| New York | 14-1702188 | |||
| (State or other jurisdiction of | ||||
| incorporation or organization) | (I.R.S. Employer Identification No.) |
518-758-8158
(Registrant’s
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| Large accelerated filer | Accelerated filer | ||
| ☐ | |||
| Non-accelerated filer | Smaller reporting company | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act¨
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29,297,333
| | |
| Item 4. Mine Safety Disclosures | 17 |
| Item 5. Other Information | 17 |
| Item 6. Exhibits | 17 |
Signatures | 18 |
–- FINANCIAL INFORMATION
Cash Flows (the “First Quarter 2017”). 2017. 2017. obtain or fulfill contracts. ASU 2017-11. First Quarter 2017. New York motions are decided. (“CHEROKEE”) The Company had $847,000. December 31, 2017 however, the Company received a waiver from Crestmark for the December 31, 2017 TNW requirement. As consideration for the granting of the waiver, Crestmark increased the interest rate on the Crestmark LOC from current Prime Rate plus 2% to the Prime Rate plus 3%. The increase in interest rate was effective as of May 1, 2018. The Company was also not in compliance with the TNW covenant at March 31, 2018; as of the date of this report, the Company is in the process of obtaining another waiver from Crestmark. Due to internal requirements within Crestmark, the waiver could not be obtained prior to the date of this report. There was no additional consideration to Crestmark for the issuance of this waiver for the year ended December 31, 2017; rather the increase in interest rate will remain in place until such time that the Company is back in compliance with the TNW covenant. expense. LOC. $446,000. The Company incurred less than $1,000 in interest expense related to the Equipment Loan in First Quarter 2018 and $0 in interest expense in the First Quarter 2017 (as the Equipment Loan was not yet in place). Given the Company has not yet received the waiver for the TNW compliance at March 31, 2018, the Company is in default under the Equipment Loan with Crestmark as of the date of this report. This results in the Equipment Loan being due and payable if called by Crestmark. Shares Aggregate Shares Weighted Aggregate Shares Aggregate Intrinsic Value Shares driving factor. new markets will be a future growth driver. In First Quarter 2018 compared to the First Quarter 2017 timing issues). Contract manufacturing sales only contributed slightly to the decline in sales in the First Quarter 2018 (even with the anticipated expiration of one of our contract manufacturing agreements in 2018) since contract manufacturing orders in the First Quarter 2017 were already decreased from prior historic levels. Sales in the clinical market improved slightly which minimally offset the declines discussed previously. prices from foreign manufacturers have required us to decrease pricing of our own products to be more competitive. We are closely examining our production schedules and requirements and anticipate making adjustments to our production schedule to mitigate any future inefficiencies. March 31, 2018 Our ability to repay our current debt September 30, December 31, 2017 2016 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 150,000 $ 156,000 Accounts receivable, net of allowance for doubtful accounts of $51,000 at September 30, 2017 and $49,000 at December 31, 2016 521,000 556,000 Inventory, net of allowance of $453,000 at September 30, 2017 and $449,000 at December 31, 2016 1,462,000 1,582,000 Prepaid expenses and other current assets 49,000 92,000 Total current assets 2,182,000 2,386,000 Property, plant and equipment, net 810,000 824,000 Patents, net 107,000 93,000 Other assets 21,000 21,000 Deferred finance costs – line of credit, net 23,000 47,000 Total assets $ 3,143,000 $ 3,371,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 306,000 $ 304,000 Accrued expenses and other current liabilities 287,000 276,000 Wages payable 257,000 299,000 Line of credit 580,000 639,000 Current portion of long-term debt 87,000 75,000 Total current liabilities 1,517,000 1,593,000 Long-term debt, net of current portion and deferred finance costs 748,000 753,000 Other long-term liabilities 22,000 0 Total liabilities 2,287,000 2,346,000 COMMITMENTS AND CONTINGENCIES Stockholders’ equity: Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at September 30, 2017 and December 31, 2016 0 0 Common stock; par value $.01 per share; 50,000,000 shares authorized; 29,297,333 issued and outstanding at September 30, 2017 and 28,842,788 issued and outstanding at December 31, 2016 293,000 288,000 Additional paid-in capital 21,115,000 21,037,000 Accumulated deficit (20,552,000 ) (20,300,000 ) Total stockholders’ equity 856,000 1,025,000 Total liabilities and stockholders’ equity $ 3,143,000 $ 3,371,000 ASSETS Current assets Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts of $51,000 at March 31, 2018 and $52,000 at December 31, 2017 Inventory, net of allowance of $521,000 at March 31, 2018 and $500,000 at December 31, 2017 Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Patents, net Other assets Deferred finance costs – line of credit, net Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable Accrued expenses and other current liabilities Wages payable Line of credit Current portion of long-term debt Total current liabilities Other liabilities/debt Long-term debt, net of current portion and deferred finance costs Total liabilities COMMITMENTS AND CONTINGENCIES Stockholders' equity: Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at March 31, 2018 and December 31, 2017 Common stock; par value $.01 per share; 50,000,000 shares authorized; 29,932,770 issued and outstanding at March 31, 2018 and 29,782,770 issued and outstanding as of December 31, 2017 Additional paid-in capital Accumulated deficit Total stockholders’ equity Total liabilities and stockholders’ equity 3 For The Nine Months Ended September 30, 2017 2016 Net sales $ 3,975,000 $ 4,392,000 Cost of goods sold 2,279,000 2,441,000 Gross profit 1,696,000 1,951,000 Operating expenses: Research and development 94,000 136,000 Selling and marketing 531,000 827,000 General and administrative 1,154,000 1,106,000 1,779,000 2,069,000 Operating loss (83,000 ) (118,000 ) Other income / (expense): Interest expense (204,000 ) (210,000 ) Other income, net 34,000 200,000 (170,000 ) (10,000 ) Net loss before tax (253,000 ) (128,000 ) Income tax benefit / (expense) 1,000 (2,000 ) Net loss $ (252,000 ) $ (130,000 ) Basic and diluted loss per common share $ (0.01 ) $ (0.01 ) Weighted average number of shares outstanding – basic & diluted 29,129,168 27,056,216 Net sales Cost of goods sold Gross profit Operating expenses: Research and development Selling and marketing General and administrative Operating loss Other income / (expense): Interest expense Other income, net Net loss before tax Income tax expense Net loss Basic and diluted loss per common share Weighted average number of shares outstanding – basic Weighted average number of shares outstanding – diluted 4Operations For The Three Months Ended September 30, 2017 2016 Net sales $ 1,354,000 $ 1,417,000 Cost of goods sold 788,000 806,000 Gross profit 566,000 611,000 Operating expenses: Research and development 26,000 28,000 Selling and marketing 159,000 275,000 General and administrative 376,000 368,000 561,000 671,000 Operating income / (loss) 5,000 (60,000 ) Other income / (expense): Interest expense (70,000 ) (71,000 ) Other income, net 14,000 44,000 (56,000 ) (27,000 ) Net loss before tax (51,000 ) (87,000 ) Income tax benefit / (expense) 2,000 (1,000 ) Net loss $ (49,000 ) $ (88,000 ) Basic and diluted loss per common share $ (0.00 ) $ (0.00 ) Weighted average number of shares outstanding – basic & diluted 29,297,333 27,284,308 Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization Amortization of debt issuance costs Allowance for doubtful accounts Provision for slow moving and obsolete inventory Share-based payment expense Changes in: Accounts receivable Inventory Prepaid expenses and other current assets Accounts payable Accrued expenses and other current liabilities Wages payable Net cash used in operating activities Cash flows from investing activities: Patent application costs Net cash used in investing activities Cash flows from financing activities: Proceeds from / (payments on) debt financing Proceeds from lines of credit Payments on lines of credit Net cash provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents - beginning of period Cash and cash equivalents - end of period Supplemental disclosures of cash flow information Cash paid during period for interest Consulting expense prepaid with restricted stock Debt issuance cost paid with restricted stock 5American Bio Medica CorporationCondensed Statements of Cash Flows(Unaudited) For The Nine Months Ended September 30, 2017 2016 Cash flows from operating activities: Net loss $ (252,000 ) $ (130,000 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 64,000 69,000 Amortization of debt issuance costs 94,000 90,000 Provision for bad debts 2,000 0 Provision for slow moving and obsolete inventory 2,000 63,000 Share-based payment expense 33,000 49,000 Changes in: Accounts receivable 32,000 (49,000 ) Inventory 116,000 127,000 Prepaid expenses and other current assets 96,000 21,000 Accounts payable 2,000 (38,000 ) Accrued expenses and other current liabilities 11,000 (6,000 ) Wages payable (42,000 ) (11,000 ) Net cash provided by operating activities 158,000 185,000 Cash flows from investing activities: Patent application costs (20,000 ) (6,000 ) Purchase of property, plant & equipment (44,000 ) 0 Net cash used in investing activities (64,000 ) (6,000 ) Cash flows from financing activities: Proceeds (payments) on debt financing (41,000 ) (75,000 ) Proceeds from lines of credit 4,729,000 4,609,000 Payments on lines of credit (4,788,000 ) (4,650,000 ) Net cash used in financing activities (100,000 ) (116,000 ) Net (decrease in) / increase in cash and cash equivalents (6,000 ) 63,000 Cash and cash equivalents - beginning of period 156,000 158,000 Cash and cash equivalents - end of period $ 150,000 $ 221,000 Supplemental disclosures of cash flow information Cash paid during period for interest $ 110,000 $ 119,000 Cash paid / (received) during period for taxes $ (1,000 ) $ 2,000 Consulting expense prepaid with restricted stock $ 50,000 $ 49,000 Debt issuance cost paid with restricted stock $ 0 $ 96,000 Related party note payable paid with restricted stock $ 0 $ 154,000 The accompanying notes are an integral part of the condensed financial statements 6September 30, 2017–- Basis of Reporting2016.2017. 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 September 30, 2017,March 31, 2018, and the results of operations for the three and nine month periods ended September 30, 2017 and September 30, 2016 and cash flows for the ninethree month periods ended September 30,March 31, 2018 (the “First Quarter 2018”) and March 31, 2017 and September 30, 2016.three and nine months ended September 30, 2017First Quarter 2018 are not necessarily indicative of results that may be expected for the year ending December 31, 2017.2018. Amounts at December 31, 20162017 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.nine months ended September 30, 2017,First Quarter 2018, 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, 2016.2016,2017, contained an explanatory paragraph regarding the Company’s ability to continue as a going concern. As of the date of this report, ourthe Company’s current cash balances, together with cash generated from future operations and amounts available under ourthe Company’s credit facilities may not be sufficient to fund operations through November 2018. On May 1, 2017, we extended our line of credit.2019. The new expiration date of ourCompany’s current line of credit ismatures on June 29, 2020. The maximum availability on ourthe Company’s line of credit remains to be $1,500,000. However, the amount available under ourthe Company’s line of credit is based upon ourthe Company’s accounts receivable and inventory. As of September 30, 2017,March 31, 2018, based on ourthe Company’s availability calculation, there were no additional amounts available under ourthe Company’s line of credit because we drawthe Company draws any balance available on a daily basis.wethe Company will have reduced availability on ourits line of credit due to decreased accounts receivable balances. In addition, wethe Company would expect ourits inventory levels to decrease if sales levels decline further, and this would also will result in reduced availability on ourthe Company’s line of credit. If availability under ourthe Company’s line of credit is not sufficient to satisfy ourits working capital and capital expenditure requirements, wethe Company will be required to obtain additional credit facilities or sell additional equity securities, or delay capital expenditures. There is no assurance that such financing will be available or that wethe Company will be able to complete financing on satisfactory terms, if at all. 7We have disclosedpreviously released accounting standardsASU 2014-09 is permitted but not prior to periods beginning after December 15, 2016 (i.e. the original adoption date per ASU No. 2014-09).earlier quarterly reports filedaccordance with ASU 2014-09. The Company has defined purchase orders as contracts in accordance with ASU 2014-09. For its customer contracts, the U.S. SecuritiesCompany’s performance obligations are identified; which is delivering goods at a determined transaction price, allocation of the contract transaction price with performance obligations (when applicable), and Exchange Commissionrecognition of revenue when (or as) the performance obligation is transferred to the customer. Goods are transferred when the customer obtains control of the goods (which is upon shipment to the customer). The Company's revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped.“Commission”"Cumulate Effect Method"); these adoptions did to comply with ASU 2014-09. The Cumulative Effect Method does not have anaffect the amounts for the prior periods, but requires that the current period be reported in accordance with ASU 2014-09. ASU 2014-09 was adopted on January 1, 2018 which was the first day of the Company's 2018 fiscal year. There was no material impact on ourthe Company’s financial statementposition or results of operations. Inthree months ended September 30, 2017, wesame period that the related sale is recorded. The Company has reviewed the overall sales transactions for variable consideration and has determined that ASU 2017-07, “Compensation - Retirement Benefits”these costs are not significant. The Company has not experienced any impairment losses, has no future performance obligations and ASU 2017-04 “Intangibles - Goodwill and Other (Topic 350)” (both previously disclosed in our Form 10-Q for the period ended June 30, 2017) diddoes not applycapitalize costs to the Company. We did not adopt any new accounting standards in the three months ended September 30, 2017.2017-11, “Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging”. ASU 2017-11 was2018-02, “Income Statement – Reporting Comprehensive Income”, issued in July 2017.February 2018, allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (enacted on December 22, 2017). The amendments in ASU 2017-11 change2018-02 eliminate the classification analysisstranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of certain equity-linkedinformation reported to financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature will no longer preclude equity classification when assessing whetherstatement users. However, because the instrument is indexedamendments only relate to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) would not be accounted for as a derivative liability at fair value as a resultthe reclassification of the existenceincome tax effects of a down round feature. For freestanding equity classified financial instruments, the amendments require entitiesTax Cuts and Jobs Act, the underlying guidance that present earnings per share (EPS) in accordance with Topic 260 to recognizerequires that the effect of the down round feature when ita change in tax laws or rates be included in income from continuing operations is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholdersnot affected. The amendments in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). ASU 2017-112018-02 also require certain disclosures about stranded tax effects. ASU 2018-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of ASU 2017-11.ASU 2017-09, “Compensation – Stock Compensation (Topic 718)”. ASU 2017-09 was issued in May 2017. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. More specifically, that an entity should account for the effects of modification unless all the following are met: 1) the fair value, calculated or intrinsic value of the modified award is the same fair value, calculated or intrinsic value of the original award immediately before the original award is modified, 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified and 3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original grant is modified. The current disclosure requirements in Topic 718 apply regardless of whether accounting modification is applied. ASU 2017-09 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating the impact of ASU 2017-09.ASU 2017-01, “Business Combinations (Topic 805)”. ASU 2017-01 was issued in January 2017. The amendments in ASU 2017-01 clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for interim and annual periods beginning after December 15, 2017 and should be applied prospectively on or after the effective date. The Company is in the process of evaluating the impact of ASU 2017-01.
2018-02. 8. ASU 2016-02 was, issued in February 2016, and it requires a lessee to recognize a lease liability and a right-of-use asset on its balance sheet for all leases, including operating leases, with a term greater than 12 months. Lease classification will determine whether a lease is reported as a financing transaction in the income statement and statement of cash flows. ASU 2016-02 does not substantially change lessor accounting, but it does make certain changes related to leases for which collectability of the lease payments is uncertain or there are significant variable payments. Additionally, ASU 2016-02 makes several other targeted amendments including a) revising the definition of lease payments to include fixed payments by the lessee to cover lessor costs related to ownership of the underlying asset such as for property taxes or insurance; b) narrowing the definition of initial direct costs which an entity is permitted to capitalize to include only those incremental costs of a lease that would not have been incurred if the lease had not been obtained; c) requiring seller-lessees in a sale-leaseback transaction to recognize the entire gain from the sale of the underlying asset at the time of sale rather than over the leaseback term; and d) expanding disclosures to provide quantitative and qualitative information about lease transactions. ASU 2016-02 is effective for all annual and interim periods beginning January 1, 2019, and is required to be applied retrospectively to the earliest period presented at the date of initial application, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2016-02.2014-09, “Revenue2017-11, “Earnings Per Share, Distinguishing Liabilities from Contracts with Customers”. ASU 2014-09 wasEquity, Derivatives and Hedging”, issued in May 2014July 2017, changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature will no longer preclude equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) would not be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and it providesas a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for revenue recognition. The core principle ofcontingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). ASU 2014-092017-11 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchangeeffective for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. Examples of the use of judgments and estimates may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The update also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 provides for two transition methods to the new guidance: a retrospective approach and a modified retrospective approach. In August 2015, ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date” was issued as a revision to ASU 2014-09. ASU 2015-14 revised the effective date to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.2018. Early adoption is permitted but not prior to periods beginning after December 15, 2016 (i.e. the original adoption date per ASU No. 2014-09).permitted. The Company is currently evaluating the transition methods and the impact of adopting this ASU.nine months ended September 30, 2017First Quarter 2018 that are expected to have or that could have a significant impact on our financial position or results of operations. September 30, 2017 December 31, 2016 Raw Materials $ 1,053,000 $ 1,028,000 Work In Process 438,000 385,000 Finished Goods 424,000 618,000 Allowance for slow moving and obsolete inventory (453,000 ) (449,000 ) $ 1,462,000 $ 1,582,000 Raw Materials Work In Process Finished Goods Allowance for slow moving and obsolete inventory September 30, 2017March 31, 2018 and 2016: September 30, 2017 September 30, 2016 Warrants 2,060,000 2,060,000 Options 2,147,000 2,182,000 4,207,000 4,242,000
2017: 9 Warrants Options threeFirst Quarter 2018 and nine months ended September 30,First Quarter 2017 was 4,207,000,4,147,000 and 4,167,000, respectively, as their effect would have been anti-dilutive due to the net loss in each period.The number of securities not included in the diluted net loss per share for the threeFirst Quarter 2018 and nine months ended September 30, 2016 was 4,242,000, as their effect would have been anti-dilutive due to the net loss in each period. Mr. Bailey formerly served as the Company’s Vice President of Sales and Marketing and as a sales consultant until December 23, 2016. The complaint seeks preliminary and permanent injunctions and a temporary restraining order against Todd Bailey (for his benefit or the benefit of another party or entity) related to the solicitation of Company customers as well as damages related to any profits and revenues that would result from actions taken by the Defendants related to Company customers. On 10, 2017, the Company was notified that it was not awarded a contract with a state agency for which it has held a contract in excess of 10 years. The contract in question is included in the February 2017 complaint. The Company believes that the Defendants actions related to this customer and a RFP that was issued by the state agency resulted in the loss of the contract award to the Company and the award of the contract to Peckham and Premier Biotech. This contract historically accounted for 10-15% of the Company’s annual revenue. The Company continued to hold a contract with the agency through September 30, 2017. The Company did protest the award of the contract to Peckham and Premier Biotech, and the state agency advised the Company on July 26, 2017 that they denied the Company’s protest of the award.ourthe Company’s supplemental motion and wethe Company filed our reply papers to the Defendants response on November 2, 2017.Company is awaiting the court’s rulings on the parties’ motions.In addition, from time to time, the Company may be namedaction in legal proceedings in connection with matters that arise during the normal course of business. While the ultimate outcome 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 liabilityMinnesota has been incurred and thatstayed while the amount of the loss can be reasonably estimated. September 30, 2017 December 31, 2016 Loan and Security Agreement with Cherokee Financial, LLC: 5 year note at an annual interest rate of 8% plus a 1% annual oversight fee, interest only and oversight fee paid quarterly with first payment being made on May 15, 2015, annual principal reduction payment of $75,000 due each year beginning on February 15, 2016, with a final balloon payment being due on February 15, 2020. Loan is collateralized by a first security interest in building, land and property. $ 1,050,000 $ 1,125,000 Crestmark Line of Credit: Line of credit (with a current termination date of June 22, 2020) with interest payable at a variable rate based on WSJ Prime plus 2% 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 in year 2 or after (and prior to natural expiration). Loan is collateralized by first security interest in receivables and inventory. 580,000 639,000 Crestmark Equipment Term Loan: 38 month equipment loan related to the purchase of manufacturing equipment, at an interest rate of WSJ Prime Rate plus 3%; or 7.25% as of the date of this report. 34,000 0 1,664,000 1,764,000 Less debt discount & issuance costs (Cherokee Financial, LLC Loan) (227,000 ) (297,000 ) Total debt, net 1,437,000 1,467,000 Current portion 667,000 714,000 Long-term portion, net of current portion $ 770,000 $ 753,000 10 Less debt discount & issuance costs (Cherokee Financial, LLC Loan) Total debt, net Current portion Long-term portion, net of current portion purpose of thedebt with Cherokee LSA was to refinance, at a better interest rate, the Company’s Series A Debentures and Cantone Asset Management Bridge Loan (both of which matured on February 1, 2015), as well as the Company’s Mortgage Consolidation Loan with First Niagara Bank (“First Niagara”). The loan 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 an annual interest rate of 8%. The Company is making interest only payments quarterly on the Cherokee Note,LSA, with the first interest payment paid on May 15, 2015. The Company is also required to make an annual principal reduction payment of $75,000 on each anniversary of the date of the closing; with the first principal reduction payment being made on February 15, 2016 and the most recent principal reduction payment being made on February 16, 2017.15, 2018 with the proceeds received from a new term loan with Cherokee Financial, LLC (See “Term Loan with Cherokee” within this Note). A final balloon payment is due on March 26, 2020. In addition to the 8% interest, the Company pays Cherokee Financial, LLC (“Cherokee”) a 1% annual fee for oversight and administration of the loan. This oversight fee is paid in cash and is paid contemporaneously with the quarterly interest payments. The Company can pay off the Cherokee Noteloan at anytimeany 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 issued 1.8 million restricted shares of the Company’s common stock to Cherokee for payment of fees. In addition, because the loan was not repaid in full as of March 19, 2016, the Company issued another 600,000 restricted shares of common stock to Cherokee in March 2016.As placement agent for the transaction, Cantone Research, Inc. (“CRI”) received a 5% cash fee on the $1.2 million, or $60,000, and 200,000 restricted shares of the Company’s common stock. In addition, because the loan was not repaid in full as of March 19, 2016, the Company issued another 196,000 restricted shares of common stock to CRI in March 2016.$60,000and $105,000 in placement agent fees, $19,000 in legal fees, $19,000 inother expenses $3,000 in state filing fees and $4,000 in interest expense (for 8% interest on $511,000 in new participations received from February 24, 2015 through March 25, 2015).fees. With the adoption of ASU No. 2015-03 in the First Quarter of Fiscal 2016, these transaction costs (with the exception of the interest expense) are now being deducted from the balance on the Cherokee LSA and are being amortized over the term of the debt.From these net proceeds, in April 2015, the Company also paid $15,000 in interest expense related to 15% interest on $689,000 in Series A Debentures and CAM Bridge Loan for the period of February 1, 2015 through March 25, 2015.$128,000$44,000 in interest expense related to the Cherokee LSA in the nine months ended September 30, 2017First Quarter 2018 (of which $70,000$24,000 is debt issuance cost amortization recorded as interest expense as a result of the adoption of new accounting standards in the first quarter of 2016,expense), and $137,000$39,000 in interest expense in the nine months ended September 30, 2016 (of which $64,000 was debt issuance cost amortization recorded as interest expense as a result of the adoption of new accounting standards in the first quarter of 2016). The Company recognized $45,000 in interest expense related to the Cherokee LSA in the three months ended September 30,First Quarter 2017 (of which $23,000 is debt issuance cost amortization recorded as interest expense as a result of the adoption of new accounting standards in the first quarter of 2016) and $47,000 in interest expense in the three months ended September 30, 2016 (of which $23,000 was debt issuance cost amortization recorded as interest expense as a result of the adoption of new accounting standards in the first quarter of 2016)expense). 11$11,000$12,000 in accrued interest expense at September 30, 2017, and $18,000 atMarch 31, 2018 related to the Cherokee LSA. 2016.As of September 30, 2017, the balance on the Cherokee LSA is $1,050,000; however the discounted balance is $823,000. As of December 31, 2016, the balance on the Cherokee LSA was $1,125,000; however the discounted balance, net of debt discount and debt issuance costs was $828,000.three-year Loan and Security Agreement (“LSA”) with Crestmark related to a new Senior Lender, to refinance the Company’s Linerevolving line of Credit with Imperium Commercial Finance, LLC (“Imperium”credit (the “Crestmark LOC”). The Crestmark Line of CreditLOC is used for working capital and general corporate purposes. 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 (See “Equipment Loan with Crestmark”),purposes and in connection with this equipment loan, the Company executed an amendment to its LSA and Promissory Note with Crestmark. The amendments addressed the inclusion of the equipment loan into the Crestmark LSA and an extension of the Company’s line of credit with Crestmark. Apart from the extension of the LSA, no terms of the line of credit were changed in the amendment. The termination date of the Crestmark line of credit was changed fromexpires on June 22, 2018 to June 22, 2020 under the amendments.Under the LSA,2020.is providingLOC provides the Company with a Linerevolving line of Credit ofcredit up to $1,500,000 (“Maximum Amount”) with a minimum loan balance requirement of $500,000. At March 31, 2018, the Company did not meet this minimum loan balance requirement as our balance was $492,000. Under the LSA, Crestmark has the right to calculate (and is calculating) interest on the minimum balance requirement rather than the actual balance on the Crestmark LOC. The Line of CreditCrestmark 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).Covenant. Under the LSA, as amended, the Company must maintain a TNWCovenant of at least $650,000. Additionally, if a quarterly net income is reported, the TNW covenant will increase by 50% of the reported net income. If a quarterly net loss is reported, the TNW covenant will remain the same as the prior quarter’s covenant amount. TNW is defined as: Total Assets less Total Liabilities less the sum of (i) the aggregate amount of non-trade accounts receivables, including accounts receivables from affiliated or related persons, (ii) prepaid expenses, (iii) deposits, (iv) net lease hold improvements, (v) goodwill and (vi) any other asset that would be treated as an intangible asset under GAAP; plus Subordinated Debt. Subordinated Debt means any and all indebtedness presently or in the future incurred by the Company to any creditor of the Company entering into a written subordination agreement with Crestmark. The Company iswas not in compliance with this covenant at September 30, 2017.Under As of the LSA, interestdate of this report, Crestmark has not elected to charge the Extra Rate even though the Company is not in compliance with the TNW covenant as of March 31, 2018 as the Company expects to receive a waiver from Crestmark.Line of CreditLOC is at a variable rate based on the Wall Street Journal Prime Rate plus 2% with a floor of 5.25%. As of March 31, 2018, the interest only rate on the Crestmark LOC was 6.75%. As of March 31, 2018, with all fees considered (the interest rate + an Annual Loan Fee of $7,500 + a monthly maintenance fee of 0.30% of the actual average monthly balance from the prior month), the interest rate on the Crestmark LOC was 11.43%. With the change in the interest rate from Prime plus 2% to Prime plus 3% (as a result of Crestmark’s waiver of the Company’s non-compliance with the TNW covenant), as of the date of this report, the interest only rate onis 7.75% and the Crestmark Line of Creditrate with all fees is 6.25%12.43%. In addition to the interest rate, on the Closing Date and on each one-year anniversary date thereafter, the Company will pay Crestmark a Loan Fee of 0.50%, or $7,500, and a Monthly Maintenance Fee of 0.30% of the actual average monthly loan balance from the prior month will be paid to Crestmark. As of the date of this report, the interest rate in effect is 10.93% (with all fees; including the weighted annual fee, which is charged on the closing date anniversary and is $7,500 regardless of our balance on the line of credit). 12In addition to the Loan Fee paid to Crestmark on the Closing Date, the Company had to pay a success fee (i.e. early termination fee) to Imperium in the amount of $50,000 on the Closing Date, and a Broker’s Fee of 5%, or $75,000, to Landmark Pegasus Inc. Prior to the Closing, the Company paid $12,000 in due diligence fees to Crestmark. The Company also incurred $3,000 of its own legal costs related to the Crestmark Line of Credit. With the exception of the early term fee ($50,000) paid to Imperium (which was fully expensed in the year ended December 31, 2015), these expenses are all being amortized over the initial term of the Crestmark Line of Credit, or three years. $24,000 of this expense$21,000 in the nine months ended September 30, 2017 and in the nine months ended September 30, 2016. The Company recognized $8,000 of this expense in the three months ended September 30, 2017 and in the three months ended September 30, 2016.The Company recognized $76,000 of interest expense related to the Crestmark Line of CreditLOC in the nine months ended September 30, 2017 (ofFirst Quarter 2018, of which $24,000 is$8,000 was debt issuance cost amortization recorded ascosts related to interest expense as a result of the adoption of new accounting standards) and $73,000expense. The Company recognized $26,000 in interest expense related to the Crestmark LOC in the nine months ended September 30, 2016 (ofFirst Quarter 2017, of which $26,000 is$8,000 was debt issuance cost amortization recorded ascosts related to interest expense). The Company recognized $25,000 of interest expense in the three months ended September 30, 2017 (of which $8,000 is debt issuance cost amortization recorded as interest expense) and $24,000 in interest expense in the three months ended September 30, 2016 (of which $8,000 is debt issuance cost amortization recorded as interest expense).Line of Credit,LOC, at September 30, 2017,March 31, 2018, the Company had $0 in accrued interest expense related to the Crestmark Line of Credit, and there is $0 in additional availability under the Crestmark Line of Credit.September 30,March 31, 2018, the balance on the Crestmark LOC was $492,000, and as of December 31, 2017, the balance on the Crestmark Line of CreditLOC was $580,000, and as of December 31, 2016, the balance on the Crestmark Line of Credit was $639,000.Company’s line of credit with Crestmark.Crestmark LOC. No terms of the line of creditCrestmark LOC were changed in the amendment. The interest rate on the term loan is the WSJ Prime Rate plus 3%; or 7.25%7.75% as of the date of this report. The termination date of the Crestmark line of credit was changed from June 22, 2018 to June 22, 2020 under the amendments. The balance on the equipment loan was $34,000$28,000 as of September 30,March 31, 2018, and $31,000 as of December 31, 2017.three months ended September 30,First Quarter 2018 and the First Quarter 2017, and September 30, 2016, the Company issued 0 stock options.
options to purchase shares of common stock. 13nine months ended September 30,First Quarter 2018 and the First Quarter 2017 and September 30, 2016 is summarized as follows (the figures contained within the tables below have been rounded to the nearest thousand): Nine months ended September 30, 2017 Nine months ended September 30, 2016 Weighted
Average
Exercise
Price
Intrinsic
Value as of
September 30,
2017
Average
Exercise
Price
Intrinsic
Value as of
September 30,
2016 Options outstanding at beginning of period 2,107,000 $ 0.13 1,435,000 $ 0.13 Granted 40,000 $ 0.13 830,000 $ 0.11 Exercised 0 NA 0 NA Cancelled/expired 0 NA (83,000 ) $ 0.19 Options outstanding at end of period 2,147,000 $ 0.13 $ 15,000 2,182,000 0.13 $ 30,000 Options exercisable at end of period 1,647,000 $ 0.13 1,184,000 $ 0.14 The following table summarizes weighted-average assumptions using the Black-Scholes option-pricing model used on the date of the grants issued during the nine months ended September 30, 2017 and September 30, 2016: Nine months ended 2017 2016 Volatility 81 % 62% - 66 % Expected term (years) 10 years 10 years Risk-free interest rate 2.16 % 1.57% - 1.94 % Dividend yield 0 % 0 % Options outstanding at beginning of year Granted Exercised Cancelled/expired Options outstanding at end of year Options exercisable at end of year $33,000$4,000 in share based payment expense in the nine months ended September 30, 2017First Quarter 2018 and $49,000$11,000 in share based payment expense in the nine months ended September 30, 2016. The Company recognized $10,000 inFirst Quarter 2017. At March 31, 2018 there was approximately $2,000 of total unrecognized share based payment expense in the three months ended September 30, 2017 and $13,000 in share based payment expense in the three months ended September 30, 2016. As of September 30, 2017, there was approximately $16,000 of total unrecognized compensation cost related to non-vested stock options, which vest over time. Theoptions. This cost is expected to be recognized over a period ranging from 3-82 months. 14nine months ended September 30,First Quarter 2018 and the First Quarter 2017 and September 30, 2016 is summarized as follows: Nine months ended September 30, 2017 Nine months ended September 30, 2016 Weighted
Average
Exercise
Price
as of
September 30,
2017 Weighted
Average
Exercise
Price Aggregate
Intrinsic Value
as of
September 30,
2016 Warrants outstanding at beginning of period 2,060,000 $ 0.18 2,385,000 $ 0.17 Granted 0 NA 0 NA Exercised 0 NA 0 NA Cancelled/expired 0 NA (325,000 ) $ 0.14 Warrants outstanding at end of period 2,060,000 $ 0.18 $ 0 2,060,000 $ 0.18 $ 0 Warrants exercisable at end of period 2,060,000 $ 0.18 2,060,000 $ 0.18 Warrants outstanding at beginning of year Granted Exercised Cancelled/expired Warrants outstanding at end of year Warrants exercisable at end of year nine months ended September 30,First Quarter 2018 and First Quarter 2017, and September 30, 2016, the Company recognized $0 in debt issuance and deferred finance costs related to the issuance of the above warrants outstanding. In the three months ended September 30, 2017 and September 30, 2016, the Company recognized $0 in debt issuance and deferred finance costs related to the issuance of the above warrants. As of September 30, 2017,March 31, 2018, there was $0 of total unrecognized expense.NOTE G – SUBSEQUENT EVENTOn October 20, 2017, the Company received notice that Todd Bailey (“Bailey”), its former Vice President of Sales & Marketing and sales consultant filed a complaint against the Company in the State of Minnesota seeking deferred commissions of $164,000 that Bailey alleges is owed to him by the Company. Bailey is one of the defendants in the litigation discussed previously in Note D. On November 2, 2017, we filed a Notice of Removal in this action to move the matter from state to federal court. On November 9, 2017, we filed a motion to dismiss or, in the alternative to transfer venue and consolidate, the Bailey complaint with our litigation filed previously against Bailey and others (see Note D).2016,2017, 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. 15Our ability to maintain and/or increase sales continues to bea very cost-competitive market currently dominated by products made outsidethe loss of an account in the fourth quarter of the United States. Evidenced byyear ended December 31, 2017 and the fact that salesexpiration of another government account in the nine months ended September 30,First Quarter 2018. The account lost in 2017 decreased again when compared tois a subject of the same period last year. In addition, our sales have been impacted by actions taken bylitigation we initiated against a former Vice President, Sales & Marketing/Sales Consultant. We have initiated litigation against this former employee/consultant related to these actions (seeConsultant (See Note D – Litigation/Legal Matters).During the nine months ended September 30, 2017, we recorded an operating loss of $83,000. This compares to an operating loss of $118,000 in the same period last year. Decreased operating expenses were the primary cause Along with these losses, products manufactured outside of the improvement in operating loss (relative to sales). Net loss in the nine months ended September 30, 2017 was $252,000, compared to a net loss of $130,000 in the same period last year. This is primarily due to other income of $200,000 (of which $150,000 was related to a tech transfer with a contract manufacturing customer) in the nine months ended September 30, 2016 that did not reoccur in the nine months ended September 30, 2017.We had cash provided by operating activities of $158,000 in the nine months ended September 30, 2017. This compares to cash provided by operating activities of $185,000 in the nine months ended September 30, 2016.We continuously examine all expenses in efforts to achieve profitability (when/if sales levels improve) or to minimize losses going forward (if salesUnited States continue to decline). Overdominate our markets; especially those markets where cost is the course of the last two fiscal years (Fiscal 2016 and Fiscal 2015), we refinanced substantially all of our existing debt at lower interest rates, manufactured our products in a partially consolidated operating environment, and maintained a salary and commission deferral program; all as part of our efforts to decrease expenses and improve cash flow.The salary and commission deferral program previously referenced continued throughout the nine months ended September 30, 2017. The deferral program currently consists of a 20% salary deferral for our executive officer and our non-executive VP Operations (and previously included the former Vice President Sales & Marketing/Sales Consultant referred to earlier in this report; until his termination in December 2016). As of September 30, 2017, we had total deferred compensation owed of $253,000. Over the course of the program, we repaid portions of the deferred compensation (with $29,000 in payments in the nine months ended September 30, 2017 and $70,000 in payments in the nine months ended September 30, 2016.). As cash flow from operations allows, we intend to continue to make paybacks, however the deferral program is continuing and we expect it will continue for up to another 12 months. continue to believe that new products and our ability to sell those products in new markets will be a future growth driver. In August 2017, the U.S. Food and Drug Administration granted over-the-counter marketing clearance for our Rapid TOX Cup II (an all-inclusive, urine based drug testing cup). We are hopeful that this marketing clearance will enable us to further penetrate clinical markets as to increase our business with our laboratory alliance.Although our primary markets continue to be extremely price-competitive, this marketing clearance should enable us to garner new sales in clinical markets (such as pain management and drug treatment) because although price is always a factor, quality and accuracy are equally important in these clinical markets.New assays and product platform developments are also in our future research and development plans. We remain focused on selling our point of collection drugs of abuse tests, and growing our business through direct sales and select distributors.Over the course of the last 12 months, we have reorganized and restructured our sales and marketing department. In addition,department, and throughout the year ended December 31, 2017, we brought on new products and service offerings to diversify our revenue stream through third party relationships. These new products and services include products for the detection of alcohol, alternative sample options for drug testing (such as lab based oral fluid testing and hair testing) as well as toxicology management services. In addition, weWe are also now offering customers lower-cost alternatives for onsite drug testing. And finally, we are reviewing our contract manufacturing operations in efforts to capitalize on offerings in that area. We have not yet derived any significant revenue from these new additions; however, the majoritywe are seeing a trend of increasing sales of the relationships were only finalizedlower cost product alternative.March/April 2017.September 2016,August 2017, the U.S. Food and Drug Administration granted over-the-counter marketing clearance for our contract manufacturingRapid TOX Cup® II (an all-inclusive, urine based drug testing cup). In January 2018, we retained a Director of Clinical Sales to spearhead our efforts in the rehabilitation/drug treatment, pain management and other clinical markets. We are hopeful that this marketing clearance and the efforts of the new sales begandirector will enable us to decrease on an annual basis duefurther penetrate clinical markets. We are also hopeful that the receipt of the FDA clearance will enable us to a manufacturing shiftincrease our business with one of our contract customers. More specifically,laboratory alliance. We are also re-focusing our efforts related to oral fluid drug testing in the year ending December 31, 2018; primarily as a result of changes in our regulatory environment and the distribution options available for alternative oral fluid products. And finally, we are currently discussing a tech transfernumber of contract manufacturing opportunities with other entities.customer, they are now their own primary supplier with the Company moving intoFirst Quarter 2017, gross profit margin was negatively impacted as a positionresult of back up or secondary supplier. Although contract manufacturing is not considered a material portion of our net sales, given this expected change, we are makinginefficiencies. We continuously examine all expenses (operational and product costs) in efforts to identifyminimize losses and secure new contractto work toward profitability (when/if sales levels rebound). Our facilities have been partially consolidated and possible diversification alternatives. In connection withdebt has been refinanced at better interest rates (although further improvement in rates is desirable). We also continued to maintain a salary deferral program for our sole executive officer and another member of senior management throughout the tech transfer,First Quarter 2018. The salary deferral program consists of a 20% salary deferral for our Chief Executive Officer/Principal Financial Officer Melissa Waterhouse and our non-executive VP Operations. As of March 31, 2018, we received a $300,000 tech transfer feehad total deferred compensation owed of $280,000 As cash flow from this customer. We recognized $150,000 relatedoperations allows, we intend to this tech transfer fee as other incomerepay portions of the deferred compensation, however we did not make any payments on deferred compensation in the nine months ended September 30, 2016.
First Quarter 2018 or the First Quarter 2017. We expect the salary deferral program will continue for up to another 12 months. 16sufferedlost significant accounts and the lossmarket continues to be infiltrated by product manufactured outside of a material contract that will impact sales starting October 1, 2017,the United States, 2) control operational costs to generate positive cash flows, 3) maintain our current credit facilities or refinance our current credit facilities if necessary, and 4) if needed, our ability to obtain working capital by selling additional shares of our common stock.nine months ended September 30, 2017nine months ended September 30, 2016nine months ended September 30, 2017First Quarter 2018 decreased 9.5%$275,000, or 20.9%, when compared to net sales in the nine months ended September 30, 2016.First Quarter 2017. The decrease in sales is primarily due to $220,000 in sales to a result of the anticipated decrease in contract manufacturing salesgovernment account lost in the nine months ended September 30, 2017 when compared to the nine months ended September 30, 2016. More specifically, contract manufacturing sales declined by approximately $222,000 (of which $197,000 was to the customer involved with the tech transfer). The remaining $195,000 in decreased sales resulted primarily from a decrease in government sales (most of which is due to the loss of an account in the fourth quarterlatter part of the year ended December 31, 2016). These declines2017. The loss of this account is due to actions we have alleged were partially offsettaken by an increase in national accountsa former Vice President Sales & Marketing/Sales Consultant (Todd Bailey) and, are the subject of ongoing litigation. Other government sales declined slightly along with international sales (which we believe is related to Latin and South America.in the nine months ended September 30, 2017 decreased to 42.7% of net sales compared to 44.2%35.7% of net sales in the nine months ended September 30, 2016. While we are still maintaining manufacturing efficiencies, there were certain periods withinFirst Quarter 2018 from 42.9% of net sales in the nine months ended September 30, 2017First Quarter 2017. This decrease in gross profit stems primarily from the fact that we produced lessdecreased sales resulted in a decrease in the number of testing strips duemade in the First Quarter 2018 when compared to the First Quarter 2017. The majority of our labor and overhead costs are fixed. When revenues decline, fewer testing strips are produced; this results in a manufacturing inefficiency (i.e. less fixed overhead cost absorption and a higher amount being expensed through cost of goods). In addition, the low product sales mix.14.0%$54,000, or 8.5%, in the nine months ended September 30, 2017First Quarter 2018 compared to the nine months ended September 30, 2016.First Quarter 2017. Expenses in research and development and selling and marketing decreased while general and administrative expense increased.increased slightly. More specifically:30.9%$21,000, or 45.7%, when comparing the nine months ended September 30, 2017First Quarter 2018 with the same period last year.First Quarter 2017. Decreased FDA compliance costs associated(associated with the timing of actions taken related to our FDA marketing clearance application) were the primary reason for Rapid TOX Cup II were partially offset by an increasethe decline in supplies and materials. Ourexpenses. All other expense remained relatively consistent with expense in the First Quarter 2017. In the First Quarter 2018, our R&D department continues to focusprimarily focused their efforts on the enhancement of our current products the development of new testing assays, new product platforms and the evaluation of potential contract manufacturing opportunities.nine months ended September 30, 2017First Quarter 2018 decreased 35.7%$35,000, or 17.9% when compared to the same period last year. One of the primary reasons for the declineFirst Quarter 2017. Reductions in expenses is decreased commission expense. In the latter part of December 2016, we terminated our relationship with a sales consultant due to competitive issues that arose during our relationship; we subsequently filed a complaint against this consultant in the early part of 2017 (See Note D – Litigation/Legal Matters). In addition to the decline in commissions, sales& marketing salaries and benefits customer relations expense, postage(due to decreased sales and marketing consulting expenses decreased. These declinespersonnel) were minimallypartially offset by an increase inincreased costs associated withrelated to trade show attendance. Our directattendance and postage (as we increase our efforts related to sales force continues to focus their efforts in our target markets, which include, but are not limited to, Workplace, Government, and Clinical (i.e. pain management and drug treatment) and in the forensic and international markets for our oral fluid product. Our sales force has also started to promote newclinical markets). In the First Quarter 2018, we promoted additional products and service offerings to diversify our revenue stream. These new products and services (through relationships with third parties) include products for the detection of alcohol, alternative sample options for drug testing (such as lab based oral fluid testing and hair testing) as well as toxicology management services and lower-cost alternatives for onsite drug testing. And finally, withThe addition of these offerings did not result in a material increase in selling and marketing expense. In the FDAFirst Quarter 2018, we re-focused our efforts related to oral fluid drug testing; primarily as a result of changes in our regulatory environment and the distribution options available for alternative oral fluid products. With the addition of a Director of Clinical Sales (retained in January 2018), we have also increased our marketing clearance granted in August 2017, our sales force is also promoting the new market application of the productefforts in the rehabilitation/drug treatment, pain management and other clinical market.
markets. 174.3%$2,000, or less than 1%, in the nine months ended September 30, 2017First Quarter 2018 when compared to G&A expense in the same period last year.First Quarter 2017. Increases in amortization of financial advisory fees, accounting fees, legal fees (associated with the ABMC vs. Bailey, et al litigation), and fees associated with our ISO certification (as 2018 was a recertification year and 2017 was a renewal year) were virtually offset by decreased costs associated with patents (due to the initiation of litigationless patent activity in the early part of 2017; see Note D – Litigation/Legal Matters)2018), and accountingconsulting fees were partially offset by reduced expenses related to investor relations (due to decreased travel), telephone and non-cash compensation (I.e. share based payment expense; dueexpense (due to less options outstanding subject to amortization). Share based payment expense was $33,000$4,000 in the nine months ended September 30, 2017First Quarter 2018 compared to $49,000$11,000 in the nine months ended September 30, 2016.Results of operations for the three months ended September 30, 2017compared to the three months ended September 30, 2016NET SALES:Net sales for the three months ended September 30, 2017 declined 4.4% when compared to the three months ended September 30, 2016. The decrease in sales results from a decrease in government sales (most of which is due to the loss of an account in the fourth quarter of 2016),First Quarter 2017.a decline in contract manufacturing sales. These declines were partially offset by increased sales to Latin America and South America and to national accounts.GROSS PROFIT:Gross profit decreased to 41.8% of net sales in the three months ended September 30, 2017 compared to gross profit of 43.1% of net sales in the three months ended September 30, 2016. While we are still maintaining manufacturing efficiencies, there were certain periods within the three months ended September 30, 2017 that we produced less testing strips due to the product sales mix.OPERATING EXPENSES: Operating expenses decreased 16.4% in the three months ended September 30, 2017, compared to the three months ended September 30, 2016. Expenses in research and development and selling and marketing decreased while general and administrative expense increased. More specifically:Research and development (“R&D”)R&D expense decreased 7.1% when comparing the three months ended September 30, 2017 with the three months ended September 30, 2016. Decreased supplies and materials costs were partially offset by increased employee benefit costs. Our R&D department continues to focus their efforts on the enhancement of current products, the development of new testing assays, new product platforms and the evaluation of contract manufacturing opportunities.Selling and marketingSelling and marketingexpense:three months ended September 30, 2017 decreased 42.2% when compared to the three months ended September 30, 2016. OneFirst Quarter 2018 consisted of the primary reasons for the decline in expenses isinterest expense associated with our credit facilities (our line of credit and equipment loan with Crestmark Bank and our two loans with Cherokee Financial, LLC), offset by other income related to decreased commission expense. In the latter part of December 2016, we terminated our relationship with a sales consultant due to competitive issues that arose during our relationship; we subsequently filed a complaint against this consultant in the early part of 2017 (See Note D – Litigation/Legal Matters). In addition to the decline in commissions, sales salaries and benefits, customer relations expense, and marketing consulting expenses decreased. These declines were minimally offset by an increase sales travel expense. Our direct sales force continues to focus their efforts in our target markets, which include, but are not limited to, Workplace, Government, and Clinical (i.e. pain management and drug treatment) and in the forensic and international markets for our oral fluid product. Our sales force has also started to promote new products and service offerings to diversify our revenue stream. These new products and services (through relationships with third parties) include products for the detection of alcohol, alternative sample options for drug testing (such as lab based oral fluid testing and hair testing) as well as toxicology management services, and lower-cost alternatives for onsite drug testing. And finally, with the FDA marketing clearance granted in August 2017, our sales force is also promoting the new market application of the product in the clinical market.General and administrative (“G&A”)G&A expense increased 2.2% in the three months ended September 30, 2017 when compared to G&Agains on certain liabilities. Other expense in the three months ended September 30, 2016. Increased legal fees (dueFirst Quarter 2017 consisted of interest expense (related to the initiationour line of litigation in the early part of 2017; see Note D – Litigation/Legal Matters) were partially offset by reduced expenses related to telephone, consulting fees, brokers feescredit with Crestmark Bank and non-cash compensation (i.e. share based payment expense; due to less options outstanding subject to amortization)our loan and security agreement with Cherokee Financial, LLC). Share based payment expense was $10,000 in the three months ended September 30, 2017 compared to $13,000 in the three months ended September 30, 2016. 18September 30, 2017 continue selling and marketing initiatives and product development/research and development activities.we expect that we will incur increased legal costs due to ongoing litigation in the year ending December 31, 2018. We are examining other growth opportunities including strategic alliances. Given our current and historical cash position, we expect such activities would need to be funded from the issuance of additional equity or additional credit borrowings, subject to market and other conditions. Our financial statements for the year ended December 31, 20162017 were prepared assuming we will continue as a going concern.November 2018.May 2019. Our current line of credit expires on June 22, 2020 and has a maximum availability of $1,500,000. However, the amount available under our line of credit is based upon the balance of our accounts receivable and inventory.inventory so, we do not have the maximum available to borrow. As of September 30, 2017,March 31, 2018, based on our availability calculation, there were no additional amounts available under our line of credit because we draw any balance available on a daily basis. If sales levels continue to decline, further, we will have reduced availability on our line of credit due to decreased accounts receivable balances. In addition, we would expect our inventory levels to decrease if sales levels decline further, which would result in further reduced availability on our line of credit. If availability under our line of credit is 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.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.September 30, 2017,March 31, 2018, we had the following debt/credit facilities:Facility Debtor Balance as of September 30, 2017 Loan and Security Agreement Cherokee Financial, LLC $ 1,050,000 Revolving Line of Credit Crestmark Bank $ 580,000 Capital Equipment Loan Crestmark Bank $ 34,000 Facility Debtor Loan and Security Agreement Cherokee Financial, LLC Revolving Line of Credit Crestmark Bank Equipment Loan Crestmark Bank Term Loan Cherokee Financial, LLC Total Debt was $664,000decreased $294,000 to $183,000 at September 30, 2017; this is a decreasethe end of $129,000 when compared to working capital of $793,000the First Quarter 2018 from $477,000 at year end December 31, 2016.2017. This decrease in working capital is primarily the result of decreased sales. We have historically satisfied working capital requirements through cash from operations and bank debt. do not expect significant increases in expenses during the year ending December 31, 2017 and as evidenced by our operating expenses for the year ended December 31, 2016 (“Fiscal 2016”), we have taken steps (and will continue to take steps) to ensure that operating expenses and manufacturing costs remain in line with sales levels.levels, however, we are incurring increased costs related to litigation and other administrative requirements. In 2017,early 2018, we also took steps (and will continue to focus our efforts on improving sales. Such steps include, but are not limitedincur additional sales and marketing expense) to further penetratingpenetrate the Clinical markets such asrehabilitation/drug treatment, pain management and drug treatment now thatother clinical markets. To offset these investments, we consolidated job responsibilities in other areas of the Company and this enabled us to implement personnel reductions.Rapid TOX Cup II received OTC marketing clearance from FDAline of credit. Two large government accounts (one of which was in Augustthe year ended December 31, 2017 and entering into strategicthe other in the year ended December 31, 2016) were lost due to alleged actions on the part of a former Vice President Sales and Marketing/Sales Consultant (Todd Bailey) and are the subject of ongoing litigation. These two accounts represented approximately $1,000,000 in annual sales to the Company (of which approximately $800,000 will impact sales revenues in the year ending December 31, 2018 (when compared to the year ended December 31, 2017). We are also experiencing declines in other areas of direct sales. To address the declines, we are promoting new products and service offerings to diversify our revenue stream. These new products and services (through relationships with third parties to offer additional products and services to our customers. This includesparties) include products for the detection of alcohol, alternative sample options for drug testing (such as lab based oral fluid testing and hair testing) as well as toxicology management services and lower-cost alternatives for onsite drug testing. We are hopeful that these additional product and service offerings will have a positive impact on sales in the future. In the nine months ended September 30, 2017, we utilized cash resources to completealso re-focusing our FDA marketing application process (which resulted in a marketing clearance in August 2017) and to take other steps that could result in increased sales. In addition, cash resources have been utilized to initiate litigation against Premier Biotech Inc., and its President, Todd Bailey (a former Vice President and sales consultant of the Company), and Peckham Vocational Industries, Inc., among others. While we expect additional cash resources to be usedefforts related to the ligation, we do not expect additional expenditures related to marketing clearancesoral fluid drug testing in the year ending December 31, 2017.
2018; primarily as a result of changes in our regulatory environment and the distribution options available for alternative oral fluid products. And finally, we are currently discussing a number of contract manufacturing opportunities with other entities. 19None of these efforts relatedsales, or any other efforts being taken related to other operational activities, resulted in a substantial increase in cash requirements in the nine months ended September 30, 2017. In the second quarter of the year ended December 31, 2016, we receivedremain compliant with our final payment of $150,000 related to a tech transfer with one ofobligations under our contract-manufacturing customers. The loss of a state agency contract starting October 1, 2017 is expected to have a material impactcurrent credit facilities will depend on our ability to replace lost sales and further increase sales. If we are unable to recoup this loss (which has historically been 10-15% of our annual sales), it is possible that our current line of credit (and advance rates) would not be adequate for our cash requirements in the year ending December 31, 2017, especially if expense levels do not decline in line with the sales decline and especially considering the costs related to litigation. In addition, extraordinary events could occur that would result in unexpected, increased expenditures.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, or 3) 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.will depend primarily upon our future operating performance, which may also be affected by the loss of a material contract in October 2017, general economic, financial, competitive, regulatory, business and other factors beyond our control, including those discussed herein. In addition,If we cannot assure youare unable to meet our credit facility obligations, we would be required to raise money through new equity and/or debt financing(s) and, there is no assurance that future borrowingswe would be able to find new financing, or equitythat any new financing willwould be availableat favorable terms.paymentyear ended December 31, 2017. . As of any indebtedness we may have.Ourthe date of this report, the Company is in the process of obtaining another waiver from Crestmark related to the TNW non-compliance for the quarter ended March 31, 2018. Due to internal requirements within Crestmark, the waiver could not be obtained prior to the date of this report. As consideration for the granting of the waiver for the year ended December 31, 2017, Crestmark increased our interest rate on the Crestmark Line of Credit from the current Prime Rate plus 2% to the Prime Rate plus 3%, effective as of May 1, 2018. A failure to comply with the TNW covenant under our revolving credit facilityCrestmark Line of Credit (a failure that is not waived by Crestmark) could result in an event of default, which, if not cured, or waived, could result in the Company being required to pay much higher costs associated with the indebtedness. Also, the Company has not yet received the waiver for the TNW compliance at March 31, 2018, the Company is in default under the Equipment Loan with Crestmark as of the date of this report. This results in the Equipment Loan being due and payable if called by Crestmark. 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. 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.(a)Evaluation of Disclosure Controls and Procedures(b)Changes in Internal Control Over Financial Reporting the interim condensed Financial Statements included in this report for a description of pending legal proceedings in which we may be a party. 202016, except for those disclosures made in our Form 10-Q for the three and six months ended June 30, 2017 filed with the Commission on August 14, 2017.None. 21 AMERICAN BIO MEDICA CORPORATION (Registrant) Dated: May 14, 2018 By: By:/s/ Melissa A. Waterhouse Melissa A. Waterhouse Principal Accounting Officer Dated: November 14, 2017 22