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, 20172022

     

¨

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

 (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)

(I.R.S. Employer Identification No.)

 

122 Smith Road, Kinderhook, New York

12106

(Address of principal executive offices)

(Zip Code)

 

518-758-8158

(Registrant’sRegistrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

ABMC

OTC Markets Pink

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days x 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)xYes¨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  

Non-accelerated filer  ¨

Smaller reporting company

x

Emerging growth company

¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)¨YesxNo

 

Indicate the number of shares outstanding of each of the issuer’sissuer's classes of common stock, as of the latest practicable date:

 

29,297,33348,098,476 Common Shares as of November 14, 2017

16, 2022

 

  

American Bio Medica Corporation

 

Index to Quarterly Report on Form 10-Q

For the quarter ended September 30, 20172022

 

PAGE

PART I – FINANCIAL INFORMATION

PAGE

Item 1.

Condensed Financial Statements

3

Condensed Balance Sheets as of September 30, 20172022 (unaudited) and December 31, 20162021

3

Condensed Unaudited Statements of Operations for the three and nine months ended September 30, 20172022 and September 30, 20162021

4

4-5

Statements of Changes in Stockholders’ Deficit for the nine months ended September 30, 2022 and September 30, 2021

6

Condensed Unaudited Statements of Cash Flows for the nine months ended September 30, 20172022 and September 30, 20162021

6

7

Notes to Condensed Financial Statements (unaudited)

7

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

28

Item 4.

Controls and Procedures

20

28

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

20

29

Item 1A.

Risk Factors

21

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

21

31

Item 3.

Defaults Upon Senior Securities

21

31

Item 4.

Mine Safety Disclosures

21

31

Item 5.

Other Information

21

31

Item 6.

Exhibits

21

32

Signatures

33

 
222

Table of Contents

 

 2

PART I - FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

 

American Bio Medica Corporation

Condensed Balance Sheets

American Bio Medica Corporation

Condensed Balance Sheets

 

 

September 30,

 

 

December 31,

 

 

 

  2022

 

 

2021

 

ASSETS

 

  (Unaudited)

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$10,000

 

 

$115,000

 

Accounts receivable, net of allowance for doubtful accounts of $2,000  at September 30, 2022 and $3,000 at December 31, 2021

 

 

39,000

 

 

 

323,000

 

Inventory, net of allowance of $256,000 at September 30, 2022 and $278,000 at December 31, 2021

 

 

380,000

 

 

 

443,000

 

Employee retention credit receivable

 

 

202,000

 

 

 

400,000

 

Prepaid expenses and other current assets

 

 

24,000

 

 

 

24,000

 

Right of use asset – operating leases

 

 

15,000

 

 

 

35,000

 

Total current assets

 

 

670,000

 

 

 

1,340,000

 

Property, plant and equipment, net

 

 

479,000

 

 

 

517,000

 

Right of use asset – operating leases

 

 

7,000

 

 

 

5,000

 

Other assets

 

 

21,000

 

 

 

21,000

 

Total assets

 

$1,177,000

 

 

$1,883,000

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$950,000

 

 

$682,000

 

Accrued expenses and other current liabilities

 

 

544,000

 

 

 

467,000

 

Right of use liability – operating leases

 

 

13,000

 

 

 

35,000

 

Wages payable

 

 

90,000

 

 

 

97,000

 

Line of credit

 

 

0

 

 

 

178,000

 

Current portion of long-term debt

 

 

1,595,000

 

 

 

1,365,000

 

Total current liabilities

 

 

3,192,000

 

 

 

2,824,000

 

Right of use liability – operating leases

 

 

7,000

 

 

 

3,000

 

Total liabilities

 

 

3,199,000

 

 

 

2,827,000

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at September 30, 2022 and December 31, 2021

 

 

0

 

 

 

0

 

Common stock; par value $.01 per share; 75,000,000 shares authorized; 48,098,476 issued and outstanding at September 30, 2022 and 47,598,476 issued and outstanding as of December 31, 2021

 

 

481,000

 

 

 

476,000

 

Additional paid-in capital

 

 

22,403,000

 

 

 

22,393,000

 

Deficit

 

 

(24,906,000)

 

 

(23,813,000)

Total stockholders’ deficit

 

 

(2,022,000)

 

 

(944,000)

Total liabilities and stockholders’ deficit

 

$1,177,000

 

 

$1,883,000

 

 

The accompanying notes are an integral part of the condensed financial statements.

 

  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 
3

Table of Contents

American Bio Medica Corporation

 Condensed Statements of Operations

(Unaudited)

 

 

    For The Nine Months Ended

 

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Net sales

 

$746,000

 

 

$1,709,000

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

799,000

 

 

 

1,284,000

 

 

 

 

 

 

 

 

 

 

Gross (loss) / profit

 

 

(53,000)

 

 

425,000

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

63,000

 

 

 

63,000

 

Selling and marketing

 

 

109,000

 

 

 

233,000

 

General and administrative

 

 

715,000

 

 

 

1,086,000

 

 

 

 

887,000

 

 

 

1,382,000

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(,000)

 

 

 

(957,000)

 

 

 

 

 

 

 

 

 

Other (expense) / income :

 

 

 

 

 

 

 

 

Interest expense

 

 

(153,000)

 

 

(145,000)

Other income, net

 

 

2,000

 

 

 

50,000

 

Income from forgiveness of PPP loan

 

 

0

 

 

 

335,000

 

Income from Employee Retention Credit

 

 

0

 

 

 

581,000

 

 

 

 

(151,000)

 

 

821,000

 

 

 

 

 

 

 

 

 

 

Loss before income tax expense

 

 

(1,091,000)

 

 

(136,000)

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(2,000)

 

 

(2,000)

 

 

 

 

 

 

 

 

 

Net loss

 

$(1,093,000)

 

$(138,000)

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$(0.02)

 

$(0.00)

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding – basic & diluted

 

 

47,990,417

 

 

 

39,281,286

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the condensed financial statements.

4

Table of Contents

American Bio Medica Corporation

 Condensed Statements of Operations

(Unaudited)

 

 

For The Three Months Ended

 

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Net sales

 

$209,000

 

 

$614,000

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

218,000

 

 

 

429,000

 

 

 

 

 

 

 

 

 

 

Gross (loss) / profit

 

 

(9,000)

 

 

185,000

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

22,000

 

 

 

21,000

 

Selling and marketing

 

 

26,000

 

 

 

79,000

 

General and administrative

 

 

205,000

 

 

 

289,000

 

 

 

 

253,000

 

 

 

389,000

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(262,000)

 

 

(204,000)

 

 

 

 

 

 

 

 

 

Other (expense) / income:

 

 

 

 

 

 

 

 

Interest expense

 

 

(53,000)

 

 

(49,000)

Income from forgiveness of PPP loan

 

 

0

 

 

 

335,000

 

Income from Employee Retention Credit

 

 

0

 

 

 

581,000

 

Other income, net

 

 

1,000

 

 

 

0

 

 

 

 

(52,000)

 

 

867,000

 

 

 

 

 

 

 

 

 

 

(Loss) / income before income tax expense

 

 

(314,000)

 

 

663,000

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

Net (loss) / income

 

$(314,000)

 

$663,000

 

 

 

 

 

 

 

 

 

 

Basic and diluted (loss) / income per common share

 

$(0.01)

 

$0.02

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding – basic & diluted

 

 

48,098,476

 

 

 

44,020,650

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the condensed financial statements.

5

Table of Contents

American Bio Medica Corporation

 Statements of Changes in Stockholders’ Deficit

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional Paid-in

 

 

Accumulated

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance – January 1, 2022

 

 

47,598,476

 

 

$476,000

 

 

$22,393,000

 

 

$(22,813,000)

 

$(944,000)

Shares issued in connection with Landmark consulting agreement

 

 

500,000

 

 

 

5,000

 

 

 

10,000

 

 

 

 

 

 

 

15,000

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,093,000)

 

 

(1,093,000)

Balance – September 30, 2022

 

 

48,098,476

 

 

$481,000

 

 

$22,403,000

 

 

$(24,906,000)

 

$(2,022,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2021

 

 

37,703,476

 

 

$377,000

 

 

$21,717,000

 

 

$(23,350,000)

 

$(1,256,000)

Shares issued to Lincoln Park for balance of Initial Purchase under the 2020 Lincoln Park Equity Line

 

 

500,000

 

 

 

5,000

 

 

 

120,000

 

 

 

 

 

 

 

125,000

 

Shares issued to Lincoln Park for purchases under the 2020 Lincoln Park Equity Line

 

 

5,800,000

 

 

 

58,000

 

 

 

449,000

 

 

 

 

 

 

 

507,000

 

Shares issued for Cherokee interest in lieu of cash

 

 

895,000

 

 

 

9,000

 

 

 

27,000

 

 

 

 

 

 

 

36,000

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(138,000)

 

 

(138,000)

Balance – September 30, 2021

 

 

44,898,476

 

 

$449,000

 

 

$22,313,000

 

 

$(23,488,000)

 

$(726,000)

 

The accompanying notes are an integral part of the condensed financial statements.

6

Table of Contents

American Bio Medica Corporation

 Condensed Statements of Cash Flows

(Unaudited)

 

 

For The Nine Months Ended

 

 

 

September 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$(1,093,000)

 

$(138,000)

Adjustments to reconcile net loss to net cash (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

38,000

 

 

 

53,000

 

Penalty added to Cherokee loan balance

 

 

0

 

 

 

120,000

 

Recovery of bad debts

 

 

(1,000)

 

 

(17,000)

(Reduction of) / provision for slow moving and obsolete inventory

 

 

(22,000)

 

 

44,000

 

Employee retention credit

 

 

0

 

 

 

(537,000)

Shares issued for services

 

 

15,000

 

 

 

0

 

Interest paid with restricted stock

 

 

0

 

 

 

36,000

 

Forgiveness of PPP loan

 

 

0

 

 

 

(332,000)

Forgiveness of PPP loan interest

 

 

0

 

 

 

(3,000)

Changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

285,000

 

 

 

(121,000)

Inventory

 

 

85,000

 

 

 

73,000

 

Employee retention credit refund

 

 

198,000

 

 

 

0

 

Prepaid expenses and other current assets

 

 

0

 

 

 

73,000

 

Right of use asset

 

 

18,000

 

 

 

26,000

 

Accounts payable

 

 

268,000

 

 

 

90,000

 

Accrued expenses and other current liabilities

 

 

77,000

 

 

 

(149,000)

Right of use liability

 

 

(18,000)

 

 

(27,000)

Wages payable

 

 

(7,000)

 

 

(24,000)

Net cash used in operating activities

 

 

(157,000)

 

 

(833,000)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from debt financing

 

 

280,000

 

 

 

0

 

Repayments of debt financing

 

 

(50,000)

 

 

(25,000)

Proceeds from Lincoln Park financing

 

 

0

 

 

 

632,000

 

Proceeds from line of credit

 

 

901,000

 

 

 

1,712,000

 

Repayments of line of credit

 

 

(1,079,000)

 

 

(1,543,000)

Net cash provided by financing activities

 

 

52,000

 

 

 

776,000

 

Net change in cash and cash equivalents

 

 

(105,000)

 

 

(57,000)

Cash and cash equivalents - beginning of period

 

 

115,000

 

 

 

98,000

 

Cash and cash equivalents - end of period

 

$10,000

 

 

$41,000

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Non-Cash transactions

 

 

 

 

 

 

 

 

Interest paid with restricted stock

 

$0

 

 

$36,000

 

Forgiveness of PPP loan principal and interest

 

$0

 

 

$335,000

 

Cash paid during period for interest

 

$143,000

 

 

$142,000

 

Cash paid during period for taxes

 

$2,000

 

 

$2,000

 

 

The accompanying notes are an integral part of the condensed financial statements.

7

Table of Contents

 

The accompanying notes are an integral part of the condensed financial statements

 3

American Bio Medica Corporation

Condensed Statements of Operations

(Unaudited)

  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 

The accompanying notes are an integral part of the condensed financial statements

 4

American Bio Medica Corporation

Condensed Statements of Operations

(Unaudited)

  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 

The accompanying notes are an integral part of the condensed financial statements

 5

American Bio Medica Corporation

Condensed 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

 6

Notes to condensed financial statements (unaudited)

September 30, 20172022

Note A - Basis of Reporting

 

The accompanying unaudited interim condensed financial statements of American Bio Medica Corporation (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, these unaudited interim condensed financial statements do not include all information and footnotes required by U.S. GAAP for complete financial statement presentation. These unaudited interim condensed financial statements should be read in conjunction with audited financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2021. In the opinion of management, the interim condensed financial statements include all normal, recurring adjustments which are considered necessary for a fair presentation of the financial position of the Company at September 30, 2017,2022, and the results of operations for the three and nine month periods ended September 30, 20172022 and September 30, 20162021 and cash flows for the nine month periods ended September 30, 20172022 and September 30, 2016.2021.

 

Operating results for the three and nine months ended September 30, 20172022 are not necessarily indicative of results that may be expected for the year ending December 31, 2017.2022. Amounts at December 31, 20162021 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2021.

 

During the nine months ended September 30, 2017,2022, there were no significant changes to the Company’s critical accounting policies, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2021.

 

The preparation of these interim condensed financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations, contingencies and litigation. The Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

These unaudited interim condensed financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. TheOur independent registered public accounting firm’s report on the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2021, 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 mayare not becurrently sufficient to fund operations through November 2018. On May 1, 2017, we extended our line2023.

Throughout most of credit. The new expiration date of ourthe nine months ended September 30, 2022, the Company had a line of credit is June 29, 2020.with Crestmark Bank. The maximum availability on ourthe Company’s line of credit remains to be $1,500,000.was $1,000,000. However, because the amount available under ourthe line of credit is based upon ourthe Company’s accounts receivable, and inventory. Asthe amounts actually available under the line of credit (historically) have been significantly less than the maximum availability. On September 30, 2017, based on our availability calculation, there were no additional amounts available under29, 2022, we paid off the balance of our line of credit because we draw($34,000) with the proceeds of a $40,000 loan from an unaffiliated third party. See Note I – Subsequent Events.

The Company’s credit facilities with Cherokee Financial, LLC (“Cherokee”) matured/expired on February 15, 2022 with a final balloon payment due of $1,240,000. On June 14, 2022, Cherokee agreed that they would defer the principal amounts due under the facilities until February 15, 2023 and that any balance availableapplicable penalties would also be deferred as long as the Company remains current on a daily basis.the quarterly interest payments. Furthermore, any penalties will also be waived if the principal amounts are paid on or prior to February 15, 2023.

The Company’s total debt at September 30, 2022 with Cherokee is $1,240,000. The Company does not expect cash from operations within the next 12 months to be sufficient to pay the amounts due under these credit facilities so, the Company is currently evaluating alternatives to pay off or refinance these facilities.

8

Table of Contents

 

As discussed in more detail in “Cash Flow, Outlook/Risk”, if sales levels continue to decline further, wethe Company will continue to 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,inadequate cash flow and this also will result in reduced availability on our line of credit. If availability under our line of credit is not sufficientbe able to satisfy ourits working capital and any capital expenditure requirements, we willrequirements. The Company would then be required to obtain additional credit facilities, or sell additional equity securities, or delay capital expenditures.expenditures and/or reduce or terminate operations, which would have a material adverse effect on the business. 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.all or continue its operations.

 

 7

Recently Adopted Accounting Standards

 

We have disclosedASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), issued in May 2021, addresses an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2021-04 on January 1, 2022 and the adoption did not have an impact on the Company’s financial condition or results of previously releasedoperations. 

ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, issued in November 2021 requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting standards in earlier quarterly reports filed withpolicies used to account for government assistance, the U.S. Securitieseffect of government assistance on the entity’s financial statements, and Exchange Commission (the “Commission”); these adoptionsany significant terms and conditions of the agreements, including commitments and contingencies. The Company adopted ASU 2021-10 on January 1, 2022 and the adoption did not have an impact on our financial statementcondition or results of operations. In the three months ended September 30, 2017, we determined that ASU 2017-07, “Compensation - Retirement Benefits” 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) did not apply to the Company. We did not adopt any new accounting standards in the three months ended September 30, 2017.operations as ASU-2021-10 only impacts annual financial statement footnote disclosures.

 

Accounting Standards Issued; Not Yet Adopted

 

ASU 2017-11, “Earnings Per Share, Distinguishing2022-04, Liabilities from Equity, Derivatives and Hedging”. ASU 2017-11 was– Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, issued in July 2017. The amendmentsSeptember 2022, requires entities that use supplier finance programs in ASU 2017-11 changeconnection with the classification analysispurchase 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 whethergoods and services to disclose 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 resultkey terms of the existence of a down round feature. For freestanding equity classified financial instruments,programs and information about obligations outstanding at the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effectend of the down round feature when itreporting period, including a rollforward of those obligations. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. ASU 2022-04 becomes effective on January 1, 2023. Early adoption is triggered. That effectpermitted. The Company does not expect the adoption of ASU 2022-04 to have an impact on its financial condition or results of operations as the Company does not (and has not historically) utilized supplier finance programs in connection with the purchase of goods and services.

ASU 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, issued in June 2022, clarifies that a contractual restriction on the sale of an equity security is treated as a dividend and as a reduction of income available to common shareholdersnot considered in basic EPS. Convertible instruments with embedded conversion optionsmeasuring the security's fair value. The standard also requires certain disclosures for equity securities 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).contractual restrictions. ASU 2017-11 is2022-03 becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.on January 1, 2024. Early adoption is permitted. The Company is evaluating the impact of ASU 2017-11.2022-03.

 

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.

 8

ASU 2016-02, “Leases”. 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.

ASU 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 was issued in May 2014 and it provides guidance for revenue recognition. The core principle of ASU 2014-09 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 exchange 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 years, beginning after December 15, 2017. 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). The Company is currently evaluating the transition methods and the impact of adopting this ASU.

There are no other accounting pronouncements issues during the nine months ended September 30, 2017 that are expected to have or that could have a significant impact on our financial position or results of operations.

Reclassifications

Certain items have been reclassified from the prior year to conform to the current year presentation.

Note B – Inventory

 

Inventory is comprised of the following:

 

 September 30, 2017  December 31, 2016 

 

September 30, 2022

 

 

December 31, 2021

 

     

 

 

 

 

 

Raw Materials $1,053,000  $1,028,000 

 

$456,000

 

$462,000

 

Work In Process  438,000   385,000 

 

93,000

 

109,000

 

Finished Goods  424,000   618,000 

 

87,000

 

150,000

 

Allowance for slow moving and obsolete inventory  (453,000)  (449,000)

 

 

(256,000)

 

 

(278,000)
 $1,462,000 $1,582,000 

 

$380,000

 

 

$443,000

 

9

Table of Contents

 

Note C – Net Loss Per Common Share

        

Basic net loss per common share is calculated by dividing the net loss by the weighted average number of outstanding common shares during the period. Diluted net lossincome per common share includes the weighted average dilutive effect of stock options and warrants. When the Company has a loss, option and warrants are not included as they would be anti-dilutive. Potential common shares outstanding as of September 30, 20172022 and 2016:2021:

 

  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 

 9

 

 

September 30, 2022

 

 

September 30, 2021

 

Options

 

 

1,736,000

 

 

 

1,937,000

 

Total

 

 

1,736,000

 

 

 

1,937,000

 

 

The number of securities not included in the diluted net loss per share for the three and nine months ended September 30, 2017 was 4,207,000, 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 three 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.

Note D – Litigation/Legal Matters

 

In February 2017, the Company filed a complaint in the Supreme Court of the State of New York in Columbia County against Premier Biotech Inc., Premier Biotech Labs, LLC and its principals, including its President Todd Bailey, and Peckham Vocational Industries, Inc. (together the “Defendants”). 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. In March 2017, the complaint was moved to the federal court in the Northern District of New York. In April 2017, the Defendants filed a motion to dismiss, to which the Company responded on April 21, 2017. On July 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. The Company amended its complaint against the Defendants to show actual damages caused by the Defendants and to show proprietary and confidential information (belonging to the Company) used by the Defendants in their response to the RFP. This confidential information belonging to the Company enabled the Defendants to comply with specifications of the RFP. The Defendants filed a response to the court opposing our supplemental motion and we filed our reply papers to the Defendants response on November 2, 2017. As of the date of this report, the Company is awaiting the court’s rulings on the parties’ motions.

In addition, fromFrom time to time, the Company may be namedinvolved in immaterial legal proceedings in connection with matters that arise during the normal course of business. While the ultimate outcome of any such immaterial litigation cannot be predicted, if we arethe Company is unsuccessful in defending any such litigation, the resulting financial losses couldare not expected to have ana material adverse effect on the financial position, results of operations andor cash flows of the Company. We are aware of no significant litigation loss contingencies for which management believes it

Property Taxes: The Company is both probable that a liabilitycurrently delinquent in its property and school taxes. The Company has been incurred and thatcommunicating with the amountcounty over the past several months to discuss options for payment of the loss can be reasonably estimated.delinquent taxes; including, but not limited to, entering into a payment plan offered by the county.

 

Note E – Line of Credit and Debt

 

  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 

The Company’s Line of Credit and Debt consisted of the following as of September 30, 2022 and December 31, 2021:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Loan and Security Agreement with Cherokee Financial, LLC: 5 year note executed on February 15, 2015, at a fixed annual interest rate of 8% plus a 1% annual oversight fee, interest and oversight fee paid quarterly with principal due on February 15, 2020. Loan was extended for one year (until February 15, 2021) under the same terms and conditions as the original loan. The loan was further extended in February 2021 to February 15, 2022 with $100,000 added to the loan principal as a penalty and the annual interest rate increased to 10%. Loan was further extended in June 2022 (until February 15, 2023). Loan is collateralized by a first security interest in building, land and machinery & equipment.

 

$1,000,000

 

 

$1,000,000

 

Crestmark Line of Credit: Line of credit maturing on June 22, 2023 with interest payable at a variable rate based on WSJ Prime plus 3% with a floor or 5.25%; loan fee of 0.5% annually & monthly maintenance fee of 0.3% on actual loan balance from prior month. Loan was collateralized by first security interest in receivables, inventory and all other assets.  Line of credit was paid off on September 29, 2022 with the proceeds of a loan with an unaffiliated third party.

 

 

0

 

 

 

178,000

 

2019 Term Loan with Cherokee Financial, LLC: Note at an annual fixed interest rate of 18% paid quarterly in arrears and a balloon payment due on February 15, 2020. Loan was extended in February 2020, until February 15, 2021 with a penalty of $20,000 added to the loan principal and, extended again in February 2021 to February 15, 2022 with another penalty of $20,000 added to the loan principal. Loan was extended in June 2022 (until February 15, 2023).

 

 

240,000

 

 

 

240,000

 

November 2020 Shareholder Note: Term loan at 7% interest with the first interest only payment being made on February 4, 2021 and the final interest and $50,000 principal due on November 4, 2022.

 

 

50,000

 

 

 

50,000

 

December 2021 Shareholder Note: Term loan with one non-affiliated shareholder at 7% interest until the loan is paid in full. Loan was amended to address additional amounts (totaling $240,000) provided under the loan.

 

 

265,000

 

 

 

75,000

 

September 2022 Loan & Promissory Note: Term loan with an unaffiliated third party at a fixed rate of 1% per month, compounded monthly. Loan is collateralized by first security interest in receivables, inventory and all other assets. Principal and accrued interest due on March 28, 2023.

 

 

40,000

 

 

 

0

 

Total Debt

 

$1,595,000

 

 

$1,543,000

 

Current portion

 

$1,595,000

 

 

$1,543,000

 

 
10

Table of Contents

 

LOAN AND SECURITY AGREEMENT (LSA) WITH CHEROKEE FINANCIAL, LLC (“CHEROKEE”)

On March 26, 2015, the Company entered into a LSA with Cherokee Financial, LLC (the “Cherokee LSA”) in the amount of $1,200,000. The Cherokee LSA reached maturity on February 15, 2020 with a balance of $900,000 (after 4 principal reduction payments of $75,000 each were made over the course of the initial term). The purposeIn February 2020, the Cherokee LSA was extended for one year, or until February 15, 2021. No terms of the facility were changed under the February 2020 extension.

In February 2021, the Cherokee LSA was further extended for another year, or until February 15, 2022 (the “February 2021 Extension”). Under the February 2021 Extension, the principal of the Cherokee LSA was increased to refinance, at$1,000,000 to include a better$100,000 penalty that was due as a result of the Company being unable to pay back the principal balance to Cherokee on February 15, 2021. The annual interest rate on the Cherokee LSA was also increased to a fixed rate of 10% (the prior fixed rate was 8%) plus a 1% annual oversight fee (that remained unchanged). Interest and the oversight fee were still due quarterly.

Cantone Research, Inc. earned a 3% fee on the extended principal of $900,000 (or $27,000) for their services related to securing the February 2021 Extension with Cherokee investors. The fee paid to Cantone Research, Inc. was recorded as a bank fee and is included in general and administrative expenses in the nine months ended September 30, 2021. The Company also paid Cherokee’s legal fees in the amount of $1,000.

On August 18, 2021, we issued 625,000 restricted shares of common stock to Cherokee in lieu of paying the $25,000 August 2021 interest payment in cash. The closing price of the Company’s Series A Debentures and Cantone Asset Management Bridge Loan (bothcommon shares on the date of which maturedthe payment in lieu of cash was $0.04.

Under the terms of the February 2021 Extension, if the Company didn’t pay off the principal on or before February 15, 2022, Cherokee could charge an 8% delinquent fee on the principal balance ($1,000,000) on February 1, 2015),15, 2022. The Company was not able to pay off the facility on February 15, 2022; however, on June 14, 2022 Cherokee agreed that they would defer the principal amounts due under the Cherokee LSA until February 15, 2023 and that any applicable penalties would also be deferred as welllong as the Company’s Mortgage Consolidation LoanCompany remained current on the quarterly interest payments. Furthermore, any penalties will also be waived if the principal amounts are paid on or prior to February 15, 2023.

11

Table of Contents

The debt with First Niagara Bank (“First Niagara”). The loanCherokee is collateralized by a first security interest in real estate and machinery and equipment. Under

In the event of default, including the Company’s inability to make any payments due under the Cherokee LSA (as amended), Cherokee has the right to increase the interest rate on the financing to 18%. As of the date of this report, the Company was providedis current in its interest and administrative fee payments and the sum of $1,200,000 in the form of a 5-year Note at an annualCompany will continue to make interest rate of 8%. The Company is making interest only paymentsand administrative fee payment quarterly on the Cherokee Note, 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 onLSA until its maturity in February 15, 2016 and the most recent principal reduction payment being made on February 16, 2017. 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.2023. 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.

The Company received net proceeds of $80,000 after $1,015,000 of debt payments, $60,000 in placement agent fees, $19,000 in legal fees, $19,000 in 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). With the adoption of ASU No. 2015-03 in the First Quarter 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.

The Company recognized $128,000$75,000 in interest expense related to the Cherokee LSA in the nine months ended September 30, 2017 (of which $70,000 is debt issuance cost amortization recorded as2022 and $73,000 in interest expense as a result ofrelated to the adoption of new accounting standards in the first quarter of 2016, and $137,000 in interest expenseCherokee LSA 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).2021. The Company recognized $45,000$25,000 in interest expense related to the Cherokee LSA in the three months ended September 30, 2017 (of which $23,000 is debt issuance cost amortization recorded as2022and $25,000 in interest expense as a result ofrelated to the adoption of new accounting standards in the first quarter of 2016) and $47,000 in interest expenseCherokee LSA 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).2021.

 11

 

The Company had $11,000$8,000 in accrued interest expense at September 30, 2017, and $18,000 at December 31, 2016.2022 related to the Cherokee LSA.

 

As of September 30, 2017,2022 and December 31, 2021, 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.$1,000,000.

 

LINE OF CREDIT WITH CRESTMARK BANK (“CRESTMARK”)

 

On June 29, 2015 (the “Closing Date”), the Company entered into a 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 Credit isLOC was used for working capital and general corporate purposes. On May 1, 2017,Upon completion of the initial 5 year term, the Crestmark LOC automatically renewed for additional one (1) year terms unless notice of termination from the Company entered into term loan withwas received by Crestmark not less than sixty (60) days prior to the end of the renewal term. On September 29, 2022, the Company made a payment to Crestmark in the amount of $38,000 related to$34,000 which paid off the purchase of manufacturing equipment (See “Equipment Loan with Crestmark”), 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 intobalance on 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 from June 22, 2018 to June 22, 2020 under the amendments.LOC.

 

Under the LSA,The Crestmark is providing the Company with a Line of Credit of up to $1,500,000 (“Maximum Amount”) with a minimum loan balance requirement of $500,000. The Line of Credit isLOC was 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).

Although secured by the assets previously indicated, the Crestmark LOC was a receivables-based only line of credit and the maximum availability (“Maximum Amount”) under the Crestmark LOC was $1,000,000. The Maximum Amount is subject to an Advance Formula comprised of: 1) 90%Crestmark LOC had a minimum loan balance requirement of Eligible Accounts Receivables (excluding, receivables remaining unpaid for more than 90 days from$500,000. Throughout the date of invoicethree and sales made to entities outside of the United States), and 2) up to 40% of eligible inventory plus up to 10% of Eligible Generic Packaging Components not to exceed the lesser of $350,000 (“Inventory Sub-Cap Limit”), or 100% of the Eligible Accounts Receivable.

So long as any obligations are due to Crestmark,nine months ended September 30, 2022 (and until the Company must comply with apaid off the Crestmark LOC on September 29, 2022), the Company did not meet the minimum Tangible Net Worth (“TNW”) Covenant.loan balance requirement. Under the LSA, as amended,Crestmark had the Company must maintain a TNW 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 Companyright to any creditor of the Company entering into a written subordination agreement with Crestmark. The Company is in compliance with this covenant at September 30, 2017.

If the Company terminates the LSA prior to June 22, 2020, an early exit fee of 2% of the Maximum Amount (plus any additional amounts owed to Crestmark at the time of termination) would be due.

In the event of a default of the LSA, which includes but is not limited to, failure of the Company to make any payment when due and non-compliance with the TNW covenant, Crestmark is permitted to charge an Extra Rate. The Extra Rate is the Company’s then current interest rate plus 12.75% per annum.

Under the LSA,calculate interest on the minimum balance requirement rather than the actual balance on the Crestmark Line of Credit isLOC (and they were exercising that right).

Interest on the Crestmark LOC was at a variable rate based on the Wall Street Journal Prime Rate plus 2%3% with a floor of 5.25%. As of the date of this report,September 29, 2022 (the payoff date), the interest only rate on the Crestmark LineLOC was 9.25%. As of Credit is 6.25%. In addition to theSeptember 29, 2022 (the payoff date), with all fees considered (the interest rate on the Closing Date and on each one-year anniversary date thereafter, the Company will pay Crestmark a+ an Annual Loan Fee of 0.50%, or $7,500 and+ a Monthly Maintenance Feemonthly 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,month), 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).

 12

In 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 (whichLOC 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. The Company recognized $24,000 of this expense 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, 2016.16.38%.

 

The Company recognized $76,000 of interest expense related to the Crestmark Line of Credit in the nine months ended September 30, 2017 (of which $24,000 is debt issuance cost amortization recorded as interest expense as a result of the adoption of new accounting standards) and $73,000incurred $35,000 in interest expense in the nine months ended September 30, 2016 (of which $26,000 is debt issuance cost amortization recorded as interest expense). The Company recognized $25,000 of2022 and $38,000 in interest expense related to the Crestmark LOC in the threenine months ended September 30, 2017 (of which $8,000 is debt issuance cost amortization recorded as interest expense) and $24,0002021. The Company incurred $13,000 in interest expense in the three months ended September 30, 2016 (of which $8,000 is debt issuance cost amortization recorded as2022 and $13,000 in interest expense).

Givenexpense in the nature of the administration of the Crestmark Line of Credit, atthree months ended September 30, 2017,2021. The Crestmark LOC was paid off on September 29, 2022 so, 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.LOC at September 30, 2022.

 

As ofAt September 30 2017,2022, the balance on the Crestmark Line of CreditLOC was $580,000,$0 and as of December 31, 2016,2021, the balance on the Crestmark Line of CreditLOC was $639,000.$178,000.

 

EQUIPMENT2019 TERM LOAN WITH CRESTMARKCHEROKEE

 In February 2019, the Company entered into an agreement with Cherokee under which Cherokee provided the Company with a loan in the amount of $200,000 (the “2019 Cherokee Term Loan”). The annual interest rate under the 2019 Cherokee Term Loan is 18% (fixed) paid quarterly in arrears.

 In February 2020, the 2019 Cherokee Term Loan was extended for one year, or until February 15, 2021. No terms of the facility were changed under the February 2020 extension. For consideration of this extension, the Company issued 1.5% of the $200,000 principal, or $3,000, in 42,857 restricted shares of the Company’s common stock to Cherokee. The Company also incurred a penalty in the amount of $20,000 which was added to the principal balance of the 2019 Cherokee Term Loan; bringing the principal to $220,000.

12

Table of Contents

 In February 2021, the 2019 Cherokee Term Loan was further extended to February 15, 2022. Under the terms of this additional extension, the 2019 Cherokee Term Loan was increased to $240,000 to include a $20,000 penalty that was due as a result of the Company being unable to pay back the principal balance to Cherokee on February 15, 2021. In addition, if the Company didn’t pay off the principal on or before February 15, 2022, Cherokee may charge an 8% delinquent fee on the principal balance ($240,000) on February 15, 2022. The Company was not able to pay off the facility on February 15, 2022; however, on June 14, 2022 Cherokee agreed that they would defer the principal amounts due under the 2019 Cherokee Term Loan until February 15, 2023 and that any applicable penalties would also be deferred as long as the Company remained current on the quarterly interest payments. Furthermore, any penalties will also be waived if the principal amounts are paid on or prior to February 15, 2023.

 In the event of default, this includes, but is not limited to, the Company’s inability to make any payments due under the 2019 Cherokee Term Loan; Cherokee has the right to increase the interest rate on the 2019 Cherokee Term Loan to 20%.

 The Company recognized $32,000 in interest expense related to the 2019 Cherokee Term Loan in both the nine months ended September 30, 2022 and the nine months ended September 30, 2021. The Company recognized $11,000 in interest expense related to the 2019 Cherokee Term Loan in both the three months ended September 30, 2022 and the three months ended September 30, 2021. The Company had $4,000 in accrued interest expense at September 30, 2022.

 The balance on the 2019 Cherokee Term Loan was $240,000 at September 30, 2022 and at December 31, 2021.

NOVEMBER 2020 TERM LOAN

On November 4, 2020, the Company entered into a loan agreement with an individual shareholder in the principal amount of $50,000. There were no expenses related to the term loan and the interest rate is 7%. The first interest only payment was paid on February 4, 2021 and the final interest payment and principal was due on May 4, 2021. On May 4, 2021, the Company extended this loan for another 6 months, or until November 4, 2021. The interest rate and all other terms of the note remained unchanged under this extension.

On November 4, 2021, the November 2020 Term Loan was extended again. Under this extension, the principal was due on November 4, 2022. The last interest payment made to the shareholder was in November 2021 and was for the period of August 5, 2021 through November 4, 2021. The shareholder agreed to defer the quarterly interest payments due on the extended facility. The facility was further extended on November 4, 2022, under the same terms and conditions, for another 6 months. Therefore, interest accruing on the November 2020 Term Loan from November 5, 2021 until May 4, 2023 would be paid upon maturity of the loan along with the principal. Provided no further funds are loaned under the facility and no payments are made on the loan, including a complete payoff, the interest due on May 4, 2023 would be $5,000. At September 30, 2022, the interest due on this loan is $3,000.

The Company recognized $3,000 of interest expense related to the November 2020 Term Loan in the nine months ended September 30, 2022 and $2,000 of interest expense in the nine months ended September 30, 2021. The Company recognized $1,000 of interest expense related to the November 2020 Term Loan in both the three months ended September 30, 2022 and in the three months ended September 30, 2021.

The Company had $3,000 in accrued interest expense related to this loan as of September 30, 2022.

The balance on the November 2020 Term Loan was $50,000 at September 30, 2022 and at December 31, 2021.

DECEMBER 2021 SHAREHOLDER LOAN

On December 14, 2021, the Company entered into Loan Agreements with two non-affiliated shareholders resulting in gross (and net) proceeds of $75,000 as there were no costs associated with the loans. Interest on the loans is 7% per annum until principal and interest were both due in full, or until June 15, 2022. The first interest payments were due on March 15, 2022 and payment of final interest and principal was due June 15, 2022.

One of the loans (in the amount of $25,000) was paid in full on June 13, 2022 along with the final interest payment due.

13

Table of Contents

On April 6, 2022, we amended the loan with the other non-affiliated shareholder. This amendment (No.1; hereinafter referred to in this paragraph as “Amendment No. 1”) increased the principal due to the shareholder by $25,000; bringing their total principal to $75,000. No other terms of the loan were changed under Amendment No. 1.

On April 14, 2022, the loan was amended again (under Amendment No. 2; hereinafter referred to in this paragraph as “Amendment No. 2”) increasing the principal again by $50,000; bringing their total principal to $125,000. No other terms of the loan were changed under Amendment No. 2.

 

On May 1, 2017,11, 2022, the loan was amended again (under Amendment No. 3; hereinafter referred to in this paragraph as “Amendment No. 3”) increasing the principal again by $75,000; bringing their total principal to $200,000. The loan was further amended to include a specific payment schedule based on receipt of anticipated ERC refunds.

On June 13, 2022, the Company made a principal reduction payment to this shareholder in the amount of $25,000 from proceeds from the ERC refund received on June 2, 2022; bringing the principal amount owed on the loan to $175,000. See Note I – Subsequent Events for more information on this loan.

On July 13, 2022, the loan was amended again (under Amendment No. 4; hereinafter referred to in this paragraph as “Amendment No. 4”) increasing the principal by $25,000; bringing their total principal to $200,000 again. The loan agreement was also amended to revise the maturity date from June 15, 2022 to no specific maturity date.

On September 13, 2022, the loan was amended again (under Amendment No. 5; hereinafter referred to in this paragraph as “Amendment No. 5”) increasing the principal by $25,000; bringing their total principal to $225,000 again.

On September 28, 2022, the shareholder provided the Company with additional funds, $40,000, under this shareholder loan with the understanding that the amount would be paid back once the September 2022 Loan funds were received and there would be no interest charged on this additional amount. This increased the amount due to the shareholder under the facility to $265,000. The Company did pay this additional amount in full on October 4, 2022 as indicated under Note I – Subsequent Events.

The Company incurred $8,000 in interest expense related to these loans in the nine months ended September 30, 2022 and $0 in interest expense in the nine months ended September 30, 2021 (as the facilities were not in place until December 2021). The Company incurred $3,000 in interest expense related to these loans in the three months ended September 30, 2022 and $0 in interest expense in the three months ended September 30, 2021 (as the facilities were not in place until December 2021).

The Company had $1,000 in accrued interest expense at September 30, 2022. The balance on these loans was $265,000 at September 30, 2022 and $75,000 at December 31, 2021. See Note I – Subsequent Event for more information regarding the balance of the loan.

SEPTEMBER 2022 LOAN & PROMISSORY NOTE

On September 28, 2022, the Company entered into terma Loan and Promissory with an unaffiliated third party (the “September 2022 Loan”) at a fixed rate of 1% per month, compounded monthly and received gross/net proceeds of $40,000. The Company utilized $34,000 of the loan withproceeds to pay off its Crestmark in the amountLine of $38,000 related to the purchaseCredit (See Note E – Line of manufacturing equipment.Credit and Debt). The equipment loanSeptember 2022 Loan is collateralized by a first security interest in the Company’s receivables, inventory and all other assets. Principal and accrued interest is due on March 28, 2023.

OTHER DEBT INFORMATION

In addition to the current debt indicated previously, previous debt facilities had financial impact on the three and/or nine months ended September 30, 2021. More specifically:

SBA PAYCHECK PROTECTION LOAN (PPP LOAN)

On April 22, 2020, the Company entered into a specific piecePromissory Note (“PPP Note”) for $332,000 with Crestmark Bank, pursuant to the U.S. Small Business Administration (“SBA”) Paycheck Protection Program under Title I of manufacturing equipment. the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed by Congress and signed into law on March 27, 2020. The PPP Note was unsecured, with an interest rate of 1.00% per annum, with principal and interest payments deferred for the first six months, and maturity in two years. On June 15, 2021, the Company applied for forgiveness of the PPP loan in the amount of $332,000 under PPP guidelines. Our forgiveness application was reviewed by the SBA and on August 3, 2021, the SBA remitted payment to Crestmark Bank for the balance of the PPP Loan principal and all interest due on the PPP Loan.

14

Table of Contents

The Company executed an amendmentrecognized $2,000 in interest expense in the nine months ended September 30, 2021 and $1,000 in interest expense in the three months ended September 30, 2021.

NOTE F – Employee Retention Credit

The employee retention credit (“ERC”), as originally enacted on March 27, 2020 by the CARES Act, is a refundable tax credit against certain employment taxes equal to its LSA and Promissory Note with Crestmark. The amendments addressed the inclusion50% of the term loan intoqualified wages an eligible employer pays to employees. On March 1, 2021, the LSAIRS released Notice 2021-20 to provide guidance on the original ERC, as modified by the Relief Act. The Relief Act extended and an extensionenhanced the ERC for qualified wages paid after December 31, 2020 through June 30, 2021. Under the Relief Act, eligible employers may claim a refundable tax credit against certain employment taxes equal to 70% of the Company’s line of credit with Crestmark. No terms ofqualified wages an eligible employer pays to employees after December 31, 2020 through June 30, 2021. Under the line of credit were changed in the amendment. The interest rate on the term loan is the WSJ Prime Rate plus 3%; or 7.25% 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, 2020American Rescue Plan Act and previously under the amendments. The balanceConsolidated Appropriations Act, 2021, the ERC was extended and expanded allowing claims through December 31, 2021 by eligible employers who retained employees during the Covid-19 pandemic. However, on November 5, 2021, the equipment loan was $34,000House of Representatives passed the Infrastructure Investment and Jobs Act (“Infrastructure Bill”) under which the ERC would terminate as of September 30, 2017.20, 2021 instead of December 31, 2021 and, President Biden signed the bill on November 15, 2021.

 

The maximum qualified wages for each employee under the current ERC is $10,000 per quarter. Also, because the Company has 100 or fewer full-time employees, health plan expenses borne by the Company can also be included as qualified wages in addition to salary. To qualify for the ERC in 2021, an employer must have experienced at least a 20% reduction in gross receipts when compared to the same quarter in either 2020 or 2019. During the first quarter of 2021, the second quarter of 2021 and the third quarter of 2021, the Company qualified for the ERC when comparing its 2021 quarters with both 2020 and 2019 quarters. In August 2021, the Company’s payroll service provider processed and mailed a Form 941-X to claim a refund in the amount of $202,000 on qualified wages paid in the first quarter of 2021. Due to a change in the Form 941-X, the Company’s payroll service provider did not process and mail its Form 941-X to claim a refund in the amount of $198,000 on qualified wages paid in the second quarter of 2021 until October 28, 2021. In the middle of the third quarter of 2021, the Company began taking the ERC in its current payroll; which reduced payroll by approximately $44,000 in the third quarter of 2021. Given this, the Company did not have to amend its Form 941 for the third quarter of 2021; however the Form 941 claiming a refund in the amount of $137,000 was filed electronically with the IRS on November 1, 2021 by the Company’s payroll service provider. Upon passing of the Infrastructure Bill, the Company ceased taking the ERC in its current payroll.

On December 28, 2021, the Company received its refund for the third quarter of 2021 in the amount of $137,000. Shortly before receiving the first refund, the Company spoke with the Internal Revenue Service (“IRS”) to obtain statuses of our filings. The Company was informed that the IRS did not have record of receiving the Company’s Form 941-X for the first quarter of 2021 (which was mailed by the Company’s service provider in August 2021). The Company re-sent the Form 941-X for the first quarter of 2021 via overnight service on December 31, 2021 and the IRS received it on January 5, 2022. This lack of receipt has resulted in a delay in receiving the expected refund in the amount of $202,000.

On June 2, 2022, the Company received a refund for the second quarter of 2021 in the amount of $199,000. This amount represents the $198,000 claimed as a refund and $1,000 in interest. The Company has had a number of discussions with the IRS and has been given a number of time frames in which the refund for the first quarter of 2021 could be expected. However, the Company has not yet received the refund. Last contact with the IRS was in mid-September 2022 and the Company was informed at that time that the filing was still being processed with no adjustments. The Company’s remaining expected refunds; totaling $202,000, is included on the Condensed Balance Sheets under current assets, as well as on the Company’s Condensed Statements of Operations under other income.

Laws and regulations concerning government programs, including the Employee Retention Credit are complex and subject to varying interpretations. Claims made under the CARES Act may also be subject to retroactive audit and review. There can be no assurance that regulatory authorities will not challenge the Company’s claim to the ERC, and it is not possible to determine the impact (if any) this would have upon the Company.

NOTE FG – Stock Options and Warrants

 

The Company currently has two non-statutory stock option plans, the Fiscal 2001 Non-statutory Stock Option Plan (the “2001 Plan”) and the 2013 Equity Compensation Plan (the “2013 Plan”). Both plans have been adopted by our Board of Directors and approved by our shareholders. Both the 2001 Plan and the 2013 Plan have options available for future issuance. Any common shares issued as a result of the exercise of stock options would be new common shares issued from our authorized issued shares.

 

15

Table of Contents

During the three months ended September 30, 20172022 and the three months ended September 30, 2016,2021, the Company issued 0 stock options.options to purchase shares of common stock.

 13

 

Stock option activity for the nine months ended September 30, 20172022 and the nine months ended September 30, 20162021 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 
  

 

Shares

  Weighted
Average
Exercise
Price
  

Aggregate
Intrinsic
Value as of
September 30,
2017

  

 

Shares

  

Weighted
Average
Exercise
Price

  

Aggregate
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%

 

 

Nine months ended September 30, 2022

 

 

Nine months ended September 30, 2021

 

 

 

Shares

 

 

Weighted Average Exercise Price

 

 

Aggregate

Intrinsic Value as of

September 30, 2022

 

 

Shares

 

 

Weighted Average Exercise Price

 

 

Aggregate Intrinsic Value as of

September 30, 2021

 

Options outstanding at beginning of year

 

 

1,937,000

 

 

$0.13

 

 

 

 

 

 

1,987,000

 

 

$0.13

 

 

 

 

Granted

 

 

0

 

 

NA

 

 

 

 

 

 

0

 

 

NA

 

 

 

 

Exercised

 

 

0

 

 

NA

 

 

 

 

 

 

0

 

 

NA

 

 

 

 

Cancelled/expired

 

 

(201,000)

 

$0.18

 

 

 

 

 

 

(50,000)

 

$0.13

 

 

 

 

Options outstanding at end of quarter

 

 

1,736,000

 

 

$0.12

 

 

$0

 

 

 

1,937,000

 

 

$0.13

 

 

$0

 

Options exercisable at end of quarter

 

 

1,736,000

 

 

$0.12

 

 

 

 

 

 

 

1,937,000

 

 

$0.13

 

 

 

 

 

 

The Company recognized $33,000$0 in share based payment expense in the nine months ended September 30, 20172022 and $49,000 in share based payment expense in the nine months ended September 30, 2016.2021. The Company recognized $10,000$0 in share based payment expense in the three months ended September 30, 20172022 and $13,000 in share based payment expense in the three months ended September 30, 2016. 2021. At September 30, 2022, there was $0 of unrecognized share based payment expense related to stock options.  

Warrants

There was no warrant activity in the three or nine months ended September 30, 2022 or September 30, 2021.

NOTE H – Changes in Stockholders’ Deficit

LANDMARK CONSULTING AGREEMENT

On March 7, 2022, the Company entered into a Financial Advisory Agreement (the “Agreement”) with Landmark Pegasus, Inc. (‘Landmark”). The Agreement provided that Landmark would provide certain financial advisory services for a minimum period of 3 months (which period commenced on February 28, 2022), and as consideration for these services, the Company would pay Landmark (a) a retainer fee consisting of 500,000 restricted shares of common stock and a warrant to purchase 2.75 million shares of the Company’s common stock at a strike price equal to the average closing price of the Company’s common shares for the 30 days preceding the Agreement, or $0.035 per share, resulting in gross proceeds to the Company in the amount of $96,250. The warrant would vest upon the closing of a transaction involving Landmark or upon the invocation of a “Breakup Fee”.

In a subsequent amendment, the terms of the warrant were changed to reflect that the warrant would be issued immediately preceding the closing of a transaction involving Landmark or immediately upon the invocation of the Breakup Fee. In each case, the warrant would vest immediately (i.e. the warrant would be 100% immediately exercisable).

The Breakup Fee would be invoked upon the generation of a specific transaction to ABMC which meets certain criteria agreed upon by both the Company and Landmark; which transaction is then rejected by the Company. The Company will also pay to Landmark a “Success Fee” for the consummation of a transaction closing during the term of the Agreement and for 12 months thereafter, between the Company and any party first introduced to the Company by Landmark, or with any party the Company has specifically requested that Landmark assistance with the transaction.

Upon invocation of the Breakup Fee or payment of the Success Fee, the Company will also issue an additional 250,000 restricted shares of the Company’s common stock.

16

Table of Contents

In the event that the Company consummates a transaction involving the provision of services to any party introduced to the Company by Landmark or with any party the Company has specifically requested Landmark’s assistance with, the Company will pay Landmark 10% of any revenues received from the transaction, unless this percentage is modified by both the Company and Landmark in writing. There is no material relationship between the Company and Landmark, other than with respect to the Agreement.

As of September 30, 2017, there2022 and as of the date of this report, no additional shares or warrants have been issued as the Breakup Fee has not been invoked nor has a Success Fee been required.

LINCOLN PARK EQUITY LINE OF CREDIT – DECEMBER 2020

On December 9, 2020, the Company entered into a Purchase Agreement and a Registration Rights Agreement with Lincoln Park (together the “Agreements”) under which Lincoln Park agreed to purchase from the Company, from time to time, up to $10,250,000 of its shares of common stock, par value $0.01 per share, subject to certain limitations set forth in the Purchase Agreement, during the term of the Purchase Agreement (two years). A Form S-1 Registration Statement was approximately $16,000declared effective by the U.S. Securities and Exchange Commission (“SEC”) on January 11, 2021. Under the terms of the Lincoln Park facility, which have been previously disclosed in our periodic reports filed with the SEC, in the nine months ended September 30, 2021, the Company sold 500,000 shares of common stock that represented the balance of an initial purchase and 5,800,000 shares of common stock to Lincoln Park as Regular Purchases. The Company received proceeds of $632,000 from these purchases. The Company did not sell any shares of common stock to Lincoln Park in the nine months ended September 30, 2022 as the closing price of the Company’s shares of common stock did not exceed $0.05 (which is a requirement under the terms of the facility). In fact, the last sale to Lincoln Park was in October 2021.

Note I – Subsequent Events

OCTOBER 2022 LOAN AND PROMISSORY NOTE

On October 3, 2022, we entered into a Loan and Promissory Note (the “October 2022 Loan) with the same unaffiliated third party (the “Holder”) discussed in the September 2022 Loan and Promissory Note (found in Note E). The total unrecognizedprincipal under the October 2022 Loan is $400,000 and includes the $40,000 that was extended under the September 2022 Loan; thereby cancelling the September 2022 Loan. The October 2022 Loan is at a fixed rate of 1% per month, compounded monthly. The October 2022 Loan is payable in three equal monthly installments of $140,132.50 with the first payment being due on January 28, 2023 and the final payment being due on March 28, 2023 (the maturity date of the facility). The October 2022 Loan is collateralized by a first security interest in the Company’s receivables, inventory and all other assets. If the Holder does not receive any payment when due, we would need to pay a late charge equaling 1% of the overdue amount. The principal may be paid prior to maturity without any premium or penalty. Our CEO Melissa Waterhouse (“Waterhouse”) also provided a Validity Guarantee in connection with the October 2022 Loan. Under the Validity Guarantee, Waterhouse provides representations and warranties with respect to the validity of our financials. Waterhouse did not receive any compensation cost relatedin connection with providing the required Validity Guarantee.

DECEMBER 2021 SHAREHOLDER LOAN

On October 4, 2022, we paid $40,000 to non-vested stock options,the shareholder to pay off a short-term loan provided to the Company on September 28, 2022. With this payment, the loan balance under the December 2021 Shareholder Loan is $225,000.

EXTENSION OF THE NJ FACILITY LEASE

On October 27, 2022, we extended the lease of our NJ facility for an additional two months after the term of our current lease (which expires on December 31, 2022), or until February 28, 2023. In connection with the extension, we were required to pay $21,000 to our landlord which, vest over time. is rent in advance for the months of November 2022 through February 2023 at a higher rate as consideration for the short-term extension.

NOVEMBER 2020 TERM LOAN

On November 4, 2022, the November 2020 Term Loan was further extended under the same terms and conditions for another 6 months, or until May 4, 2023.

17

Table of Contents

Note J – Income Taxes

The costCompany follows ASC 740 “Income Taxes” (“ASC 740”) which prescribes the asset and liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted laws and tax rates that will be in effect when the differences are expected to reverse. The measurement of net, deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are not expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized over ain the period ranging from 3-8 months.

 14

Warrantsthat such tax rate changes are enacted. Under ASC 740, tax benefits are recorded only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

 

Warrant activityOn March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. With regards to the use of net losses incurred for 2018 and later, such net operating losses have no expiration date, while net operating loss carryforwards can only be used to offset up to 80% of taxable income. Net operating losses incurred prior to 2018 may be fully utilized to offset taxable income, but expire in 20 years.

A reconciliation of the U.S. Federal statutory income tax rate to the effective income tax rate is as follows:

 

 

Quarter Ended

September 30, 2022

 

 

Quarter Ended

September 30, 2021

 

Tax expense at federal statutory rate

 

(21

%)

 

(21

%)

State tax expense, net of federal tax effect

 

 

0%

 

 

0%

Increase in valuation allowance

 

 

21%

 

 

21%

Effective income tax rate

 

(0

%)

 

(0

%)

18

Table of Contents

                Deferred income taxes reflect the temporary differences between the financial statement carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, adjusted by the relevant tax rate. The components of deferred tax assets and liabilities are as follows:

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

 

 

 

 

 

Inventory capitalization

 

$0

 

 

$8,000

 

Inventory allowance

 

 

66,000

 

 

 

72,000

 

Allowance for doubtful accounts

 

 

1,000

 

 

 

1,000

 

Accrued compensation

 

 

18,000

 

 

 

18,000

 

Stock based compensation

 

 

149,000

 

 

 

160,000

 

Deferred wages payable

 

 

19,000

 

 

 

21,000

 

Depreciation – Property, Plant & Equipment

 

 

(19,000)

 

 

(24,000)

Research and development credits

 

 

24,000

 

 

 

24,000

 

Net operating loss carry-forwards

 

 

2,916,000

 

 

 

2,631,000

 

Total deferred income tax assets, net

 

 

3,174,000

 

 

 

2,911,000

 

Less: valuation allowance

 

 

(3,174,000

 

 

 

(2,911,000)

Net deferred income tax assets

 

$0

 

 

0

 

                The valuation allowance for deferred income tax assets was $3,174,000 as of September 30, 2022 and $2,911,000 as of December 31, 2021. The net change in the deferred income tax assets valuation allowance was $263,000 for the nine months ended September 30, 2017 and September 30, 20162022. The Company believes that it is summarized as follows:more likely than not that the deferred tax assets will not be realized.

 

  Nine months ended September 30, 2017  Nine months ended September 30, 2016 
  

 

Shares

  Weighted
Average
Exercise
Price
  

Aggregate

Intrinsic Value
as of
September 30,
2017

  

 

Shares

  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     

In the nine 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 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, there was $02022, the prior full three years remain open for examination by the federal or state regulatory agencies for purposes of total unrecognized expense.an audit for tax purposes.

 

NOTE G – SUBSEQUENT EVENT                At September 30, 2022, the Company had Federal and state net operating loss carry-forwards for income tax purposes of approximately $11,214,000 and research and development credits of $24,000. The Company’s net operating loss carry-forwards began to expire in 2022 and continue to expire through 2037. Net operating losses incurred from 2018 to date have no expiration date. In assessing the reliability of deferred income tax assets, management considers whether or not it is more likely than not that some portion or all deferred income tax assets, net, will be realized. The ultimate realization of net deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment.

 

19

On 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).

Table of Contents

 

Item2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

The following discussion and analysis provides information, which we believe is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with the Interim Condensed Financial Statements contained herein and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believes”, “anticipates”, “estimates”, “expects”, “intends”, “projects”, and words of similar import, are forward-looking as that term is defined by the Private Securities Litigation Reform Act of 1995 (“1995 Act”), and in releases issued by the United State Securities and Exchange Commission (the “Commission”). These statements are being made pursuant to the provisions of the 1995 Act and with the intention of obtaining the benefits of the “Safe Harbor” provisions of the 1995 Act. We caution that any forward-looking statements made herein are not guarantees of future performance and that actual results may differ materially from those in such forward-looking statements as a result of various factors, including, but not limited to, any risks detailed herein, in our “Risk Factors” section of our Form 10-K for the year ended December 31, 2016,2021, 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.

 15

 

Overview/Plan of Operations

 

Our abilitySales of drug tests continue to maintain and/or increase salesbe negatively impacted as customer pricing continues to be impacted bydecrease as a very cost-competitive market currently dominated byresult of our markets being saturated with products made outside of the United States; primarily products made in China. This has resulted in a commoditization of the onsite drug testing market at a time when costs associated with labor, utilities, materials, insurance, etc. keep rising. In attempts to retain current customers and/or attract new customers that require lower pricing, we are offering two drug test product lines that are manufactured in China.

In addition to the marketing of drug tests, we are continuing to market various Covid-19 rapid tests. All of the Covid-19 tests we are offering are being marketed in accordance with the March 2020 Emergency Use Authorization (“EUA”) policy set forth by the United States Food and Drug Administration (FDA) and in accordance with the individual EUAs issued for the products. We are currently offering a number of different rapid antigen tests and rapid antibody tests that can be used in various different settings, including home use; depending on their specific EUA issuance.

In addition to increased costs, the materials used in the manufacture of our drug test products are the same materials used in the manufacture of lateral flow Covid-19 tests and this has resulted in supply chain delays; some of which have negatively impacted our customer relationships.

We are still not marketing our oral fluid drug test (OralStat®) in the employment and insurance markets in the United States (under a limited exemption set forth by the FDA). We remain hopeful that we can effectively market our OralStat in the United States markets given its superior sensitivity and accuracy. Initially we may re-introduce the product in markets outside the United States via distribution relationships.

In 2019 we expanded our contract manufacturing operations with two new customers. Unfortunately, the Covid-19 pandemic halted sales to these customers throughout 2020 and into 2021 but, in the year ended December 31, 2021, we started to ship orders to them again as their business started to return to normal. We are hopeful that sales to these customers will improve as we get further outside of the pandemic.

20

Table of Contents

In our current fiscal year and beyond, we are focusing our efforts on further penetration of our markets with our current products that we manufacture and distribute and we are continually looking into other products to offer via distribution relationships.

Although the cost of manufacturing drug tests in the United States is proving to be nearly cost prohibitive, we do believe there are opportunities to capitalize on our US-based lateral flow manufacturing capabilities; specifically for small to mid-size diagnostic firms that require high quality manufacturing; especially given the current challenges with getting imports into the United States. Evidenced by

Gross margin has been declining due to the increased costs of manufacturing in the United States and the fact that overhead costs associated with both of our facilities cannot be decreased any further. As sales continue to decline, and these costs cannot be adjusted downward, greater manufacturing inefficiencies occur. The manufacturing inefficiencies are increasing despite our efforts to mitigate them. We are also taking steps to obtain materials at the best available pricing. However, in many cases, we are purchasing at much lower volumes than the larger diagnostic companies and that results in higher per piece pricing. We are currently looking into possible production alternatives in attempts to address these fixed costs.

Operating expenses declined in the nine months ended September 30, 2017 decreased again2022 when compared to the same period last year. In addition, our sales have been impacted by actions taken by a former Vice President Sales & Marketing/Sales Consultant. We have initiated litigation against this former employee/consultant related to these actions (see Note D – Litigation/Legal Matters).

During the nine months ended September 30, 2017,2021. We continuously make efforts to control operational expenses to ensure they are in line with sales including, but not limited to, consolidating job responsibilities in certain areas of the Company, securing more cost effective service providers and reduction of facility hours so they are more in line with production and administrative needs.

From August 2013 until June 2020 and from April 2022 through the date of this report, we recorded an operating lossmaintained a salary deferral program for our sole executive officer, our Chief Executive Officer/Principal Financial Officer Melissa Waterhouse. The salary deferral program was initiated by Ms. Waterhouse voluntarily in both August 2013 and April 2022. Another member of $83,000. This compares to an operating loss of $118,000senior management participated in the voluntary 2013 program until his retirement in November 2019. After the member of senior management retired, we had to make payments on the deferred compensation (i.e. deferred salary) owed to this individual. In the nine months ended September 30, 2021, we made payments totaling $22,000 to this individual and his deferred compensation was paid in full in May 2021.

Once the deferred compensation was paid in full to this individual in May 2021, we began to make payments at the same period last year. Decreased operating expenses wererate to Ms. Waterhouse given the primary causelength of time the improvement in operating loss (relativeamount had been owed and that Ms. Waterhouse had not received any payments on her deferred compensation since August 2017. We made payments totaling $10,000 to sales). Net lossMs. Waterhouse 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 sales continue to decline). Over the course of the last two fiscal years (Fiscal 20162022 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$20,000 in payments in the nine months ended September 30, 2017 and $70,0002021. We stopped making payments on Ms. Waterhouse’s deferred compensation in paymentsApril 2022 when Ms. Waterhouse again voluntarily deferred her salary by 20%. As of September 30, 2022, we had deferred compensation owed to Ms. Waterhouse in the nine months endedamount of $79,000 and $6,000 in payroll taxes that are due as payments are made to Ms. Waterhouse; for a total of $85,000 in deferred compensation owed to Ms. Waterhouse. In addition, as of September 30, 2016.). As cash flow from operations allows,2022, 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.owe Ms. Waterhouse $30,000 in current salary that was not paid.

 

We continue to believe that new products and our ability to sell those productsBeginning in new markets will be a future growth driver. In August 2017,April 2022, another member of senior management participated in 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 pointsalary deferral program. As of collection drugs of abuse tests, and growing our business through direct sales and select distributors.

Over the course of the last 12 months,September 30, 2022, we have reorganized and restructured our sales and marketing department. In addition, 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, we are 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 derived any significant revenue from these new additions; however, the majority of the relationships were only finalized in March/April 2017.

In September 2016, our contract manufacturing sales began to decrease on an annual basis due to a manufacturing shift with one of our contract customers. More specifically, as a result of a tech transfer with the customer, they are now their own primary supplier with the Company moving into a position 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 making efforts to identify and secure new contract work and possible diversification alternatives. In connection with the tech transfer, we received a $300,000 tech transfer fee from this customer. We recognized $150,000 relatedhad deferred compensation owed to this tech transfer fee as other incomeindividual in the nine months ended September 30, 2016.amount of $9,000 and $1,000 in payroll taxes that are due as payments are made to this individual; for a total of $10,000 in deferred compensation.

 16

 

Our continued existence is dependent upon several factors, including our ability to: 1) raise revenue levels even though the drug testing market continues to be infiltrated by product manufactured outside of the United States as well as being impacted by supply chain issues and increased costs of material and labor 2) further penetrate the markets (in and outside of the United States) for the products we have suffered the loss of a materialmanufacture as well as products we offer via distribution, 3) secure new contract that will impact sales starting October 1, 2017, 2)manufacturing customers, 4) control operational costs and manufacturing inefficiencies to generate positive cash flows, 3)5) maintain our current credit facilities or refinance our current credit facilities if necessary, and 4)6) if needed, our ability to obtain working capital by selling additional shares of our common stock. Should the Company not be able to continue to achieve positive cash flows from operations or raise additional funding, it may be required to further reduce or terminate operations.

 

21

Table of Contents

Results of operations for the nine months ended September 30, 2017

2022 compared to the nine months ended September 30, 20162021

 

NET SALES:Net sales for the nine months ended September 30, 20172022 decreased 9.5%by 56.3%, when compared to net sales in the nine months ended September 30, 2016. The decrease2021; primarily as a result in a decline in sales isof drugs of abuse (“DOA”) tests that we manufacture. The decline in DOA sales stems almost entirely from decreased sales to our largest customer who has historically been a significant portion of our revenues. This customer has two segments of their business for which we supply products. They informed us in February 2022 that sales to one of those segments (which we supplied exclusively) would decrease as a result of their desire to have multiple vendors supplying the segment. They indicated this was to ensure uninterrupted supply as they had experienced periodic supply interruptions with us in 2021 (as a result of the anticipatedsupply chain issues we experienced in 2021 and continue to experience into 2022; particularly with plastics and other materials that are used to manufacture our drug tests; materials that are also used in the manufacture of lateral flow Covid-19 tests). They indicated that the other segment we supply would remain unchanged but, even in that particular segment; we saw a decline in sales when comparing the nine months ended September 30, 2022 with the nine months ended September 30, 2021. In addition to the decline in sales to this customer, international sales also declined; the majority of which is due to lower sales to one of our distributors along with a backorder at September 30, 2022.

Contract manufacturing sales also declined when comparing the two nine-month periods; primarily due to decreased sales of the malaria product we manufacture. This decrease inwas partially offset by increased sales of the RSV test we manufacture and private label to an unaffiliated third party, the private label Rapid TOX® product we manufacture and contract manufacturing salesassembly work we performed on a limited basis in the nine months ended September 30, 20172022.

Distribution sales increased in the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2016. More specifically, contract manufacturing2021. This increase stems from increased sales declinedof the lower cost DOA tests that we sell via distribution which was primarily offset 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 fromof rapid Covid-19 tests we have been distributing. We still believe that given the continued downward trend of pricing of Covid-19 tests and the fact that we are distributing these tests (which requires further markup); sales of Covid-19 tests will not have a decrease in governmentsignificant impact on our sales (most of which is due to the loss of an account in the fourth quarter of the year ended December 31, 2016). These declines were partially offset by an increase in national accounts and international sales to Latin and South America.going forward.

 

GROSS (LOSS) / PROFIT:Gross profitOnce again we recorded a gross (loss) in the nine months ended September 30, 2017 decreased to 42.7%2022 of net sales$(53,000); this is compared to 44.2%gross profit of net sales$425,000 in the nine months ended September 30, 2016. While we are still maintaining manufacturing efficiencies, there were certain periods within2021. Gross profit began to dramatically decline in the nine months ended September 30, 2017 that we produced less testing stripsfirst quarter of 2022 and further declined in the second and third quarter of 2022 due to even further reduced sales. This change to a gross (loss) from a gross profit is almost entirely due to decreased sales to our largest customer in one of their segments (previously discussed in net sales). The two segments we were supplying were comprised of one with low margin sales and one with higher margin sales. This allowed the productCompany to maintain an appropriate blended gross profit margin on the sales mix.to the customer. The segment in which sales have decreased significantly is the segment in which products were sold at a higher profit margin and this has significantly reduced the blended gross profit margin on the account. At the same time, this decline in sales has resulted in greater inefficiencies in manufacturing. Manufacturing inefficiencies occur when production levels decrease but, not all costs can be reduced to be in line with production levels because they are fixed; these costs include but, are not limited to, depreciation, insurance, interest, taxes, utilities and other costs associated with running our two facilities.

 

OPERATING EXPENSES:We have taken steps to reduce manufacturing costs, including but not limited to, costs associated with labor, to mitigate these inefficiencies; however, the previously discussed fixed costs cannot easily be decreased. Given the price sensitivity in our markets and the commoditized nature of drug testing products, customer pricing is challenging; however, we did implement a price increase to non-contractual customers in July 2021 however, the customer previously discussed has a contracted price in place that is not as easily increased.

Operating expenses decreased 14.0%35.8% in the nine months ended September 30, 20172022 compared to the nine months ended September 30, 2016.2021. Expenses in researchSelling and developmentMarketing and sellingGeneral and marketingAdministrative expenses decreased while general and administrative expense increased.Research and Development expenses remained unchanged. More specifically:

 

22

Table of Contents

Research and development (“R&D”)

 

R&D expense decreased 30.9%was unchanged when comparing the nine months ended September 30, 20172022 with the same period last year. Decreased FDA compliance costs associated withnine months ended September 30, 2021. Although salary expense decreased slightly due to the timing of actions takenpay periods, other expenses did increase slightly. More specifically, expenses related to ourutilities and FDA marketing clearance for Rapid TOX Cup II were partially offset by an increase in supplies and materials. Ourcompliance increased slightly. All other expenses remained relatively consistent when comparing the two nine-month periods. In the nine months ended September 30, 2022, our R&D department continuescontinued to focus their efforts on the enhancement of our current products the development of newand validations related to drug testing assays, new product platforms and the evaluation of contract manufacturing opportunities.components.

 

Selling and marketing

 

Selling and marketing expense in the nine months ended September 30, 20172022 decreased 35.7%53.2% when compared to the same period last year. Onenine months ended September 30, 2021. Reductions in sales salary expense and benefits (due to the termination of personnel for performance reasons as well as an employee departure), commissions (due to decreased sales), auto expense, reductions in costs associated with shipping and promotional expense (due to the nine months ended September 30, 2021 including fees paid to OTC Markets) were the primary reasons for the decline in expenses. All other expenses is decreased commission expense. remained relatively consistent when comparing the two nine-month periods.

In the latter part of December 2016,nine months ended September 30, 2022, 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 additioncontinued selling and marketing efforts related to the decline in commissions, sales salariesdrug tests we manufacture and benefits, customer relations expense, postage and marketing consulting expenses decreased. These declines were minimally offset by an increase in costs associated with trade show attendance. 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-costlower cost alternatives for onsite drug testing. And finally,testing via distribution relationships. We also marketed and sold rapid Covid-19 tests via distribution relationships. These offerings did not result in increased selling and marketing expenses when comparing the nine months ended September 30, 2022 with the FDA marketing clearance granted in August 2017,nine months ended September 30, 2021. Terminations of sales personnel have been due to poor performance. While we have taken efforts to increase the size of our sales force is also promoting theteam to further penetrate our markets; no new market application of the product in the clinical market.

 17

General and administrative (“G&A”)

G&A expense increased 4.3%sales reps were hired in the nine months ended September 30, 2017 when compared to the same period last year. Increases in legal fees (due to the initiation of litigation in the early part of 2017; see Note D – Litigation/Legal Matters), and accounting 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;2022 due to less options outstanding subjectlack of qualified candidates. We continue to amortization). Sharelook for contract manufacturing opportunities or situations in which we can leverage our U.S. based paymentmanufacturing operations.

General and administrative (“G&A”)

G&A expense was $33,000decreased 34.2% in the nine months ended September 30, 20172022 when compared to $49,000G&A expense in the nine months ended September 30, 2016.2021. A primary reason for the decline is that the nine months ended September 30, 2022 did not include any fees associated with our loans with Cherokee while the nine months ended September 30, 2021 included a total of $148,000 in fees incurred in connection with a penalty related to extension of the Cherokee loans in February 2021.

 

In addition, quality assurance salaries declined (due to retirement of an employee, departure of another employee as well as a reduced work week implemented early in April 2022), general and administrative salaries and benefits declined (due to fewer employees and the reduced work week implemented in April 2022), accounting fees declined (due to lower costs from our new accounting firm), expenses associated with intellectual property declined (due to less international patent maintenance fees paid and less legal fees incurred), and payroll service fees declined (due to change in vendor) along with other smaller declines in other expenses. These declines were partially offset by increased consulting fees (due to the execution of the Financial Advisory Agreement with Landmark Pegasus, Inc. in the nine months ended September 30, 2022), increased utility expenses and repairs and maintenance expense. There was no expense related to share based payments in either the nine months ended September 30, 2022 or the nine months ended September 30, 2021.

OTHER INCOME AND EXPENSE: Other expense of $151,000 in the nine months ended September 30, 2022 consisted of interest expense associated with our credit facilities (our line of credit, our two loans with Cherokee Financial, LLC and shareholder loans) and interest income of $2,000 (most of which is interest received in connection with the ERC refund we received in June 2022).

Other income of $821,000 in the nine months ended September 30, 2021 consisted of income related to the forgiveness of our PPP loan in the amount of $335,000, other income of $50,000 related to certain non-refundable prepayments (customer deposits) that were forfeited when the customer did not remit the remaining amounts due on the order, $581,000 in income from the Employee Retention Credit recognized in the nine months ended September 30, 2021 (which is $44,000 in credits taken in Q3 2021 and $537,000 in refunds filed for credits in the first three quarters of 2021). This income was offset by interest expense associated with our credit facilities (our line of credit, our two loans with Cherokee Financial, LLC and a shareholder loan).

23

Table of Contents

Results of operations for the three months ended September 30, 2017

2022 compared to the three months ended September 30, 20162021

 

NET SALES:Net sales for the three months ended September 30, 20172022 decreased 66%, when compared to net sales in the three months ended September 30, 2021 primarily as a result in a decline in sales of DOA tests that we manufacture.

The decline in DOA sales stems almost entirely from decreased sales to our largest customer who has historically been a significant portion of our revenues. This customer has two segments of their business for which we supply products. They informed us in February 2022 that sales to one of those segments (which we supplied exclusively) would decrease as a result of their desire to have multiple vendors supplying the segment. They indicated this was to ensure uninterrupted supply as they had experienced periodic supply interruptions with us in 2021 (as a result of the supply chain issues we experienced in 2021 and continue to experience into 2022; particularly with plastics and other materials that are used to manufacture our drug tests; materials that are also used in the manufacture of lateral flow Covid-19 tests). They indicated that the other segment we supply would remain unchanged but, even in that particular segment; we saw a decline in sales when comparing the three months ended September 30, 2022 with the three months ended September 30, 2021. In addition to the decline in sales to this customer, international sales also declined; most of which is due to a backorder at September 30, 2022.

Contract manufacturing sales also decreased when comparing the three-month periods. This decrease stems from decreased sales of the malaria product we manufacture; partially offset by increased sales of the private label Rapid TOX® product we manufacture and contract assembly work we performed on a limited basis in the three months ended September 30, 2022.

Distribution sales also decreased when comparing the three months ended September 30, 2022 to the three months ended September 30, 2021. This decrease stems primarily from lower sales of rapid Covid-19 tests we have been distributing; partially offset by increased sales of the lower cost DOA tests were are distributing. In the three months ended September 30, 2022, we did not have sales of Covid-19 tests. Market pricing of Covid-19 tests has continued to decline and demand has decreased somewhat. Going forward, this will make it difficult for the Company to sell these tests given we are only distributing them (which requires further mark up to customers), therefore, we still believe that sales of Covid-19 tests will not have a significant impact on our sales going forward.

GROSS (LOSS) / PROFIT:

Once again we recorded a gross (loss) in the three months ended September 30, 2022 of $(9,000) ; this is compared to gross profit of $185,000 in the three months ended September 30, 2021. Gross profit began to dramatically decline in the first quarter of 2022 and further declined 4.4%in the second and third quarter of 2022 due to even further reduced sales. This change to a gross (loss) from a gross profit is almost entirely due to decreased sales to our largest customer in one of their segments (previously discussed in net sales). The two segments we were supplying were comprised of one with low margin sales and one with higher margin sales. This allowed the Company to maintain an appropriate blended gross profit margin on the sales to the customer. The segment in which sales have decreased significantly is the segment in which products were sold at a higher profit margin and this has significantly reduced the blended gross profit margin on the account. At the same time, this decline in sales has resulted in greater inefficiencies in manufacturing. Manufacturing inefficiencies occur when production levels decrease but, not all costs can be reduced to be in line with production levels because they are fixed; these costs include but, are not limited to, depreciation, insurance, interest, taxes, utilities and other costs associated with running our two facilities.

There was some improvement in the gross loss between the second and third quarter of 2022 (from a gross loss of $(45,000) in the three months ended June 30, 2022 to a gross loss of $(9,000) in the three months ended September 30, 2022) as we continue to take steps to reduce manufacturing costs. These manufacturing costs include, but are not limited to, costs associated with labor. However, fixed costs cannot easily be decreased. Given the price sensitivity in our markets and the commoditized nature of drug testing products, customer pricing is also challenging; however, we did implement a price increase to non-contractual customers in July 2021 however, the customer previously discussed has a contracted price in place that is not as easily increased.

24

Table of Contents

OPERATING EXPENSES: Operating expenses decreased 35% in the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Selling and Marketing and General and Administrative expenses decreased while R&D Expense nominally increased. More specifically:

Research and development (“R&D”)

R&D expense in the three months ended September 30, 2022 increased 4.8% when compared to the three months ended September 30, 2016.2021. The decrease in sales results from a decrease in government sales (most of which isactual increase was $1,000 and this was due to the loss of an account in the fourth quarter of 2016), and 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 stripshigher salary expense which, was due to the product sales mix.

OPERATING EXPENSES: Operatingtiming of pay periods. All other 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%remained relatively consistent 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.two three-month periods.

 

Selling and marketing

 

Selling and marketing expense in the three months ended September 30, 20172022 decreased 42.2%67.1% when compared to the three months ended September 30, 2016. One2021. Reductions in sales salary expense and benefits (due to the termination of personnel for performance reasons as well as an employee departure), auto expense, and costs associated with shipping are the primary reasons for the decline indecline. Other expenses is 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.remained relatively unchanged.

 

General and administrative (“G&A”)

 

G&A expense increased 2.2%decreased 29.1% in the three months ended September 30, 20172022 when compared to G&A expense in the three months ended September 30, 2016. Increased2021. Decreased costs associated with general and administrative salaries and benefits (due to fewer employees and the reduced work week implemented in April 2022), quality assurance salaries (due to retirement of an employee, departure of another employee as well as a reduced work week implemented early in April 2022), and intellectual property (due to less international patent maintenance fees paid and less legal fees (due to the initiation of litigation in the early part of 2017; see Note D – Litigation/Legal Matters)incurred) were partially offset by reduced expensesincreased costs associated with increased legal fees. There was no expense related to telephone, consulting fees, brokers fees and non-cash compensation (i.e. share based payment expense; due to less options outstanding subject to amortization). Share based paymentpayments in either the three months ended September 30, 2022 or the three months ended September 30, 2021.

OTHER INCOME AND EXPENSE:

Other expense was $10,000of $52,000 in the three months ended September 30, 2017 compared to $13,0002022 consisted of interest expense associated with our credit facilities (our line of credit, our two loans with Cherokee Financial, LLC and shareholder loans) and interest income of $1,000. Other income of $867,000 in the three months ended September 30, 2016.2021 consisted of income related to the forgiveness of our PPP loan in the amount of $335,000 and $581,000 in income from the Employee Retention Credit recognized in the three months ended September 30, 2021 (which is $44,000 in credits taken in Q3 2021 and $537,000 in refunds filed for credits in the first three quarters of 2021). This income was offset by interest expense associated with our credit facilities (our line of credit, our two loans with Cherokee Financial, LLC and a shareholder loan).

 

 18

Liquidity and Capital Resources as of September 30, 20172022

 

Our cash requirements depend on numerous factors, including but not limited to manufacturing costs (such as labor and overhead costs, raw materials, equipment, etc.), selling and marketing initiatives, product development activities, regulatory costs, legal costs, associated with current litigation, and effective management of inventory levels and production levels in response to sales forecasts. We expect to devote capital resources to continue sellinghistory and marketing initiatives and product development/research and development activities.forecasts (if available). We are examining other growth opportunities including strategic alliances.alliances and contract manufacturing. 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.

The following transactions materially impacted our liquidity and cash flow in the nine months ended September 30, 2022 and/or the nine months ended September 30, 2021 or are expected to have an impact on our cash flow in the year ending December 31, 2022:

Employee Retention Credit (“ERC”)

As discussed in Note F to our financial statements, on June 2, 2022, we received a refund for the second quarter of 2021 in the amount of $199,000. This amount represented the $198,000 claimed as a refund and $1,000 in interest. We are still expecting to receive one more ERC refund in the amount of $202,000.

25

Table of Contents

Shareholder Loans

We currently have two shareholder loan facilities; the November 2020 Shareholder Loan and the December 2021 Shareholder Loan (See Note E – Line of Credit and Debt). In the nine months ended September 30, 2022, we received proceeds totaling $240,000 under the December 2021 Shareholder Loan and we made payments totaling $50,000 on the December 2021 Shareholder Loan.

September 2022 Loan and Promissory Note

On September 28, 2022, we entered into a Loan and Promissory with an unaffiliated third party (the “September 2022 Loan”) and received gross/net proceeds of $40,000. We utilized $34,000 of the loan proceeds to pay off the Crestmark Line of Credit (See Note E – Line of Credit and Debt).

Lincoln Park Equity Line

On December 9, 2020, we entered into a Purchase Agreement and a Registration Rights Agreement with Lincoln Park under which Lincoln Park agreed to purchase from the Company, from time to time, up to $10,250,000 of shares of our common stock, par value $0.01 per share, subject to certain limitations set forth in the Purchase Agreement, over a two year period. In the nine months ended September 30, 2022, we were not able to sell any shares of common stock to Lincoln Park due to the market price of our common shares (i.e. they are not closing at or above $0.05 per share and have not closed at that price since the latter part of the year ended December 31, 2021). In the nine months ended September 30, 2021, the Company sold 6,300,000 shares of common stock to Lincoln Park (including 500,000 shares required as an initial purchase under the Purchase Agreement) as Regular Purchases and received proceeds of $632,000.

Going Concern

Our financial statements for the yearnine months ended December 31, 2016September 30, 2022 were prepared assuming we will continue as a going concern.

concern, which assumes the realization of assets and the satisfaction of liabilities in the normal course of business. Our current cash balances, together with cash generated from future operations, ERC refund, and amounts available under our credit facilities mayrecent loans from shareholders and other third parties will not be sufficient to fund operations through November 2018. 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. As of2023. At September 30, 2017, based2022, we have Stockholders’ Deficit of $(2,022,000). Should the Company not be able to increase sales to generate positive cash flows or obtain additional financing in the form of additional loans or sale of equity, it will be required to reduce or terminate operations.

Debt

Our loan and security agreement and 2019 Term Note with Cherokee for $1,000,000 and $240,000, respectively, expired on our availability calculation, there were no additionalFebruary 15, 2022. On June 14, 2022, Cherokee agreed that they would defer the principal amounts availabledue under our line of credit because we drawthe Cherokee LSA until February 15, 2023 and that any balance availableapplicable penalties would also be deferred as long as the Company remains current on a daily basis. If sales levels decline further, wethe quarterly interest payments. Furthermore, any penalties will have reduced availabilityalso be waived if the principal amounts are paid on our line of credit dueor prior to decreased accounts receivable balances. In addition, we wouldFebruary 15, 2023.

We do not expect our inventory levelscash from operations within the next 12 months 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 notbe sufficient to satisfy our working capital and capital expenditure requirements,pay the amounts due under these credit facilities, which are due in full on February 15, 2023. Given this, we will be required to obtain additional creditrefinance the facilities either via a new debt facility or sell additional equity securities, or delayraising capital expenditures.through some other means. 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.all or that we would be able to raise capital via other means.

Throughout most of the nine months ended September 30, 2022, we had a line of credit with Crestmark Bank. The maximum availability on the line of credit was $1,000,000. However, because the amount available under the line of credit was based upon our accounts receivable, the amounts actually available under our line of credit (historically) have been significantly less than the maximum availability. When sales levels declined, we had reduced availability on our line of credit due to decreased accounts receivable balances. On September 29, 2022 we made a payment to Crestmark Bank in the amount of $34,000 which paid off the balance on the Crestmark LOC. The payoff of the Crestmark Line of Credit will result lower interest costs. Through the nine months ended September 30, 2022, we recognized $35,000 in interest expense related to the Crestmark Line of Credit and in the nine months ended September 30, 2021, we recognized $38,000 in interest expense.

26

Table of Contents

If cash generated from operations, cash received from a refund under the ERC program and loan proceeds are not sufficient to satisfy our working capital and capital expenditure requirements, we will be required to seek additional credit facilities, sell additional equity securities, or delay capital expenditures which could have a material adverse effect on our business. There is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms, if at all or that alternative strategies will be available.

 

As of September 30, 2017,2022, we had the following debt/credit facilities:

 

Facility Debtor Balance as of September 30, 2017 

 

Debtor

 

Balance as of

September 30, 2022

 

 

Due Date

 
Loan and Security Agreement Cherokee Financial, LLC $1,050,000 

 

Cherokee Financial, LLC

 

$1,000,000

 

February 15, 2023

 
Revolving Line of Credit Crestmark Bank $580,000 
Capital Equipment Loan Crestmark Bank $34,000 

Term Loan

 

Cherokee Financial, LLC

 

240,000

 

February 15, 2023

 

Term Loan

 

Individual

 

50,000

 

May 4, 2023(1)

 

Term Loan

 

Individual

 

265,000

 

NA(2)

 

Term Loan

 

Unaffiliated Third Party

 

 

40,000

 

 

January 28, 2023

 

Total Debt

 

 

 

$1,595,000

 

 

 

 

(1) The loan agreement was amended on November 4, 2022 to change the maturity date to May 4, 2023.

(2) The loan agreement was amended on July 13, 2022; one of the revisions made was changing the maturity date from June 15, 2022 to no specific maturity date. 

Working Capital Deficit

OurAt September 30, 2022, we were operating at a working capital was $664,000 at September 30, 2017; this isdeficit of $2,522,000. This compares to a decrease of $129,000 when compared to working capital deficit of $793,000$1,484,000 at December 31, 2016. This decrease2021. The increase in the working capital deficit is primarily due to the resultdecline in cash balances and accounts receivable (both of which are due to decreased sales.sales) along with a decline in the ERC tax receivable (due to the receipt of one of the refunds in the nine months ended September 30, 2022). We have historically satisfied working capital requirements through cash from operations, bank debt and debt.equity financings.  

Dividends

We have never paid any dividends on our common shares and anticipate that all future earnings, if any, will be retained for use in our business, and therefore, we do not anticipate paying any cash dividends.

 

Cash Flow, Outlook/Risk

We 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. In 2017, we will continue to focus our efforts on improving sales. Such steps include, but are not limited to, further penetrating the Clinical markets such as pain management and drug treatment now that our Rapid TOX Cup II received OTC marketing clearance from FDA in August 2017 and entering into strategic relationships with third parties to offer additional products and services to our customers. This includes 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, 2017,2022, we utilizedhad a net loss of $1,093,000 and net cash resourcesused in operating activities of $157,000.

Our cash position decreased to complete our FDA marketing application process (which resulted$10,000 at September 30, 2022 from $115,000 at December 31, 2021 and $41,000 at September 30, 2021. Cash at December 31, 2021 was positively impacted by an ERC refund in a marketing clearanceDecember 2021 (in the amount of $137,000). We did receive an ERC refund in August 2017) and to take other steps that could resultthe amount of $198,000 in increased sales.early June 2022. 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 used related to the ligation, we do not expect additional expenditures related to marketing clearances in the year ending December 31, 2017.2022, we are expecting one more ERC refund in the amount of $202,000

 

 19

In February 2022 we were informed by our largest customer that sales to one of their segments (which we supplied exclusively) would decrease as a result of their desire to have multiple vendors supplying the segment. This decrease in sales to the one segment of their business also negatively impacts gross profit as this segment is the more profitable segment from a margin perspective. This has resulted in less profit to the Company which is negatively impacting cash flows. We also continue to be impacted by material delays and cost increases (in both manufacturing and other business costs).

 

NoneThe extent to which the commoditized nature of these efforts relatedour markets will continue to impact our business, liquidity, results of operations and financial condition will depend on future developments, which are still uncertain and cannot be predicted. Current levels of sales or any other efforts being taken relateddeclines are impacting our business, liquidity, results of operations and financial condition and our ability to other operational activities, resulted in a substantial increase in cash requirements inaccess the nine months ended September 30, 2017. Incapital markets may also be limited. Prior to the secondfourth quarter of the year ended December 31, 2016,2021, we received our final payment of $150,000 relatedwere able to a tech transfer with oneutilize the Lincoln Park Equity Line; however, the downturn of our contract-manufacturing customers. The loss of a state agency contractcommon stock starting October 1, 2017 is expected to have a material impact on our 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 thethird quarter of 2021 has prevented any further sales decline and especially considering the costs related to litigation. In addition, extraordinary events could occur that would result in unexpected, increased expenditures.be initiated.

 

27

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.

Table of Contents

 

Our ability to repay our current debt will depend primarily upon our future operating performance, whichand other liabilities may also be affected by the loss of a material contract in October 2017, general economic, financial, competitive, regulatory, legal, business and other factors beyond our control, including those discussed herein. In addition,Given the current state of our business and the current stock price, it is unlikely we cannot assure you that future borrowings or equity financing will be available forable to facilitate purchases under our Purchase Agreement with Lincoln Park in the payment ofnear future before it expires in December 2022. If we are unable to meet our credit facility obligations we will be required to raise money through new equity and/or debt financing(s) and, there is no assurance that we would be able to find new financing, or that any indebtedness we may have.new financing would be at favorable terms.

 

Our failureWe will continue to complytake steps to ensure that operating expenses remain in line with the covenant under our revolving credit facility could resultsales levels and make every effort to control manufacturing costs, although as previously discussed herein; certain overhead costs are fixed and cannot be reduced to be in an eventline with sales levels. We have consolidated job responsibilities in multiple areas of default, which, if not cured or waived, could result in the Company being requiredand this has enabled us to pay higher costs associated with the indebtedness. implement personnel reductions. We are also promoting alternative products and service offerings to diversify our revenue stream.

If we are forced to refinance our debt on less favorable terms, our results of operations and financial condition couldwould be further adversely affected by increased costs and rates.  There is also no assurance that we could obtain alternative debt facilities. We may also be forced to pursue one or more alternative strategies, such as restructuring, selling assets, reducing or delaying capital expenditures or seeking additional equity capital. There can be no assurances that any of these strategies could be implemented on satisfactory terms, if at all.

 

If events and circumstances occur such that 1) we do not increase sales, 2) we are unable to raise sufficient additional equity or debt financing, 3) we are unable to effect sales under the Lincoln Park Equity Line, 4) we are unable to utilize equity as a form of payment in lieu of cash or 5) our credit facilities are insufficient or not available, we may be required to further reduce expenses or take other steps which could have a material adverse effect on our future performance including reducing or terminating operations.

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

(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

(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.

 

28

Table of Contents

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

See Part I, Item 1, Note D in the Notes to the interim condensed Financial Statements included in this report for a description of pending legal proceedings in which we may be a party.

 

 20

Item 1A. Risk Factors

 

There have been no material changes to ourThe following risk factors set forth in Part I, Item 1A, in our Annual Report on Form 10-K for the year ended December 31, 2016, except2021 are being revised in connection with the results of the three and nine months ended September 30, 2022 and recent developments related to our debt obligations. Any risk factors not appearing within this section remain unchanged from the disclosure in the Annual Report on Form 10-K for those disclosures made inthe year ended December 31, 2021.

29

Table of Contents

Risks Related to our Form 10-QFinancial Condition

We have a history of incurring net losses. As of December 31, 2021, we have a stockholders’ deficit and for the three and sixnine months ended JuneSeptember 30, 2017 filed2022, we have a gross loss.

Since our inception and throughout most of our history, we have incurred net losses, including but not limited to, a net loss of $463,000 incurred in Fiscal 2021. As of December 31, 2021, we also reported negative stockholders’ equity of $944,000. For the three and nine months ended September 30, 2022 we have gross losses of $9,000 and $53,000, respectively. We incur substantial expenditures for sales and marketing, general and administrative and research and development purposes. Our ability to achieve profitability in the future will primarily depend on our ability to increase sales of our products. Stockholders’ equity improvement will also be dependent on our ability to increase sales which will increase the value of our assets and decrease our liabilities. Future profitability is also dependent on our ability to reduce manufacturing costs. However, some manufacturing costs are fixed and cannot be reduced. There can be no assurance that we will be able to increase our revenues at a rate that equals or exceeds expenditures which will enable us to manufacture products in sufficient quantities to absorb the expenditures, including but not limited to fixed overhead expenditures. Our failure to increase sales while controlling sales and marketing, general and administrative, and research and development costs (relative to sales) would result in additional losses and/or the reduction or termination of operations.

Our inability to comply with our debt obligations could result in our creditors declaring all amounts owed to them due and payable with immediate effect, or result in the collection of collateral by the creditor, both of which would have an adverse material impact on our business and our ability to continue operations.

We have a loan and security agreement with Cherokee Financial, LLC. (“Cherokee”) which is secured by a first security interest in our real estate and machinery and equipment. We also have an unsecured term loan with Cherokee. We also have a number of smaller loans with individuals.

In addition to general economic, financial, competitive, regulatory, business and other factors beyond our control, our ability to make payments to our creditors will depend primarily upon our future operating performance; which has been negatively impacted by the loss of material contracts and the increased price competition in our core markets for drug testing.

A failure to repay any of our debt obligations 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 Commissionindebtedness and/or enable our creditors to declare all amounts owed to them due and payable with immediate effect. In fact, in February 2021, with the extension of the loans until February 2022, Cherokee imposed penalties in the amount of $120,000 in response to our inability to pay back our facilities along with increasing the interest rate on August 14, 2017.our larger facility from 8% to 10%. In February 2022, we did not repay the Cherokee loans.

 

On June 14, 2022, Cherokee agreed that they would defer the principal amounts due under the Cherokee LSA and the 2019 Term Loan with Cherokee until February 15, 2023 and that any applicable penalties would also be deferred as long as we remain current on the quarterly interest payments. Furthermore, any penalties will also be waived if the principal amounts are paid on or prior to February 15, 2023.

If we are forced to refinance our debt on less favorable terms, our results of operations and financial condition would be further 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, or that future borrowings or equity financing would be available for the payment of any indebtedness we may have. In addition, in an event of default, our creditors could begin proceedings to collect the collateral securing the debt. This would have a material adverse effect on our ability to continue operations.

We may need additional funding for our existing and future operations.

Our financial statements for Fiscal 2021 were prepared assuming we will continue as a going concern. If sales continue to decline, our current cash balances and cash generated from future operations will not be sufficient to fund operations through November 2023. Future events, including the expenses and difficulties which may be encountered in maintaining a market for our products could make cash on hand and cash available under our line of credit facility insufficient to fund operations. If this happens, we may be required to sell equity or debt securities or obtain additional credit facilities. There can be no assurance that any of these financings will be available or that we will be able to complete such financing on satisfactory terms. Should additional financing not be available, we may be required to reduce or terminate operations.

30

Table of Contents

One of our customers accounted for more than 50% of our total net sales in Fiscal 2021.

One of our customers accounted for 57.5% and 35.2% of our net sales in Fiscal 2021 and Fiscal 2020, respectively. We currently have a contract in place with this long-standing customer that does not expire in the near future. However, in February 2022, the customer informed us that sales to one of their business segments (which we supplied exclusively) would decrease as a result of their desire to have multiple vendors supplying the segment. They indicated this was to ensure uninterrupted supply. They indicated that the other segment we supply would remain unchanged but, even in that particular segment; however, even in that segment, we are seeing declines in sales when comparing sales so far in 2022 to sales during the same period in 2021. There can be no assurance that this customer will stop ordering products from us completely, or that any of our current customers will continue to place orders, or that orders by existing customers will continue at current or historical levels.

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.

 

31

Table of Contents

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

101

101

The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2022, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Balance Sheet, (ii) Condensed Statements of Income (iii) Condensed Statements of Cash Flows, (iv) Statements of Changes in Stockholders’ Deficit and (iv)(v) Notes to Condensed Financial Statements.

 

 
 2132

Table of Contents

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

AMERICAN BIO MEDICA CORPORATION

(Registrant)

(Registrant)
   
By:/s/ Melissa A. Waterhouse

Melissa A. Waterhouse

Chief Executive Officer (Principal Executive Officer)

Principal Financial Officer

Principal Accounting Officer

 

Dated: November 14, 201716, 2022

 

 
 2233