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 ended September 30, 2016

 

¨

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from            to

 

Commission File Number: 0-28666

 

AMERICAN BIO MEDICA CORPORATION

(Exact name of registrant as specified in its charter)

 

New York		14-1702188
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

122 Smith Road, Kinderhook, New York		12106
(Address of principal executive offices)		(Zip Code)

 

518-758-8158

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 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) x Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ Yes x No

 

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

 

28,458,173 Common Shares as of November 14, 2016

 

  

American Bio Medica Corporation

 

Index to Quarterly Report on Form 10-Q

For the quarter ended September 30, 2016

 

		PAGE
PART I – FINANCIAL INFORMATION		3
Item 1.	Condensed Financial Statements	3
	Condensed Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	3
	Condensed Unaudited Statements of Operations for the three and nine months ended September 30, 2016 and September 30, 2015	4
	Condensed Unaudited Statements of Cash Flows for the nine months ended September 30, 2016 and September 30, 2015	6
	Notes to Condensed Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
PART II – OTHER INFORMATION		19
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Mine Safety Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	19
Signatures		20

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Financial Statements

 

American Bio Medica Corporation

Condensed Balance Sheets

 

		September 30,				December 31,
		2016				2015
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	221,000			$	158,000
Accounts receivable, net of allowance for doubtful accounts of $50,000 at September 30, 2016 and December 31, 2015			721,000				672,000
Inventory, net of allowance of $495,000 at September 30, 2016 and $432,000 at December 31, 2015			1,556,000				1,746,000
Prepaid expenses and other current assets			61,000				40,000
Total current assets			2,559,000				2,616,000
Property, plant and equipment, net			844,000				910,000
Patents, net			70,000				67,000
Other assets			21,000				14,000
Deferred finance costs – line of credit, net			55,000				79,000
Total assets		$	3,549,000			$	3,686,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	305,000			$	373,000
Accrued expenses and other current liabilities			225,000				212,000
Wages payable			281,000				292,000
Line of credit			736,000				777,000
Current portion of long-term debt			75,000				75,000
Total current liabilities			1,622,000				1,729,000
Other liabilities			19,000				38,000
Related party note payable			0				124,000
Long-term debt, net of current portion and deferred finance costs			730,000				834,000
Total liabilities			2,371,000				2,725,000
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at September 30, 2016 and December 31, 2015			0				0
Common stock; par value $.01 per share; 50,000,000 shares authorized; 28,458,173 issued and outstanding at September 30, 2016 and 26,032,930 issued and outstanding at December 31, 2015			285,000				260,000
Additional paid-in capital			20,979,000				20,656,000
Accumulated deficit			(20,086,000	)			(19,955,000	)
Total stockholders’ equity			1,178,000				961,000
Total liabilities and stockholders’ equity		$	3,549,000			$	3,686,000

 

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

 

 

American Bio Medica Corporation

Condensed Statements of Operations

(Unaudited)

 

		For The Nine Months Ended
		September 30,
		2016				2015
Net sales		$	4,392,000			$	4,785,000
Cost of goods sold			2,441,000				2,543,000
Gross profit			1,951,000				2,242,000
Operating expenses:
Research and development			136,000				125,000
Selling and marketing			827,000				899,000
General and administrative			1,124,000				1,298,000
			2,087,000				2,322,000
Operating loss			(136,000	)			(80,000	)
Other income / (expense):
Interest income			0				(1,000	)
Interest expense			(192,000	)			(196,000	)
Other income			200,000				147,000
			8,000				(50,000	)
Net loss before tax			(128,000	)			(130,000	)
Income tax expense			(2,000	)			0
Net loss		$	(130,000	)		$	(130,000	)
Basic and diluted loss per common share		$	(0.01	)		$	(0.01	)
Weighted average number of shares outstanding – basic & diluted			27,056,216				25,557,021

 

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

 

 

American Bio Medica Corporation

Condensed Statements of Operations

(Unaudited)

 

		For The Three Months Ended
		September 30,
		2016				2015
Net sales		$	1,417,000			$	1,590,000
Cost of goods sold			806,000				823,000
Gross profit			611,000				767,000
Operating expenses:
Research and development			28,000				45,000
Selling and marketing			275,000				291,000
General and administrative			368,000				370,000
			671,000				706,000
Operating income / (loss)			(60,000	)			61,000
Other income / (expense):
Other income			44,000				0
Interest income			0				0
Interest expense			(71,000	)			(63,000	)
			(27,000	)			(63,000	)
Net loss before tax			(87,000	)			(2,000	)
Income tax expense			(1,000	)			0
Net loss		$	(88,000	)		$	(2,000	)
Basic and diluted loss per common share		$	(0.00	)		$	(0.00	)
Weighted average number of shares outstanding – basic & diluted			27,284,308				26,032,930

 

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

 

 

American Bio Medica Corporation

Condensed Statements of Cash Flows

(Unaudited)

 

		For The Nine Months Ended
		September 30,
		2016				2015
Cash flows from operating activities:
Net loss		$	(130,000	)		$	(130,000	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			69,000				70,000
Amortization of deferred finance and debt discount			90,000				187,000
Provision for bad debts			0				(1,000	)
Provision for slow moving and obsolete inventory			63,000				63,000
Share-based payment expense			49,000				27,000
Changes in:
Accounts receivable			(49,000	)			13,000
Inventory			127,000				(189,000	)
Prepaid expenses and other current assets			21,000				5,000
Accounts payable			(38,000	)			19,000
Accrued expenses and other current liabilities			(6,000	)			18,000
Wages payable			(11,000	)			23,000
Net cash provided by operating activities			185,000				105,000
Cash flows from investing activities:
Purchase of property, plant and equipment			0				(10,000	)
Patent application costs			(6,000	)			(4,000	)
Net cash used in investing activities			(6,000	)			(14,000	)
Cash flows from financing activities:
Proceeds from (payments on) debt financing			(75,000	)			130,000
Deferred finance costs			0				(205,000	)
Proceeds from lines of credit			4,609,000				5,090,000
Payments on lines of credit			(4,650,000	)			(5,234,000	)
Net cash used in financing activities			(116,000	)			(219,000	)
Net Increase / (decrease) in cash and cash equivalents			63,000				(128,000	)
Cash and cash equivalents – beginning of period			158,000				352,000
Cash and cash equivalents - end of period		$	221,000			$	224,000
Supplemental disclosures of cash flow information
Cash paid during period for interest		$	119,000			$	176,000
Cash paid during period for taxes		$	2,000			$	0
Consulting expense prepaid with restricted stock		$	49,000			$	0
Debt issuance cost paid with restricted stock		$	96,000			$	0
Related party note payable paid with restricted stock		$	154,000			$	0

 

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

 

 

Notes to condensed financial statements (unaudited)

 

September 30, 2016

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, 2015. 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 September 30, 2016, the results of operations for the three and nine month periods ended September 30, 2016 and September 30, 2015, and cash flows for the nine month periods ended September 30, 2016, and September 30, 2015.

 

Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of results that may be expected for the year ending December 31, 2016. Amounts at December 31, 2015 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Reclassifications have been made to the audited financial statements for the year ended December 31, 2015 to conform to the presentation of the financial statements for the three and nine months ended September 30, 2016.

 

During the nine months ended September 30, 2016, 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, 2015.

 

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

 

These unaudited interim condensed financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. The independent registered public accounting firm’s report on the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, contained an explanatory paragraph regarding the Company’s ability to continue as a going concern. As of the date of this report, the Company’s current cash balances, together with cash generated from future operations and amounts available under current credit facilities may not be sufficient to fund operations for the next 12 months if sales levels do not improve. If cash generated from operations is not sufficient to satisfy the Company’s working capital and capital expenditure requirements, the Company will be required to sell additional equity or obtain additional credit facilities. There is no assurance that such financing will be available or that the Company will be able to complete financing on satisfactory terms, if at all.

 

Recent Accounting Standards

 

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments”. The ASU addresses specific cash flow items with the objective of reducing existing diversity in practice, including the treatment of distributions received from equity method investees. The updated standard will be effective for the Company on January 1, 2018 and must be applied retrospectively to all periods presented; early adoption is permitted. The Company does not expect the updated standard to have a material impact on our financial position or results of operations.

 

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. The update’s core principle 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. The update provides for two transition methods to the new guidance: a retrospective approach and a modified retrospective approach. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, as a revision to ASU 2014-09, which 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). In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies certain aspects of the principal-versus-agent guidance, including how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The amendments also reframe the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether it recognizes revenue over time or at a point in time. The amendments also clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial in the context of a contract. And finally, in May 2016, FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers”. This update amends the new revenue recognition guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. The amendments also clarify how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard's contract criteria. We are currently evaluating the transition methods and the impact of adoption of this ASU on our consolidated financial statements.

 

Recently Adopted Standards

 

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. This Update is part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The Board received feedback that having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity. Recognizing debt issuance costs as a deferred charge (that is, an asset) also is different from the guidance in International Financial Reporting Standards (IFRS), which requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. Additionally, the requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. 6, Elements of Financial Statements, which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. Concepts Statement 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update were effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted this ASU in the first quarter 2016.

 

The Company also adopted ASU No. 2015-15, “Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements” in the first quarter 2016; ASU No. 2015-15 clarifies guidance on the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements. The adoption of ASU No. 2015-15 did not have any impact on our financials statements.

 

 

In January 2015, the FASB issued ASU No 2015-01, “Income Statement – Extraordinary and Unusual Items”. This ASU is part of FASB’s initiative to reduce complexity in the account standards by eliminating the concept of extraordinary items from GAAP. The amendments eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, however, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently is retained and is expanded to include items that are both unusual in nature and infrequently occurring. This update applies to all entities and was effective for fiscal years, and interim periods within the fiscal year, beginning after December 15, 2015. We adopted this ASU in the first quarter 2016, and it did not have any impact on our financial statements.

 

Reclassifications

 

Certain items have been reclassified from the prior years to conform to the current year presentation. More specifically, certain debt issuance costs and deferred finance costs were reclassified from an asset to a reduction against the long-term liability (as a result of the adoption of ASU No. 2015-03), and $75,000 that was originally recorded in net sales in the nine months ended September 30, 2015 was reclassified as other income in this report.

 

Note B – Inventory

 

Inventory is comprised of the following:

 

		September 30, 2016				December 31, 2015
Raw Materials		$	1,054,000			$	1,208,000
Work In Process			440,000				399,000
Finished Goods			557,000				571,000
Allowance for slow moving and obsolete inventory			(495,000	)			(432,000	)
		$	1,556,000			$	1,746,000

 

Note C – Net Loss Per Common Share

 

Basic net loss per common share is calculated by dividing the net loss by the weighted average number of outstanding common shares during the period. Diluted net loss per common share includes the weighted average dilutive effect of stock options and warrants. Potential common shares outstanding as of September 30, 2016 and 2015:

 

		September 30, 2016				September 30, 2015
Warrants			2,060,000				2,385,000
Options			2,182,000				1,435,000
			4,242,000				3,820,000

 

The number of securities not included in the diluted net loss per share for the three and nine months ended September 30, 2016 (because the effect would have been anti-dilutive) was 4,242,000.

 

The number of securities not included in the diluted net loss per share for the three and nine months ended September 30, 2015 (because the effect would have been anti-dilutive) was 3,820,000.

 

Note D – Litigation/Legal Matters

 

From time to time, the Company may be named in legal proceedings in connection with matters that arise during the normal course of business. While the ultimate outcome of any such litigation cannot be predicted, if we are unsuccessful in defending any such litigation, the resulting financial losses could have an adverse effect on the financial position, results of operations and cash flows of the Company. We are not aware of any significant litigation loss contingencies for which management believes it is both probable that a liability has been incurred and that the amount of the loss can be reasonably estimated.

 

 

Note E – Line of Credit and Debt

 

		September 30, 2016				December 31, 2015
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 due 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.		$	1,125,000			$	1,200,000
Crestmark Line of Credit: 3 year line of credit dated June 29, 2015 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 3% if terminated in year 1 and 2% if terminated in year 2 or after (and prior to natural expiration). Loan is collateralized by first security interest in receivables and inventory.			736,000				777,000
			1,861,000				1,977,000
Less debt discount & issuance costs (Cherokee Financial, LLC Loan)			(320,000	)			(291,000	)
Total debt		$	1,541,000			$	1,686,000
Current portion		$	811,000			$	852,000
Long-term portion		$	730,000			$	834,000

 

LOAN AND SECURITY AGREEMENT WITH CHEROKEE FINANCIAL, LLC

 

On March 26, 2015, the Company entered into a LSA with Cherokee Financial, LLC (“Cherokee”). The purpose of the Cherokee Loan and Security Agreement (the “Cherokee LSA”) was to refinance, at a better interest rate, the Company’s Series A Debentures and Cantone Asset Management Bridge Loan as well as the Company’s Mortgage Consolidation Loan with First Niagara Bank (“First Niagara”). The Cherokee loan is collateralized by a first security interest in the Company’s real estate and machinery and equipment. Under the Cherokee LSA, the Company was provided the sum of $1,200,000 in the form of a 5-year Note at an annual interest rate of 8%. The Company is making quarterly interest only payments 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 paid on February 15, 2016. A final balloon payment is due on March 26, 2020. In addition to the 8% interest, the Company pays Cherokee a 1% annual fee for oversight and administration of the loan. This oversight fee is paid in cash and is paid contemporaneously with the quarterly interest payments. The Company can pay off the Cherokee Note at anytime 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, if the loan was not repaid in full as of March 19, 2016, the Company was required to issue another 600,000 restricted shares of common stock to Cherokee. The Company did instruct its transfer agent to issue these additional shares in March 2016 as required.

 

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, if the loan was not repaid in full as of March 19, 2016, the Company was required to issue another 196,000 restricted shares of common stock to CRI. The Company did instruct its transfer agent to issue these additional shares in March 2016 as required.

 

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 as of March 31, 2016, 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 $144,000 in interest expense related to the Cherokee LSA in the nine months ended September 30, 2016 (of which $72,000 is debt issuance cost amortization recorded as interest expense as a result of the adoption of new accounting standards in the first quarter of 2016) and, $85,000 in interest expense in the nine months ended September 30, 2015 (of which $35,000 is debt issuance costs reclassified as interest expense). The Company recognized $49,000 in interest expense related to the Cherokee LSA in the three months ended September 30, 2016 (of which $17,000 is debt issuance cost amortization recorded as interest expense as a result of the adoption of new accounting standards in the first quarter of 2016), and $42,000 in interest expense in the three months ended September 30, 2015 (of which $17,000 is debt issuance costs reclassified as interest expense).

 

The Company had $16,000 in accrued interest expense at September 30, 2016 and the Company had $13,000 in accrued interest expense at September 30, 2015.

 

As of September 30, 2016, the balance on the Cherokee LSA was $1,125,000, however the discounted balance was $805,000. As of December 31, 2015, the balance on the Cherokee LSA was $1,200,000, however the discounted balance was $909,000.

 

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, a new Senior Lender, to refinance the Company’s Line of Credit with Imperium Commercial Finance, LLC (“Imperium”). The Crestmark Line of Credit is used for working capital and general corporate purposes.

 

Under the LSA, 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 is secured by a first security interest in the Company’s inventory, and receivables and security interest in all other assets of the Company (in accordance with permitted prior encumbrances).

 

The Maximum Amount is subject to an Advance Formula comprised of: 1) 90% of Eligible Accounts Receivables (excluding, receivables remaining unpaid for more than 90 days from the date of invoice and sales made to entities outside of the United States), and 2) up to 40% of eligible inventory plus up to 10% of Eligible Generic Packaging Components not to exceed the lesser of $500,000 (“Inventory Sub-Cap Limit”), or 100% of the Eligible Accounts Receivable. Starting August 1, 2015, the Inventory Sub-Cap Limit has been reduced by $10,000 per month. This reduction of $10,000 per month will continue until October 1, 2016, when the Inventory Sub-Cap Limit will reach $350,000; where it will stay fixed.

 

So long as any obligations are due to Crestmark, the Company must comply with a minimum Tangible Net Worth (“TNW”) Covenant. Under the LSA, as amended, 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 Company 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, 2016.

 

If the Company terminates the LSA at any time prior to June 29, 2018 (the 3-year anniversary of the LSA), 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, interest on the Crestmark Line of Credit is at a variable rate based on the Wall Street Journal Prime Rate plus 2% with a floor of 5.25%. As of the date of this report, the interest rate on the Crestmark Line of Credit is 5.25%. In addition to the interest rate, on the Closing Date and on each one-year anniversary date thereafter, the Company will pay Crestmark a Loan Fee of 0.50%, or $7,500, and a Monthly Maintenance Fee of 0.30% of the actual average monthly loan balance from the prior month will be paid to Crestmark. When these additional fees are considered, the rate on the Crestmark Line of Credit is 9.35% annually (the Imperium Line of Credit rate was 12% when all fees were considered).

 

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 (which was expensed fully in the year ended December 31, 2015), these expenses are all being amortized over the 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, 2016 and $8,000 in expense in the nine months ended September 30, 2015. The Company recognized $8,000 of this expense in the three months ended September 30, 2016, and $6,000 of costs in the three months ended September 30, 2015.

 

The Company recognized $47,000 in interest expense related to the Crestmark Line of Credit in the nine months ended September 30, 2016 and $21,000 in interest expense in the nine months ended September 30, 2015. The Company recognized $16,000 in interest expense related to the Crestmark Line of Credit in the three months ended September 30, 2016, and $21,000 in interest expense in the three months ended September 30, 2015.

 

Given the nature of the administration of the Crestmark Line of Credit, at September 30, 2016, 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.

 

As of September 30, 2016, the balance on the Crestmark Line of Credit was $736,000, and as of December 31, 2015, the balance on the Crestmark Line of Credit was $777,000.

 

PRIOR DEBT INSTRUMENTS AFFECTING PRIOR PERIOD

 

FIRST NIAGARA: MORTGAGE CONSOLIDATION LOAN

 

The Company refinanced the mortgage consolidation loan with First Niagara in March 2015. The nine and three months ended September 30, 2016 did not include any expense related to First Niagara loan, while the nine and three months ended September 30, 2015 included $5,000 and $0 in interest expense, respectively.

 

DEBENTURE FINANCING/BRIDGE LOAN

 

The Company refinanced the Series A Debentures and associated bridge loan in March 2015. The nine and three months ended September 30, 2016 did not include any expense related to the Series A Debentures while the nine months ended September 30, 2015 included $22,000 in interest expense and the three months ended September 30, 2015 included $0 in interest expense.

 

Line of Credit with Imperium

 

The Company refinanced its line of credit with Imperium in June 2015. The nine and three months ended September 30, 2016 did not include any expense related to the Imperium Line of Credit. The nine months ended September 30, 2015 included $137,000 in debt issuance costs (of which $69,000 was accelerated costs due to the early termination of the line of credit), and $39,000 in interest expense. The three months ended September 30, 2015 included $0 in both debt issuance costs and interest expense.

 

NOTE F – Stock Options and Warrants

 

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

 

 

During the three months ended September 30, 2016 and the three months ended September 30, 2015, the Company issued 0 stock options.

 

Stock option activity for the nine months ended September 30, 2016 and the nine months ended September 30, 2015 is summarized as follows (the figures contained within the tables below have been rounded to the nearest thousand):

 

		Nine months ended September 30, 2016												Nine months ended September 30, 2015
		Shares				Weighted Average Exercise Price				Aggregate Intrinsic Value as of September 30, 2016				Shares				Weighted Average Exercise Price				Aggregate Intrinsic Value as of September 30, 2015
Options outstanding at beginning of period			1,435,000			$	0.13								1,295,000			$	0.27
Granted			830,000			$	0.11								340,000			$	0.12
Exercised			0				NA								0				NA
Cancelled/expired			(83,000	)		$	0.19								(200,000	)		$	0.90
Options outstanding at end of period			2,182,000			$	0.13			$	30,000				1,435,000				0.14			$	16,300
Options exercisable at end of period			1,184,000			$	0.14								1,027,000			$	0.15

 

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, 2016 and 2015:

 

		Nine month ended
		September 30, 2016				September 30, 2015
Volatility			62% - 66%				63% - 64%
Expected term (years)			10 years				10 years
Risk-free interest rate			1.57% - 1.94%				1.92% – 2.33%
Dividend yield			0%				0%

 

The Company recognized $49,000 in share based payment expense in the nine months ended September 30, 2016 and $27,000 in share based payment expense in the nine months ended September 30, 2015. The Company recognized $13,000 in share based payment expense in the three months ended September 30, 2016 and $9,000 in share based payment expense in the three months ended September 30, 2015.

 

As of September 30, 2016, there was approximately $57,000 of total unrecognized compensation cost related to non-vested stock options, which vest over time. This cost is expected to be recognized over a period of 9-20 months.

 

Warrants

 

Warrant activity during the nine months ended September 30, 2016 and the nine months ended September 30, 2015 is summarized as follows:

 

		Nine month ended September 30, 2016												Nine months ended September 30, 2015
		Shares				Weighted Average Exercise Price				Aggregate Intrinsic Value as of September 30, 2016				Shares				Weighted Average Exercise Price				Aggregate Intrinsic Value as of September 30, 2015
Warrants outstanding at beginning of period			2,385,000			$	0.17								3,303,000			$	0.17
Granted			0				NA								0				NA
Exercised			0				NA								0				NA
Cancelled/expired			(325,000	)		$	0.14								(918,000	)		$	0.15
Warrants outstanding at end of period			2,060,000			$	0.18			$	0				2,385,000			$	0.17			$	0
Warrants exercisable at end of period			2,060,000			$	0.18								2,385,000			$	0.17

 

 

The Company recognized $0 in debt issuance and deferred finance costs related to the issuance of the above warrants outstanding in the nine months ended September 30, 2016, and $100,000 in debt issuance and deferred finance costs in the nine months ended September 30, 2015. The Company recognized $0 in debt issuance and deferred finance costs related to the issuance of the above warrants outstanding in both the three months ended September 30, 2016 and the three months ended September 30, 2015.

 

As of September 30, 2016, there was $0 of total unrecognized expense related to warrants.

 

NOTE G – Related Party Note Payable

 

As previously disclosed in a Current Report on Form 8-K (filed with the Commission on October 4, 2016), on September 29, 2016, upon request of Edmund M. Jaskiewicz, President of the corporation and former Chairman of the Board, and upon approval of the Company’s Board of Directors, the Company entered into an agreement to exchange Mr. Jaskiewicz’s related party note payable for restricted shares of the Company’s common stock. The extinguishment of the debt was also authorized and consented to by Crestmark Bank, the Company’s line of credit lender, (“Crestmark”); as the debt owed to Mr. Jaskiewicz was subordinate to the Crestmark line of credit debt.

 

On September 30, 2016 and in connection with the agreement indicated above, the Company exchanged the Jaskiewicz related party note in the amount of $154,279 for 1,186,765 restricted shares of the Company’s common stock. The number of common shares to be issued to Mr. Jaskiewicz was determined by a using the average closing price of the Company’s common shares for the ten (10) consecutive trading days preceding the issuance, or $0.13 per share. The issuance of the shares of common stock was exempt from the registration requirements under Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction by an issuer not involving any public offering.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

The following discussion and analysis provides information, which we believe is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with the Interim Condensed Financial Statements contained herein and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believes”, “anticipates”, “estimates”, “expects”, “intends”, “projects”, and words of similar import, are forward-looking as that term is defined by the Private Securities Litigation Reform Act of 1995 (“1995 Act”), and in releases issued by the United State Securities and Exchange Commission (the “Commission”). These statements are being made pursuant to the provisions of the 1995 Act and with the intention of obtaining the benefits of the “Safe Harbor” provisions of the 1995 Act. We caution that any forward-looking statements made herein are not guarantees of future performance and that actual results may differ materially from those in such forward-looking statements as a result of various factors, including, but not limited to, any risks detailed herein, in our “Risk Factors” section of our Form 10-K for the year ended December 31, 2015, in our most recent reports on Form 10-Q and Form 8-K and from time to time in our other filings with the Commission, and any amendments thereto. Any forward-looking statement speaks only as of the date on which such statement is made, and we are not undertaking any obligation to publicly update any forward-looking statements. Readers should not place undue reliance on these forward-looking statements.

 

Overview/Plan of Operations

 

Our ability to maintain and/or increase sales continues to be impacted by a very cost-competitive market currently dominated by products made outside of the United States. 

 

 

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). In the year ended December 31, 2015, we refinanced substantially all of our existing debt in efforts to decrease our interest costs, improve working capital and increase cash flow. The interest rate on our loan and security agreement with Cherokee Financial, LLC (“Cherokee”) is 9% (with all fees considered) while the majority of the debt refinanced by the Cherokee loan was at 15% (some of the debt refinanced was at 8.25%). The interest rate on the line of credit with Crestmark is 9.35% (with all fees), while the interest rate on the Imperium line of credit was 12% (with all fees).

 

The salary and commission deferral program continued in the three months ended September 30, 2016. The deferral program consists of a 20% salary deferral for our executive officer (Melissa Waterhouse), and our non-executive VP Operations, as well as a 20% commission deferral for a sales consultant. As of September 30, 2016, we had total deferred compensation owed of $195,000. Over the course of the program, we repaid portions of the deferred compensation (with $70,000 in payments in the nine months ended September 30, 2016, and $96,000 in payments in the nine months ended September 30, 2015). Additional payments of $5,000 were made subsequent to the nine months ended September 30, 2016. As cash flow from operations allows, we intend to continue to make paybacks, however the deferral program is continuing and we expect it will continue for up to another 12 months.

 

We continue to believe that new products and our ability to sell those products in new markets will be the primary future organic growth driver. In the year ended December 31, 2015, we began the process to receive a marketing clearance from the FDA to sell an all-inclusive, urine based, drug-testing cup to customers requiring a CLIA waived product, and we expect to receive a decision from FDA in the near future. In December 2015, we also completed development on a new assay for K2, or synthetic marijuana. New assays and product platform developments are also in our research and development plans. We remain focused on selling our point of collection drugs of abuse tests, and growing our business through direct sales and select distributors.

 

In addition to a plan for organic growth from the sales of our products, we have taken steps to diversify our revenue stream. Late in the first quarter of 2016, we signed an independent agent agreement with an entity that will allow us to sell a toxicology management service to our existing customers and new customers. The nine months ended September 30, 2016 does not include any revenues from this new relationship. We are currently looking at other potential relationships that would allow us to diversify our revenue stream.

 

In September 2016, our contract manufacturing sales began to decrease on an annual basis due to manufacturing shift with one of our contract customers. More specifically, as a result of a tech transfer with one of our customers, starting in September 2016 the customer became their own primary supplier with ABMC 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 did receive a $300,000 tech transfer fee from this customer. We recognized other income of $200,000 in the nine months ended September 30, 2016, of which $150,000 was related to the tech transfer, net of expenses. We recognized other income of $147,000 in the nine months ended September 30, 2015, of which $150,000 was related to the tech transfer, net of expenses.

 

Our continued existence is dependent upon several factors, including our ability to raise revenue levels (either organically or through diversification), control costs to generate positive cash flows, maintain our current credit facilities or refinance our current credit facilities if necessary, and if needed, the ability to obtain working capital by selling additional shares of our common stock.

 

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

COMPARED TO THE NINE MONTHs ended SEPTEMBER 30, 2015

 

NET SALES: Net sales in the nine months ended September 30, 2016 declined 8.2% when compared to net sales in the nine months ended September 30, 2015. The decline in sales is primarily from declines in our inside sales department, international markets and contract manufacturing sales. In international sales, the decline was due to a slight decline in Latin American sales offset by an increase in sales in other parts of the world. In contract manufacturing, sales were negatively impacted by the manufacturing shift indicated previously. Overall, these declines were partially offset by an increase in government sales and national account sales. The increase in government sales stems from new customers in government sales and increased sales under our current contracts.

 

Our primary markets continue to be extremely price-competitive. Our latest all-inclusive cup is having some success in competing against lower priced products manufactured outside of the US. We are hopeful that when/if over-the-counter clearance is received by FDA for our all-inclusive drug testing cup, we will be able 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 usually equally important in these clinical markets.

 

 

In addition, late in the first quarter 2016, we entered into an independent agent agreement with a company that offers a toxicology management service. We believe a number of our current customers will find this offering complimentary to the drug testing products we provide and that new customers will also desire this service. Sales in the nine months ended September 30, 2016 do not include revenues from this relationship.

 

GROSS PROFIT: Gross profit decreased to 44.4% of net sales in the nine months ended September 30, 2016, from 46.9% of net sales in the nine months ended September 30, 2015. The decrease in gross profit stems primarily from the fact that we produced less testing strips in the nine months ended September 30, 2016, thereby decreasing manufacturing efficiencies.

 

OPERATING EXPENSES: Operating expenses continued to decrease (by 10.1%) in the nine months ended September 30, 2016 when compared to the nine months ended September 30, 2015. Research and Development expense increased while Selling and Marketing and General and Administrative expenses declined. More specifically:

 

Research and development (“R&D”)

 

R&D expense increased 8.8% when comparing the nine months ended September 30, 2016 with the nine months ended September 30, 2015. Increased FDA compliance costs (due to timing of actions taken related to our marketing application to the FDA) were minimally offset by reductions in utilities (as a result of timing of the consolidation of our New Jersey facility in late December 2014; i.e. the first quarter of 2015 included costs associated with the actual consolidation efforts), and reductions in supplies and materials (as 2015 included costs associated with the development of a K2 assay). Our R&D department will continue to focus their efforts on the enhancement of current products, the development of new testing assays, new product platforms and the evaluation of contract manufacturing opportunities.

 

Selling and marketing

 

Selling and marketing expense decreased 8.0% in the nine months ended September 30, 2016 when compared to the nine months ended September 30, 2015. Decreases in sales salaries and travel expense (due to decreased sales personnel), commissions (due to decreased product sales and changes to commission structure in the first quarter 2016) were partially offset by increases in consulting fees (due to the retention of a criminal justice marketing consultant in early 2016) and customer relations fees (related to one of our contract manufacturing customers). Our direct sales force will continue 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. Staring in April 2016, our sales force started to promote the toxicology management service to current and potential new customers, and we expect these efforts to continue throughout the year ending December 31, 2016.

 

General and administrative (“G&A”)

 

G&A expense decreased 13.4% in the nine months ended September 30, 2016 when compared to G&A expense in the nine months ended September 30, 2015. Consulting, broker and legal fees decreased (all as a result of reduced debt refinancing activity), bank service fees decreased (as a result of less collateral monitoring charges on our line of credit), decreased audit fees associate with our ISO certifications and decreased costs related to repairs and maintenance. These reductions were partially offset by increased investor relations costs (associated with investor travel and news dissemination), and accounting fees (due to the cross-over of two accounting firms). Share based payment expense also increased in the nine months ended September 30, 2016 to $49,000 from $27,000 in the nine months ended September 30, 2015. This stems primarily from stock based compensation related to options issued to our CEO in January 2016.

 

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016

COMPARED TO THE THREE MONTHs ended SEPTEMBER 30, 2015

 

NET SALES: Net sales in the three months ended September 30, 2016 declined 10.9% when compared to net sales in the three months ended September 30, 2015. The decline in sales is primarily from declines in direct sales in our inside sales department, contract manufacturing sales and international sales. These declines were partially offset by increased government sales and national account sales. The increase in government sales stems from new customers in government sales and increased sales under our current contracts.

 

Our primary markets continue to be extremely price-competitive. Our latest all-inclusive cup is having some success in competing against lower priced products manufactured outside of the US. We are hopeful that when/if over-the-counter clearance is received by FDA for our all-inclusive drug testing cup, we will be able 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 usually equally important in these clinical markets.

 

In addition, late in the first quarter 2016, we entered into an independent agent agreement with a company that offers a toxicology management service. We believe a number of our current customers will find this offering complimentary to the drug testing products we provide and that new customers will also desire this service. Sales in the three months ended September 30, 2016 do not include revenues from this relationship.

 

GROSS PROFIT: Gross profit decreased to 43.1% of net sales in the three months ended September 30, 2016, from 48.2% of net sales in the three months ended September 30, 2015. The decrease in gross profit stems primarily from the fact that we produced less testing strips in the nine months ended September 30, 2016, thereby decreasing manufacturing efficiencies.

 

OPERATING EXPENSES: Operating expenses decreased 5.0% in the three months ended September 30, 2016, compared to the three months ended September 30, 2015. Expenses in all three divisions decreased. More specifically:

 

Research and development (“R&D”)

 

R&D expense decreased 37.8% when comparing the three months ended September 30, 2016 with the three months ended September 30, 2015.Decreased FDA compliance costs (due to timing of actions taken related to our marketing application to the FDA) and reduced expenses related to supplies and materials (as 2015 included costs associated with the development of a K2 assay) were minimally offset by increased employment taxes. Our R&D department will continue to focus their efforts on the enhancement of current products, the development of new testing assays, new product platforms and the evaluation of contract manufacturing opportunities.

 

Selling and marketing

 

Selling and marketing expense in the three months ended September 30, 2016 decreased 5.5% when compared to the three months ended September 30, 2015. Decreases in sales salaries and travel expense (due to decreased sales personnel), commissions (due to decreased product sales and changes to commission structure in the first quarter 2016), and local trade show expenses were partially offset by increases in consulting fees (due to the retention of a criminal justice marketing consultant in early 2016) and customer relations fees (related to one of our contract manufacturing customers). Our direct sales force will continue 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. Staring in April 2016, our sales force started to promote the toxicology management service to current and potential new customers, and we expect these efforts to continue throughout the year ending December 31, 2016.

 

General and administrative (“G&A”)

 

G&A expense decreased less than 1% in the three months ended September 30, 2016 when compared to G&A expense in the three months ended September 30, 2015. Decreased repairs and maintenance costs were offset by increased costs associated with our annual meeting of shareholders and investor relation’s expense, along with increased broker fees (due to a reclassification of fees) and patents and licenses (due to increased activity related to currently pending patent application). Share based payment expense also increased in the three months ended September 30, 2016 to $13,000 from $8,000 in the three months ended September 30, 2015. This stems primarily from stock based compensation related to options issued to our CEO in January 2016.

 

 

Liquidity and Capital Resources as of September 30, 2016

 

Our cash requirements depend on numerous factors, including but not limited to manufacturing costs (such as raw materials, equipment, etc.), selling and marketing initiatives, product development activities, regulatory costs, and effective management of inventory levels and production levels in response to sales forecasts. We expect to devote capital resources to continue selling and marketing initiatives and product development/research and development activities. We are examining other growth opportunities including strategic alliances and expect such activities will be funded from existing cash and cash equivalents, and/or the issuance of additional equity or additional borrowings, subject to market and other conditions. Our financial statements for the year ended December 31, 2015 were prepared assuming we will continue as a going concern. Our current cash balances, together with cash generated from future operations and amounts available under our credit facilities may not be sufficient to fund operations for the next twelve months. Our current line of credit has a term of 3 years, expiring on June 29, 2018 and has a maximum availability of $1,500,000. However, the amount available under our line of credit is based upon our accounts receivable and inventory. As of September 30, 2016, based on our availability calculation, there were no additional amounts available under our line of credit because we draw any balance available on a daily basis. If sales levels decline further, we will have reduced availability on our line of credit due to decreased accounts receivable balances. In addition, we would expect our inventory levels to decrease if sales levels decline further, and this also means reduced availability on our line of credit. If availability under our line of credit is not sufficient to satisfy our working capital and capital expenditure requirements, we will be required to obtain additional credit facilities or sell additional equity securities. There is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms, if at all,

 

As of September 30, 2016, we had the following debt/credit facilities:

 

Facility		Debtor		Balance as of June 30, 2016
Loan and Security Agreement		Cherokee Financial, LLC		$	1,125,000
Revolving Line of Credit		Crestmark Bank		$	736,000

 

Working Capital

 

Our working capital was $937,000 at September 30, 2016; this is an increase of $50,000 when compared to working capital at December 31, 2015. The increase in working capital is primarily due to an increase in accounts receivables, and increased cash balances, lower line of credit balance and decreased accounts payable, partially offset by a decrease in inventory.

 

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 in the year ending December 31, 2016 and we continue to take steps to ensure that operating expenses and manufacturing costs remain in line with sales levels. In 2016, we are focusing our efforts on improving sales. Such steps include, but are not limited to, obtaining an over-the-counter marketing clearance from FDA for one of our all-inclusive drug testing cups (allowing us to further penetrate Clinical markets such as pain management and drug treatment), and entering into strategic relationships with third parties to offer additional services (such as toxicology management services) to our customers (thereby increasing product sales and generating other revenue from the sale of services). We expect to utilize cash resources to complete this application process and to take other steps that would result in increased sales. None of these efforts related to sales, or any other efforts being untaken related to other operational activities are expected to result in a substantial increase in cash requirements. In the second quarter of 2016, we received our final payment of $150,000 related to a tech transfer with one of our contract-manufacturing customers. We believe our current line of credit (and advance rates) are adequate for our cash requirements in the year ending December 31, 2016.

 

Although our financial condition has improved over previous recent fiscal years, 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.

 

 

Our ability to repay our current debt will depend primarily upon our future operating performance, which may be affected by general economic, financial, competitive, regulatory, business and other factors beyond our control, including those discussed herein. In addition, we cannot assure you that future borrowings or equity financing will be available for the payment of any indebtedness we may have.

 

Our failure to comply with the covenant under our revolving credit facility could result in an event of default, which, if not cured or waived, could result in the Company being required to pay higher costs associated with the indebtedness. If we are forced to refinance our debt on less favorable terms, our results of operations and financial condition could be adversely affected by increased costs and rates. We may also be forced to pursue one or more alternative strategies, such as restructuring, selling assets, reducing or delaying capital expenditures or seeking additional equity capital. There can be no assurances that any of these strategies could be implemented on satisfactory terms, if at all.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, we are not required to provide the information required by this item.

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer (Principal Executive Officer)/Chief Financial Officer (Principal Financial Officer), together with other members of management, has reviewed and evaluated the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this review and evaluation, our Principal Executive Officer/Principal Financial Officer concluded that our disclosure controls and procedures are effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported in a timely manner.

 

(b) Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the last quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

There have been no material changes to our risk factors set forth in Part I, Item 1A, in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1/31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer/Chief Financial Officer
32.1/32.2	Certification of the Chief Executive Officer/Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Balance Sheet, (ii) Condensed Statements of Income (iii) Condensed Statements of Cash Flows, and (iv) Notes to Condensed Financial Statements.

 

 

SIGNATURES

 

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

 

	AMERICAN BIO MEDICA CORPORATION
	(Registrant)
	By: /s/ Melissa A. Waterhouse
	Melissa A. Waterhouse
	Chief Executive Officer (Principal Executive Officer)
	Principal Financial Officer
	Principal Accounting Officer

 

Dated: November 14, 2016