.00 | ) | $ | (0.01 | ) | ||
| Weighted average number of shares outstanding – basic and diluted | 21,744,768 | 21,744,768 | ||||||
| For The Three Months Ended | ||||||||
| March 31, | ||||||||
| 2012 | 2011 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (206,000 | ) | $ | (425,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 30,000 | 69,000 | ||||||
| Amortization of debt issuance costs | 12,000 | 12,000 | ||||||
| Provision for bad debts | 0 | (15,000 | ) | |||||
| Provision for slow moving and obsolete inventory | 24,000 | (6,000 | ) | |||||
| Share-based payment expense | 6,000 | 12,000 | ||||||
| Changes in: | ||||||||
| Accounts receivable | (57,000 | ) | (131,000 | ) | ||||
| Inventory | (98,000 | ) | 221,000 | |||||
| Prepaid expenses and other current assets | (35,000 | ) | (25,000 | ) | ||||
| Accounts payable | 244,000 | 266,000 | ||||||
| Accrued expenses and other current liabilities | (35,000 | ) | (68,000 | ) | ||||
| Wages payable | (41,000 | ) | 24,000 | |||||
| Other liabilities | 1,000 | 0 | ||||||
| Net cash used in operating activities | (155,000 | ) | (66,000 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property, plant and equipment | (1,000 | ) | (2,000 | ) | ||||
| Patent application costs | (20,000 | ) | 0 | |||||
| Net cash used in investing activities | (21,000 | ) | (2,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on debt financing | (32,000 | ) | (45,000 | ) | ||||
| Net proceeds from line of credit | 121,000 | 159,000 | ||||||
| Net cash provided by financing activities | 89,000 | 114,000 | ||||||
| Net increase / (decrease) in cash and cash equivalents | (87,000 | ) | 46,000 | |||||
| Cash and cash equivalents - beginning of period | 93,000 | 37,000 | ||||||
| Cash and cash equivalents - end of period | $ | 6,000 | $ | 83,000 | ||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid during period for interest | $ | 65,000 | $ | 69,000 | ||||
The accompanying notes are an integral part of the financial statements
| For The Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2011 | 2010 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (330,000 | ) | $ | (408,000 | ) | ||
| Adjustments to reconcile net loss to net cash provided by / (used in) operating activities: | ||||||||
| Depreciation | 208,000 | 220,000 | ||||||
| Loss on disposal of property, plant and equipment | 1,000 | |||||||
| Amortization of debt issuance costs | 35,000 | 53,000 | ||||||
| Provision for bad debts | (14,000 | ) | 19,000 | |||||
| Provision for slow moving and obsolete inventory | (6,000 | ) | (48,000 | ) | ||||
| Share-based payment expense | 45,000 | 23,000 | ||||||
| Changes in: | ||||||||
| Accounts receivable | (381,000 | ) | (457,000 | ) | ||||
| Inventory | 434,000 | 612,000 | ||||||
| Prepaid expenses and other current assets | (28,000 | ) | (103,000 | ) | ||||
| Other assets | 1,000 | |||||||
| Accounts payable | 252,000 | (89,000 | ) | |||||
| Accrued expenses and other current liabilities | (63,000 | ) | (185,000 | ) | ||||
| Wages payable | 36,000 | 37,000 | ||||||
| Other liabilities | 2,000 | 2,000 | ||||||
| Net cash provided by / (used in) operating activities | 191,000 | (323,000 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of property, plant and equipment | (141,000 | ) | (57,000 | ) | ||||
| Net cash used in investing activities | (141,000 | ) | (57,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on debt financing | (103,000 | ) | (77,000 | ) | ||||
| Proceeds from equipment loan | 11,000 | |||||||
| Net proceeds from line of credit | 27,000 | 488,000 | ||||||
| Net cash provided by / (used in) financing activities | (65,000 | ) | 411,000 | |||||
| Net increase / (decrease) in cash and cash equivalents | (15,000 | ) | 31,000 | |||||
| Cash and cash equivalents - beginning of period | 37,000 | 35,000 | ||||||
| Cash and cash equivalents - end of period | $ | 22,000 | $ | 66,000 | ||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid during period for interest | $ | 170,000 | $ | 179,000 | ||||
Notes to financial statements (unaudited)
March 31, 2012
Note A - Basis of Reporting
The accompanying unaudited interim 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 financial statements do not include all information and footnotes required by U.S. GAAP for complete financial statement presentation. These unaudited interim financial statements should be read in conjunction with our audited financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2010.2011. In the opinion of management, the interim financial statements include all normal, recurring adjustments which are considered necessary for a fair presentation of the financial position of the Company at September 30, 2011,March 31, 2012, the results of our operations for the three month period ended March 31, 2012 and nine month periods ended September 30,March 31, 2011 and September 30, 2010, and cash flows for the ninethree month periodsperiod ended September 30,March 31, 2012 (the “First Quarter 2012”) and March 31, 2011 and September 30, 2010.
Operating results for the three and nine months ended September 30, 2011First Quarter 2012 are not necessarily indicative of results that may be expected for the year ending December 31, 2011.2012. Amounts at December 31, 20102011 are derived from our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.
During the nine months ended September 30, 2011,First Quarter 2012, there were no significant changes to our critical accounting policies, which are included in our Annual Report on Form 10-K for the year ended December 31, 2010.
The preparation of these interim 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, we evaluate estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations, contingencies and litigation. We base 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 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. Our independent registered public accounting firm’s report on the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010,2011, contained an explanatory paragraph regarding our ability to continue as a going concern. As of the date of this report, our current cash balances, together with cash generated from future operations and amounts available under current credit facilities may not be sufficient to fund operations for the next 12 months if sales levels do not improve (and an inability to market and sell our point of collection oral fluid drug tests in the Workplace market would negatively impact our revenues). If cash generated from operations is not sufficient to satisfy our working capital debt maturity and capital expenditure requirements, we will be required to sell additional equity or obtain additional credit facilities or refinance our current debt.facilities. 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.
Recent Accounting Standards
There were no new standards adopted that are expected to have a material impact on our interim financial statements.
Note B – Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the net loss by the weighted average number of outstanding common shares during the period. Diluted net loss per common share includes the weighted average dilutive effect of stock options and warrants. Potential common shares outstanding as of September 30, 2011March 31, 2012 and 2010:
September 30, 2011 | September 30, 2010 | |||||||
| Warrants | 75,000 | 75,000 | ||||||
| Options | 3,081,580 | 2,826,580 | ||||||
| March 31, 2012 | March 31, 2011 | |||||||
| Warrants | 75,000 | 75,000 | ||||||
| Options | 2,609,080 | 3,036,580 | ||||||
The number of securities not included in the diluted net loss per common share for the three and nine months ended September 30,March 31, 2012 and March 31, 2011 and September 30, 2010 (because the effect would have been anti-dilutive) .
Note C – Litigation
On December 16, 2010, we filed a complaint in the Supreme Court of the State of New York in Columbia County against Martin R. Gould (“Gould”), Jacqueline Gale (“Gale”), Advanced Diagnosticum Products, Inc. (“ADPI”) and Biosure, Inc. (“Biosure”), together the “Defendants”. The complaint alleges that Gould, our former Chief Science Officer and Executive Vice President of Technology, and Gale, our former Vice President of Manufacturing and Development, were performing illegal, competitive, employment-related services for ADPI and Biosure during their employment with the Company, were using Company resources to perform such services, and were doing so in their capacity as employees and/or officers of ADPI and Biosure. Because the Defendants continue to engage in illegal activity, in addition to the compensatory and punitive damages noted below, the complaint also seeks an injunction restraining the Defendants from engaging in further wrongdoing. The Defendants exercised their right to move the action to federal court, and proceedings are now pending in the United States District Court for the District of New Jersey.
In the Complaint, we assert claims of breach of duty of loyalty, breach of contract, violation of fiduciary duty and unfair competition and conversion specifically against Gould, and claims of breach of duty, violation of fiduciary duty and unfair competition and conversion specifically against Gale. In addition to these claims, we assert claims of conversion, tortious interference with contract, interference with prospective advantage and common law misappropriation of trade secret information against all Defendants. We are seeking judgment on nine (9) causes of action for compensatory damages against Defendants in such amount as may be established at trial; together with punitive damages in the amount of one million dollars ($1,000,000) for each cause of action in the Complaint.
On March 28, 2011, the Defendants filed an Answer to our Complaint and Defendant Gould filed a counter-claim against the Company in the amount of $150,000 alleging breach of contract related to an employment agreement between Gould and the Company. We filed a reply to Gould’s counterclaim on April 13, 2011. Our reply asserted that the Company did not breach the prior employment agreement in place with Gould, that the Company provided the required written notice of non-renewal of Gould’s employment agreement, and that Gould’s employment agreement expired on May 31, 2010; at which time Gould became an at-will employee of the Company. Gould was subsequently terminated for cause on July 28, 2010. A conference was held with the court on June 16, 2011, at which issues in dispute were discussed and a discovery schedule was set. The Company has responded to the Defendants discovery requests and as of the date of this report, the Company is awaiting complete responsive discovery items from Defendants.
As previously disclosed, we received a warning letter from the FDA in July 2009 that alleges we re marketing our point of collection oral fluid drug test, OralStat, in workplace settings without marketing clearance or approval (see Current Report on Form 8-K filed with the SEC on August 5, 2009 and the Risk Factor titled, “Any adverse changes in our regulatory framework could negatively impact our business” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011). A warning letter is considered by FDA to be informal and advisory. While a warning letter communicates FDA’s position on a matter it does not commit the FDA to taking enforcement action. However, the Company has not received a “close-out” letter from FDA, therefore the Company’s July 2009 warning letter remains unresolved. We continue to move forward with our efforts to resolve this issue with FDA. Unresolved warning letters can lead to further FDA action, including but not limited to seizure, injunction and/or civil money penalties.
In addition, from time to time, the Company is named in legal proceedings in connection with matters that arose during the normal course of business. While the ultimate result of any such litigation cannot be predicted, if we are unsuccessful in defending any such litigation, the resulting financial losses could have an adverse effect on the financial position, results of operations and cash flows of the Company. We are aware of no significant litigation loss contingencies for which management believes it is both probable that a liability has been incurred and that the amount of the loss can be reasonably estimated. We are unaware of any proceedings being contemplated by governmental authorities as of the date of this report.
Note D – Line of Credit and Debt
Rosenthal and Rosenthal, Inc. (“Rosenthal”) Line of Credit
We have entered into a Financing Agreement (the “Financing Agreement”) with Rosenthal. Under the Financing Agreement, Rosenthal providesprovided the Company with up to $1,500,000 under a revolving secured line of credit (“Rosenthal Line of Credit”). The Rosenthal Line of Credit iswas collateralized by a first security interest in all of the Company’s accounts receivables, inventory, and intellectual property, and a second security interest in our machinery and equipment, leases, leasehold improvements, furniture and fixtures. The maximum availability of $1,500,000 iswas subject to an availability formula based on certain percentages of accounts receivable and inventory, and elements of the availability formula arewere subject to periodic review and revision by Rosenthal. Under the Financing Agreement, we paypaid Rosenthal an administrative fee of $1,500 per month and an annual fee of $15,000. There were additional administrative fees paid that totaled $23,000 and $9,000$5,000 in the nine months ended September 30,First Quarter 2011 and September 30, 2010, respectively. The(there were no additional administrative fees paid duringcharged in the three months ended September 30, 2011 and September 30, 2010 were $7,000 and $1,000, respectively.First Quarter of 2012). Under the Financing Agreement, interest is payable monthly. Interestmonthly, and is charged at variable rates (based on the Prime Rate), with minimum monthly interest of $4,000. We incurred $42,000$12,000 in interest expense in the nine months ended September 30, 2011First Quarter 2012 and $40,000$13,000 in the nine months ended September 30, 2010. Interest expense in the three months ended September 30, 2011 and September 30, 2010 were $14,000 and $12,000, respectively.
So long as any obligations arewere due under the Rosenthal Line of Credit, we mustthe Company had to maintain certain working capital of not less than $2,000,000 and tangible net worth, requirementsas defined by the Financing Agreement, of not less than $4,000,000 at the end of each fiscal quarter. Under the Financing Agreement, tangible net worth is defined as (a) the aggregate amount of all Company assets (in accordance with U.S. GAAP), excluding such other assets as are properly classified as intangible assets under U.S. GAAP, less (b) the aggregate amount of liabilities (excluding liabilities that are subordinate to Rosenthal). Pursuant to an amendment to the Financing Agreement effective March 31, 2011, the tangible net worth requirement was lowered from $4,000,000 to $2,750,000; the working capital requirement of not less than $2,000,000 remained unchanged byunder the amendment. AsWe maintained compliance with the covenants of the dateFinancing Agreement, as amended, through the second quarter of this report, we are notFiscal 2011. At September 30, 2011, the Company was no longer in compliance with the working capital requirement underrequirement. On November 15, 2011, the Financing Agreement however we are in the process of enteringCompany entered into ananother amendment to the Financing Agreement, with Rosenthaleffective September 30, 2011, that would lowerlowered the working capital covenant.
We incurred $41,000 in costs related to the future could constituteRosenthal Line of Credit. These costs were amortized over the term of the Rosenthal Line of Credit. We amortized $3,500 of these costs during both the First Quarter 2012 and the First Quarter 2011.
The amount outstanding on the Rosenthal Line of Credit at March 31, 2012 was $518,000 with $427,000 of this amount collateralized by accounts receivable at an event of default and all amounts outstanding, at Rosenthal’s option, could be immediately due and payable without notice or demand. Upon the occurrence of any such default, in addition to other remedies provided under the Financing Agreement, we could be required to pay to Rosenthal a charge at theinterest rate of the Over-Advance Rate plus 3% per annum8% and $91,000 collateralized by inventory at an interest rate of 9%. Additional loan availability was $183,000, for a total Loan Availability of $701,000 as of March 31, 2012.
The amount outstanding on the Rosenthal Line of Credit at December 31, 2011 was $397,000, with $361,000 of this amount outstanding balance from the datecollateralized by accounts receivable at an interest rate of default until the date8% and $36,000 collateralized by inventory at an interest rate of full payment9%. Additional loan availability was $159,000, for a total Loan Availability of all amounts to Rosenthal. However, in no event could the default rate exceed the maximum rate permitted by law. $556,000 as of December 31, 2011.
The Rosenthal Line of Credit iswas payable on demand and Rosenthal maycould terminate the Financing Agreement at any time by giving the Company 45 days advance written notice.
First Niagara Bank Mortgage Consolidation Loan (“Mortgage Consolidation Loan”)
On February 23, 2011, we amended and extended our Mortgage Consolidation Loan with First Niagara Bank (“First Niagara”). The amended Mortgage Consolidation Loan has a maturity date of March 1, 2013, and has a 6-year (72 month) amortization. The principal amount of the amended Mortgage Consolidation Loan is $815,000 with a fixed interest rate of 8.25%. The monthly payment of principal and interest is $14,000 and payments commenced on March 1, 2011. We were required to make a $15,000 principal payment at the time of closing of the amended Mortgage Consolidation Loan. We also incurred approximately $2,000 in costs associated with this amendment, which were legal costs incurred by First Niagara and passed on to the Company. The unamortized balance of these costs was $1,000 as of September 30, 2011.March 31, 2012. The amended Mortgage Consolidation Loan continues to be secured by our facility in Kinderhook, New York as well as various pieces of machinery and equipment. All other terms of the Mortgage Consolidation Loan remain unchanged, including compliance with a covenant (measured monthly) to maintain a certain level of liquidity (defined as any combination of cash, marketable securities or borrowing availability under one or more credit facilities other than the Mortgage Consolidation Loan). As of the date of this report, we are in compliance with this covenant.
The balance on the Mortgage Consolidation Loan was $753,000$697,000 at September 30, 2011March 31, 2012 and $850,000$725,000 at December 31, 2010.2011. Interest expense recognized during the nine months ended September 30, 2011First Quarter 2012 was $50,000$14,000 and $18,000 for the nine months ended September 30, 2010. Interest expense recognized during the three months ended September 30, 2011 was $16,000 and interest expense recognized was $18,000 for the three months ended September 30, 2010.
Copier Leases
In May 2007, we purchased a copier through an equipment lease with RICOH in the amount of $17,000. The term of the lease is five years with an interest rate of 14.11%. The amount outstanding on this lease was $3,000$2,000 at September 30, 2011March 31, 2012 and $6,000$3,000 at December 31, 2010.
In October 2010, we purchased a copier through an equipment lease with Marlin Leasing in the amount of $4,000. The term of the lease is threetwo years with an interest rate of 14.46%. The amount outstanding on this lease was $3,000$1,000 at September 30, 2011March 31, 2012 and $4,000$2,000 at December 31, 2010.
Debenture Financing
In August 2008, we completed an offering of Series A Debentures and received gross proceeds of $750,000. The net proceeds of the offering of Series A Debentures were $631,000 after $54,000 of placement agent fees and expenses, legal and accounting fees of $63,000 and $2,000 of state filing fees.
The Series A Debentures accrue interest at a rate of 10% per annum (payable by the Company semi-annually) and mature on August 1, 2012. As placement agent, Cantone Research, Inc. (“Cantone”) received a placement agent fee of $52,500, or 7% of the gross principal amount of Series A Debentures sold. In addition, we issued Cantone a four-year warrant to purchase 30,450 shares of the Company’s common stock at an exercise price of $0.37 per share (the closing price of the Company’s common shares on the date of closing) and a four-year warrant to purchase 44,550 shares of the Company’s common stock at an exercise price of $0.40 per share (the closing price of the Company’s common stock on the Series A Debentures completion date). All warrants issued to Cantone were immediately exercisable upon issuance. We registered the common shares underlying the Series A Debentures in a registration statement on Form S-3 filed with the SEC on April 15, 2009 and amended on May 5, 2009. On June 10, 2009, the SEC issued a notice of effectiveness related to this Form S-3, as amended.
We incurred $131,000 in expenses related to the offering, including $12,000 in expense related to warrants issued to Cantone. We amortized $24,000 of expense related to these debt issuance costs in both the nine months ended September 30, 2011 and September 30, 2010, of which just over $2,000 was share based payment expense related to the Cantone warrants. We amortized $8,000 of expense related to these debt issuance costs in both the three months ended September 30,First Quarter 2012 and the First Quarter 2011, and September 30, 2010, of which less than $1,000 was share based payment expense related to the Cantone warrants. The unamortized balance was $27,000$11,000 as of September 30, 2011March 31, 2012 and $52,000$19,000 as of December 31, 2010.2011. We also had accrued interest expense related to the Series A Debentures of $12,000$13,000 at September 30, 2011March 31, 2012 and $31,000 December 31, 2010. The Company recognized $56,000 in interest expense during both the nine months ended September 30, 2011 and September 30, 2010.2011. The Company recognized $19,000 in interest expense during both the three months ended September 30, 2011First Quarter 2012 and September 30, 2010.
Note E – Stock Option Grants
Financing Option Grants
As a condition to the Financing Agreement with Rosenthal, our Chief Executive Officer, Stan Cipkowski (“Cipkowski”) was required to execute a Validity Guarantee (the “Validity Guarantee”) that includes representations and warranties with respect to the validity of the Company’s receivables and guarantees the accuracy of the Company’s reporting to Rosenthal related to its receivables and inventory. The Validity Guarantee places Cipkowski’s personal assets at risk in the event of a breach of such representations, warranties and guarantees. As part of the compensation for his execution of the Validity Guarantee, on July 1, 2009, Cipkowski was awarded an option grant representing 500,000 common shares of the Company under its Fiscal 2001 Stock Option Plan (the “2001 Plan”), at an exercise price of $0.20, the closing price of the Company’s common shares on the date of the grant. The option grant vests over 3 years in equal installments, and the first 33% of the grant vested on July 1, 2010 and the second 33% vested on July 1, 2011. We will recognize $78,000 in share-based payment expense amortized over the required service period of 3 years. We recognized $20,000 in share-based payment expense for this grant in each of the nine months ended September 30, 2011 and September 30, 2010. We recognized $6,000 in share-based payment expense for this grant in each ofboth the three months ended September 30, 2011First Quarter 2012 and September 30, 2010.the First Quarter 2011. As of September 30 2011,March 31 2012, there was $17,000$7,000 in unrecognized expense with 93 months remaining.
On July 1, 2011, the Company issued an option grant under the 2001 Plan to the Financing Agreement with Rosenthal,purchase 50,000 shares of common stock to the Company’s President and Chairman of the Board Edmund M. Jaskiewicz (“Jaskiewicz”) at an exercise price of $0.12, the closing price of the Company’s common shares on the date of the grant. The option grant was requiredimmediately exercisable. The fair value of this stock option grant was estimated utilizing the Black-Scholes option-pricing model. The following weighted average assumptions were used: dividend yield of 0%; risk-free interest rate of 3.22%, expected life of 10 years; and stock price volatility of 91%. The value of this stock option grant totaled $6,000 and the Company recognized this share-based payment expense fully in the third quarter of Fiscal 2011.
The options were issued to executeMr. Jaskiewicz as the third and final stock option grant representing compensation for his execution of an Agreement of Subordination and Assignment (“Subordination Agreement”) required as a condition to the Rosenthal Line of Credit. The first stock option grant was issued to Jaskiewicz in July 2009 when the Subordination Agreement was executed, and the second stock option grant was issued to Jaskiewicz in July 2010. The Subordination Agreement was related to $124,000 owed to Jaskiewicz by the Company as of June 29, 2009 (the “Jaskiewicz Debt”). Under the Subordination Agreement, the Jaskiewicz Debt iswas not payable, iswas junior in right to the Rosenthal Line of Credit and no payment maycould be accepted or retained by Jaskiewicz unless and until the Company has paid and satisfied in full any obligations to Rosenthal. Furthermore, the Jaskiewicz Debt was assigned and transferred to Rosenthal as collateral for the Rosenthal Line of Credit.
Employee Grant
On December 31, 2010, we issued options to purchase 275,000 shares of common stock under the 2001 Plan to 4 members of senior management and 8 other employees of the Company at an exercise price of $0.09 (the closing price of the Company’s common shares on the date of the grant). These option grants vestvested 100% on the one-year anniversary of the date of the grant.grant, or on December 31, 2011. We will recognizerecognized $25,000 in share-based payment expense over the required service period of one year. We recognized $20,000 of this expense in the nine months ended September 30, 2011 and $6,000 of this expense in the threeFirst Quarter 2011. No expense was recognized in the First Quarter 2012 as the remaining $19,000 of this expense was recognized during the remaining nine months of the year ended September 30,December 31, 2011.
Note F – Subsequent Events
Loan and Security Agreement with Medallion Financial Corp (“Medallion”)
On April 20, 2012 (the “Closing Date”), we entered into a Loan and Security Agreement (the “Loan Agreement”) with Medallion, a new Senior Lender, to refinance the Company’s Line of Credit with Rosenthal.
Under the Loan Agreement, Medallion has agreed to provide the Company with up to $1,000,000 under a revolving secured line of credit (the “Medallion Line of Credit”), which is secured by a first security interest in all of the Company’s receivables, inventory, and intellectual property rights along with a second security interest in the Company’s machinery and equipment. The maximum amount available under the Medallion Line of Credit is subject to an Advance Rate that consists of: 85% of eligible accounts receivable and up to 30% of eligible inventory (not to exceed $150,000). “Eligible Receivables” are defined as those receivables that are paid within ninety (90) days of the invoice date. Eligible Receivables consists of both domestic sales and those international sales made in North America. An Eligible Receivable becomes ineligible if more than 25% of the aggregate receivables due from a customer are more than ninety (90) days past due or the aggregate receivables from a customer exceed 25% of the then total outstanding Eligible Receivables. “Eligible Inventory” is defined as raw materials and finished goods that are not obsolete or unmerchantable and are acceptable to Medallion. From the loan availability, we drew approximately $566,000 to pay off the Rosenthal Line of Credit on the Closing Date. As of September 30, 2011, therethe Closing Date, our loan availability under the Medallion Line of Credit was $6,000$49,000 and our balance due under the Medallion Line of Credit was $566,000.
We were charged a facility fee of 1% of the balance of the Medallion Line of Credit on the Closing Date and will be charged the same facility fee of 1% on each anniversary of the Closing Date thereafter. Under the Loan Agreement, interest on outstanding borrowings is payable monthly and is charged at an annual rate equal to 4% above a base rate (which is the Wall Street Journal Prime as published from time to time. As of the date of this report, the Wall Street Journal Prime is 3.25%). If we were to default under the Loan Agreement, interest on outstanding borrowings under the Medallion Line of Credit would be charged at an annual rate of 2% above the interest rate in unrecognized expenseseffect at the time of such default. We are subject to two audits per year by Medallion (provided we are not in default) at a rate of $950.00 per person per day. Prior to closing, we also paid a non-refundable fee in the amount of $10,000 to Medallion for field exam and due diligence costs.
So long as any obligations are due to Medallion under the Medallion Line of Credit, we must maintain stockholders’ equity of at least $1,750,000, and as of the date of this report, we are in compliance with this requirement.
Medallion Financing Stock Option Grants
As a condition to the Medallion Line of Credit, Cipkowski and our controller J. Duncan Urquhart (“Urquhart”) were each required to execute Validity Guarantees (the “Validity Guarantees”). Under the Validity Guarantees, Cipkowski and Urquhart provide representations and warranties with respect to the validity of our receivables as well as guaranteeing the accuracy of our reporting to Medallion related to the Company’s receivables. As compensation for their execution of the Validity Guarantees, on April 20, 2012, Cipkowski and Urquhart were each awarded an option grant representing 250,000 common shares of the Company under the Company’s Fiscal 2001 stock option plan, at an exercise price of $0.18, the closing price of our common shares on the date of the grant. The option grants vest over three months remaining.
As another condition to the financing, Jaskiewicz was required to execute another Subordination Agreement (“Subordination Agreement”) related to the Jaskiewicz Debt (the $124,000 currently owed to Jaskiewicz by the Company). Under the Subordination Agreement, the Jaskiewicz Debt is not payable, is junior in right to the Medallion Line of Credit and no payment may be accepted or retained by Jaskiewicz for the Jaskiewicz Debt unless and until we have paid and satisfied in full any obligations to Medallion. As compensation for his execution of the Subordination Agreement, on April 20, 2012 Jaskiewicz was awarded an option grant representing 150,000 common shares of the Company under the Company’s Fiscal 2001 stock option plan, at an exercise price of $0.18, the closing price of the Company’s common shares on the date of the grant. The option grant vests over three (3) years in equal installments.
Employment Agreement
On April 23, 2012, the Company entered into an Employment Contract with Melissa A. Waterhouse (a copy of this contract was attached as an exhibit to our Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on April 25, 2012). Our Board of Directors appointed Ms. Waterhouse to the office of Executive Vice President and Chief Compliance Officer effective April 23, 2012.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion of our financial condition and the results of operations should be read in conjunction with the interim Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains, in addition to historical statements, forward-looking statements that involve risks and uncertainties. Our actual future results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20102011 and in this Quarterly Report on Form 10-Q. Any forward-looking statement speaks only as of the date on which such statement is made and we do not intend to update any such forward-looking statements.
Overview
Sales in the ninethree months ended September 30, 2011. Although we experienced sales growth in the year ended DecemberMarch 31, 2010 (when compared to the year ended December 31, 2009), sales in the nine months ended September 30, 2011 were down 14.6%2012 (“First Quarter 2012”) increased when compared to the ninethree months ended September 30, 2010. The Company’sMarch 31, 2011 (“First Quarter 2011”). First Quarter 2012 was the second consecutive quarter of sales improvement when comparing year over year results. We remain hopeful that this trend of improvement will continue, however, conditions in the global economy remain tenuous at best so there can be no assurance that it will continue. Our core markets remain thecontinue to be Workplace and Government, markets. Weand we continue to believe that it will be some time before significant economic growth occurs allowing employment rates and government budgets to return to pre-recession levels. In addition, ourlevels, and therefore sometime before we will experience significant sales were negatively impactedgrowth in the first quarter of 2011 due to the temporary and voluntarily cessation of marketing and selling of our oral fluid product in the Workplace market (See Part II, Item 1A; Risk Factors).
Given this uncertainty, we continue to examine all expenses closely in efforts to achieve profitability (if sales levels continue to improve) or to minimize losses going forward if(if sales remain at current levels or continuestart to decline or to reach profitability if sales levels improve.
During the First Quarter 2012, we continued to market and distribute our point of collection products to detect the presence or absence of drugs of abuse in a urine or oral fluid specimen and our Rapid Reader® drug screen result and data management system, and we also performed bulk test strip contract manufacturing services for unaffiliated third parties.
Plan of Operations
We continue to focus on selling our point of collection drugs of abuse tests, and growing our business through direct sales including(including but not limited to the pursuit of new national accounts, while identifyingaccounts) and select distributors. We also continue to make efforts to identify and secure new contract work, such as contract manufacturing opportunities.or contract assembly. Simultaneously with these efforts, we will continue to focus onconcentrate on: the reduction of manufacturing costs and operating expenses, enhancement of our current products and development of new product platforms and configurations to address market trends.
Our continued existence is dependent upon several factors, including our ability to raise revenue levels and reduce costs to generate positive cash flows, and to obtain working capital by selling additional shares of ourCompany common stock and/or securing additional credit facilities, and/or renewing or extending our current credit facilities whenas necessary.
Results of operations for the nine months ended September 30, 2011First Quarter 2012 compared to the nine months ended September 30, 2010
NET SALES:
Net sales for theContract manufacturing sales also improved quarter over quarter, primarily due to increased contract manufacturing of a product for fetal amniotic rupture. Sales increases were partially offset by declines in the United StatesGovernment and International markets.
Government sales declined in the First Quarter 2012 when compared to the First Quarter 2011. Sales to government accounts continue to remain relatively unchanged with minor fluctuations, and this along with the uncertaintybe negatively impacted by price pressures caused by competitors selling products manufactured outside of general economic conditions in the United States continues to affect our sales levels. The Bureau of Labor Statistics report released in October 2011 shows that regional and state unemployment rates were generally unchanged in September 2011; while 25 states did post unemployment rate decreases, 14 states posted rate increases and 11 states and the District of Columbia had no rate changes. The national jobless rate was unchanged at 9.1%, but 0.5 percentage point lower than a year earlier.
International sales increased in the nine months ended September 30, 2011 when compareddeclined slightly due to the nine months ended September 30, 2010. This increase was a result of an increased contract manufacturing of a product for fetal amniotic membrane rupture, partiallydecreased sales to Latin America, offset by decreased contract manufacturingincreased sales to other parts of the world, including sales to Dräger Safety (under their trademark “DrugCheck”; in July 2011, we entered into a product for RSV (respiratory syncytial virus) partially offset by increased.
COST OF GOODS SOLD/GROSS PROFIT:
Cost of goods sold decreased toGross profit for the nine months ended September 30, 2011 declinedFirst Quarter 2012 also improved from gross profit in the nine months ended September 30, 2010First Quarter 2011 as we continue to see a result of the shift in sales mix duepreviously noted. We continue to price pressures from foreign manufacturers.
OPERATING EXPENSES:
Operating expensesResearch and Development (“R&D”) expense
R&D expense forwas unchanged when comparing the nine months ended September 30, 2011 decreased 30.3%, compared toFirst Quarter 2012 with the nine months ended September 30, 2010. This decrease is a result of reductionsFirst Quarter 2011. Decreases in salaries employment taxes,and employee related benefits were offset by increased costs related to supplies and materials, repairs and travel related costs, minimally offset by an increase inmaintenance and phone, due and patent fees.costs. Our R&D department continues to focus their efforts on the enhancement of current products, development of new product platforms and exploration of contract manufacturing opportunities.
Selling and Marketing expense
Selling and marketing expense for the nine months ended September 30, 2011 decreased 13.9%,First Quarter 2012 increased 14.0% when compared to the nine months ended September 30, 2010.First Quarter 2011. This decreaseincrease is primarily a result of reductionsincreases in sales salaries and employee related benefits (due to decreased personnel and adjustment in base salaries) andincreased sales personnel), commissions (as a result of reducedincreased sales), and advertising costs, trade show-related costs, partiallyexpense, offset by increasesdecreases in postage costs, sales suppliestravel related expense and marketing-related travel.postage. In the nine months ended September 30, 2011,First Quarter 2012, we continued to promote our products through selected advertising, participation at high profile trade shows and other marketing activities. Our direct sales force continued to focus their selling efforts in our target markets, which include, but are not limited to, Workplace and Government, as well as focusing on the Clinical market, primarily physicians and pain management clinics, with our CLIA waived Rapid TOX product line, which includes the only CLIA waived test for Buprenorphine.
General and Administrative (“G&A”) expense
G&A expense for the nine months ended September 30, 2011First Quarter 2012 decreased 11.0% when compared to the nine months ended September 30, 2010.First Quarter 2011. Decreases in G&A salaries and benefits, accounting and auto expense (as a result of the departure of our former Chief Financial Officer and our former Executive Vice President of Operations in late March 2011), investor relations, quality assurance salaries and employee related benefits, shipping supplies, directorslegal fees, bank service fees and expenses, patentshare based payment expense (stemming from option grants issued in the third quarter of 2009 and licensesthe third and repairs and maintenancefourth quarter of 2010; see Part I, Item 1, Note E), were partially offset by increases in consulting fees and legalSEC reporting fees (stemming from our effortscompliance with XBRL filing requirements), consulting fees (stemming from due diligence performed related to respond to and address a warning letter received from the U.S. Food and Drug Administration in July 2009; see Part II, Item 1A; Risk Factors)our line of credit refinancing), bankoffice travel expense, computer supplies, outside service fees (stemming from compliance with regulatory requirements related to sales outside of the United States) and share-based payment expense. Share-baseddues and subscriptions. Share based payment expense totaled $45,000$6,000 in the nine months ended September 30, 2011First Quarter 2012 and $23,000$12,000 in the nine months ended September 30, 2010.
Liquidity and Capital Resources as of September 30, 2011
Our cash requirements depend on numerous factors, including product development activities, penetration of our core markets, and effective management of inventory levels and production levels in response to sales forecasts. We expect to devote capital resources to continue product development and research and development activities. We will examine other growth opportunities including strategic alliances and expect such activities will be funded from existing cash and cash equivalents, issuance of additional equity or additional borrowings, subject to market and other conditions. Our financial statements for the year ended December 31, 20102011 were prepared assuming we will continue as a going concern. As of the date of this report, we do not believe that our current cash balances, together with cash generated from future operations and amounts available under our credit facilities may notwill be sufficient to fund operations for the next twelve months. As of the date of filing this report, two of our credit facilities, the Rosenthal Line of CreditFirst Niagara Mortgage Consolidation Loan and the Series A Debentures, will expire in less than 12 months. The Company continues to explore possible financing alternatives to these credit facilities; including but not limited to extension and/or refinancing of the current credit facilities. If cash generated from operations is not sufficient to satisfy our working capital debt maturities and capital expenditure requirements, we will be required to sell additional equity or obtain additional credit facilities ore refinance our current debt.facilities. There is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms, if at all.
As of September 30, 2011,March 31, 2012, we had a Mortgage Consolidation Loan with First Niagara and a Line of Credit with Rosenthal. The Rosenthal Line of Credit had a total loan availability of $717,000$701,000 as of September 30, 2011,March 31, 2012, with $197,000$183,000 of this amount available for borrowing.
Working capital
Our working capital decreased $1,021,000$786,000 at September 30, 2011,March 31, 2012 when compared to working capital at December 31, 2010. The decrease in working capital is2011, primarily theas a result of the reclassification of the company’s Series A debenturesour Mortgage Consolidation Loan with First Niagara from non currentlong term debt to current liabilitiesshort term debt (considering its maturity date of March 1, 2013). In addition, a decrease in cash along with increases in our line of credit balance and the company’s current period net loss.
We have historically satisfied net working capital requirements through cash from operations, bank debt, credit facilities with other lending institutions, occasional proceeds from the exercise of stock options and warrants (approximately $623,000 since 2002) and through the private placement of equity securities ($3,299,000 in gross proceeds since August 2001, with net proceeds of $2,963,000 after placement, legal, transfer agent, accounting and filing fees).
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 Flows
Increases in inventory, accounts receivable, prepaid expenses and a decrease in accrued expenses, offset by increases in accounts payable and inventory reserve resulted in cash used in operating activities provided $191,000of $155,000 for the First Quarter 2012. The primary use of cash flowsin the First Quarter 2012 and the First Quarter 2011 was funding of operations.
Net cash used in investing activities in the First Quarter 2012 was for investment in property, plant and equipment and patent application costs, net cash used in investing activities in the nine months ended September 30,First Quarter 2011 as compared to using $323,000was for investment in property, plant and equipment.
Net cash provided by financing activities in the nine months ended September 30, 2010. DuringFirst Quarter 2012 and the nine months ended September 30,First Quarter 2011 accounts receivable increased $381,000, inventory decreased $434,000, prepaid expenses increased $28,000, accounts payable increased $252,000, accrued expenses and other current liabilities decreased $25,000. In addition we incurred non-cash expensesconsisted primarily of $244,000 for depreciation amortization and disposal of equipment, $14,000 for provision for bad debts, $6,000 for provision for obsolete inventory and $45,000 for stock based compensation.
At September 30, 2011,March 31, 2012, we had cash and cash equivalents of $22,000.
Outlook
Given our current sales levels and results of operations, we expect that we may need to raise additional capital in the year ending December 31, 2012 to be able to continue operations. If events and circumstances occur such that we do not meet our current operating plans, we are unable to raise sufficient additional equity or debt financing, or 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.
Our primary short-term working capital needs relate to our efforts to increase high volume sales in the drugs of abuse testing market, to refine manufacturing and production capabilities and establish adequate inventory levels to support expected sales, while continuing support of research and development activities. We believe that our current infrastructure is sufficient to support our business; however, if at some point in the future we experience renewed growth in sales, we may be required to increase our infrastructure to support sales. It is also possible that additional investments in research and development, and increased expenditures in selling and marketing and general and administrative departments may be necessary in the future to: develop new products, enhance current products to meet the changing needs of the point of collection drugs of abuse testing market, grow contract manufacturing operations, promote our products in our markets and institute changes that may be necessary to comply with various public company reporting requirements, as well as FDA requirements related to the marketing and use of our products. We continue to take measures to attempt to control the rate of increase of these costs to be consistent with any sales growth rate we may experience in the near future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this item.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer (Principal Executive Officer)/Chief Financial Officer (Principal Financial Officer), together with other members of management, has reviewed and evaluated the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this review and evaluation, our Principal Executive Officer/Principal Financial Officer concluded that our disclosure controls and procedures are effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported in a timely manner.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the last quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 1, Note C in the Notes to interim Financial Statements included in this report for a description of pending legal proceedings in which we may be a party.
Item 1A. Risk Factors
There have been no material changes to our risk factors set forth in Part I, Item 1A, in our Annual Report on Form 10-K for the year ended December 31, 2010 and in our Quarterly Report on Form 10-Q for the period ended March 31, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits 31.1/31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer/Chief Financial Officer 32.1/32.2 Certification of the Chief Executive Officer/Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated:
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