AMERICAN BIO MEDICA CORP - Quarter Report: 2015 June (Form 10-Q)
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 June 30, 2015
| ¨ | 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:
26,032,930 Common Shares as of August 14, 2015
American Bio Medica Corporation
Index to Quarterly Report on Form 10-Q
For the quarter ended June 30, 2015
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
American Bio Medica Corporation
Condensed Balance Sheets
| June 30, | December 31, | |||||||
| 2015 | 2014 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 433,000 | $ | 352,000 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $51,000 at June 30, 2015, and $47,000 at December 31, 2014 | 859,000 | 814,000 | ||||||
| Inventory, net of allowance of $366,000 at June 30, 2015 and $324,000 at December 31, 2014 | 1,824,000 | 1,722,000 | ||||||
| Current portion of deferred financing | 0 | 43,000 | ||||||
| Prepaid expenses and other current assets | 96,000 | 85,000 | ||||||
| Total current assets | 3,212,000 | 3,016,000 | ||||||
| Property, plant and equipment, net | 942,000 | 983,000 | ||||||
| Patents | 68,000 | 65,000 | ||||||
| Other assets | 14,000 | 14,000 | ||||||
| Deferred finance costs | 193,000 | 0 | ||||||
| Total assets | $ | 4,429,000 | $ | 4,078,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 508,000 | $ | 410,000 | ||||
| Accrued expenses and other current liabilities | 190,000 | 192,000 | ||||||
| Wages payable | 318,000 | 264,000 | ||||||
| Line of credit, net | 1,072,000 | 979,000 | ||||||
| Current portion of long-term debt, net | 75,000 | 858,000 | ||||||
| Total current liabilities | 2,163,000 | 2,703,000 | ||||||
| Other liabilities | 68,000 | 68,000 | ||||||
| Related party note | 124,000 | 124,000 | ||||||
| Long-term debt | 923,000 | 213,000 | ||||||
| Total liabilities | 3,278,000 | 3,108,000 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued and outstanding at June 30, 2015 and December 31, 2014 | ||||||||
| Common stock; par value $.01 per share; 50,000,000 shares authorized; 26,032,930 issued and outstanding at June 30, 2015 and 23,648,315 issued and outstanding at December 31, 2014 | 260,000 | 236,000 | ||||||
| Additional paid-in capital | 20,641,000 | 20,356,000 | ||||||
| Accumulated deficit | (19,750,000 | ) | (19,622,000 | ) | ||||
| Total stockholders’ equity | 1,151,000 | 970,000 | ||||||
| Total liabilities and stockholders’ equity | $ | 4,429,000 | $ | 4,078,000 | ||||
The accompanying notes are an integral part of the condensed financial statements
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American Bio Medica Corporation
Condensed Statements of Operations
(Unaudited)
| For The Six Months Ended | ||||||||
| June 30, | ||||||||
| 2015 | 2014 | |||||||
| Net sales | $ | 3,270,000 | $ | 3,854,000 | ||||
| Cost of goods sold | 1,721,000 | 2,186,000 | ||||||
| Gross profit | 1,549,000 | 1,668,000 | ||||||
| Operating expenses: | ||||||||
| Research and development | 80,000 | 91,000 | ||||||
| Selling and marketing | 608,000 | 559,000 | ||||||
| General and administrative | 943,000 | 933,000 | ||||||
| 1,631,000 | 1,583,000 | |||||||
| Operating income / (loss) | (82,000 | ) | 85,000 | |||||
| Other (expense) / income: | ||||||||
| Interest income | (1,000 | ) | 1,000 | |||||
| Interest expense | (117,000 | ) | (127,000 | ) | ||||
| Other income, net | 72,000 | 10,000 | ||||||
| (46,000 | ) | (116,000 | ) | |||||
| Net loss before tax | (128,000 | ) | (31,000 | ) | ||||
| Income tax expense | 0 | (1,000 | ) | |||||
| Net loss | $ | (128,000 | ) | $ | (32,000 | ) | ||
| Basic and diluted loss per common share | $ | (0.01 | ) | $ | (0.00 | ) | ||
| Weighted average number of shares outstanding – basic and diluted | 26,032,930 | 23,168,155 | ||||||
The accompanying notes are an integral part of the condensed financial statements
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American Bio Medica Corporation
Condensed Statements of Operations
(Unaudited)
| For The Three Months Ended | ||||||||
| June 30, | ||||||||
| 2015 | 2014 | |||||||
| Net sales | $ | 1,768,000 | $ | 1,811,000 | ||||
| Cost of goods sold | 919,000 | 1,020,000 | ||||||
| Gross profit | 849,000 | 791,000 | ||||||
| Operating expenses: | ||||||||
| Research and development | 51,000 | 45,000 | ||||||
| Selling and marketing | 309,000 | 267,000 | ||||||
| General and administrative | 520,000 | 456,000 | ||||||
| 880,000 | 768,000 | |||||||
| Operating income / (loss) | (31,000 | ) | 23,000 | |||||
| Other (expense) / income: | ||||||||
| Interest income | 0 | 0 | ||||||
| Interest expense | (52,000 | ) | (64,000 | ) | ||||
| (52,000 | ) | (64,000 | ) | |||||
| Net loss before tax | (83,000 | ) | (41,000 | ) | ||||
| Income tax expense | 0 | 0 | ||||||
| Net loss | $ | (83,000 | ) | $ | (41,000 | ) | ||
| Basic and diluted loss per common share | $ | (0.00 | ) | $ | (0.00 | ) | ||
| Weighted average number of shares outstanding – basic and diluted | 26,032,930 | 23,168,155 | ||||||
The accompanying notes are an integral part of the condensed financial statements
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American Bio Medica Corporation
Condensed Statements of Cash Flows
(Unaudited)
| For The Six Months Ended | ||||||||
| June 30, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (128,000 | ) | $ | (32,000 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation | 45,000 | 58,000 | ||||||
| Loss on disposal of fixed assets | 0 | 1,000 | ||||||
| Amortization of debt issuance costs | 164,000 | 152,000 | ||||||
| Provision for bad debts | 4,000 | (12,000 | ) | |||||
| Provision for slow moving and obsolete inventory | 42,000 | 15,000 | ||||||
| Share-based payment expense | 18,000 | 19,000 | ||||||
| Changes in: | ||||||||
| Accounts receivable | (49,000 | ) | 145,000 | |||||
| Inventory | (144,000 | ) | 127,000 | |||||
| Prepaid expenses and other current assets | (11,000 | ) | 26,000 | |||||
| Accounts payable | 98,000 | (135,000 | ) | |||||
| Accrued expenses and other current liabilities | (2,000 | ) | (89,000 | ) | ||||
| Wages payable | 54,000 | 17,000 | ||||||
| Other liabilities | 0 | (79,000 | ) | |||||
| Net cash provided by operating activities | 91,000 | 213,000 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property, plant and equipment | (4,000 | ) | (7,000 | ) | ||||
| Patent application costs | (3,000 | ) | (5,000 | ) | ||||
| Net cash used in investing activities | (7,000 | ) | (12,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| (Payments) on debt financing | (1,070,000 | ) | (133,000 | ) | ||||
| Proceeds from refinance | 1,200,000 | 0 | ||||||
| Deferred finance costs | (130,000 | ) | 0 | |||||
| Proceeds from lines of credit | 3,483,000 | 3,469,000 | ||||||
| Payments on lines of credit | (3,486,000 | ) | (3,736,000 | ) | ||||
| Net cash (used in) provided by financing activities | (3,000 | ) | (400,000 | ) | ||||
| Net increase / (decrease) in cash and cash equivalents | 81,000 | (199,000 | ) | |||||
| Cash and cash equivalents - beginning of period | 352,000 | 646,000 | ||||||
| Cash and cash equivalents - end of period | $ | 433,000 | $ | 447,000 | ||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid during period for interest | $ | 131,000 | $ | 126,000 | ||||
| Cash paid for taxes | $ | 0 | $ | 0 | ||||
The accompanying notes are an integral part of the condensed financial statements
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Notes to condensed financial statements (unaudited)
June 30, 2015
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 our audited financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2014. 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 June 30, 2015, the results of our operations for the three and six month periods ended June 30, 2015 and June 30, 2014, and cash flows for the six month periods ended June 30, 2015 and June 30, 2014.
Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of results that may be expected for the year ending December 31, 2015. Amounts at December 31, 2014 are derived from our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.
During the six months ended June 30, 2015, there were no significant changes to our critical accounting policies, which are included in our Annual Report on Form 10-K for the year ended December 31, 2014.
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, we evaluate estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations, contingencies and litigation. We base estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
These unaudited interim 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. Our independent registered public accounting firm’s report on the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014, contained an explanatory paragraph regarding our ability to continue as a going concern. As of the date of this report, our current cash balances, together with cash generated from future operations and amounts available under current credit facilities may not be sufficient to fund operations for the next 12 months if sales levels do not improve. If cash generated from operations is not sufficient to satisfy our working capital and capital expenditure requirements, we will be required to sell additional equity or obtain additional credit facilities. There is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms, if at all.
Recent Accounting Standards
Certain reclassifications have been made to the prior period to confirm to the presentation of the current period.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” this Update as 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 are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. The Company is currently evaluating the effects of adopting this ASU, if it is deemed to be applicable.
The Financial Accounting Standards Board has issued certain accounting standards, updates and regulations as of June 30, 2015 that will become effective in subsequent periods. We do not believe that any of those standards, updates or regulations would have significantly affected our financial accounting measures or disclosures had they been in effect during the three and six months ended June 30, 2015 or June 30, 2014, and we do not believe that any of them will have a significant impact on our financial statements at the time they become effective.
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Note B – Inventory
Inventory is comprised of the following:
| June 30, 2015 | December 31, 2014 | |||||||
| Raw Materials | $ | 1,174,000 | $ | 1,136,000 | ||||
| Work In Process | 421,000 | 390,000 | ||||||
| Finished Goods | 595,000 | 520,000 | ||||||
| Allowance for slow moving and obsolete inventory | (366,000 | ) | (324,000 | ) | ||||
| $ | 1,824,000 | $ | 1,722,000 | |||||
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 June 30, 2015 and 2014:
| June 30, 2015 | June 30, 2014 | |||||||
| Warrants | 3,303,000 | 3,224,000 | ||||||
| Options | 1,547,000 | 2,579,000 | ||||||
The number of securities not included in the diluted net loss per common share for the three and six months ended June 30, 2015 and the three and six months ended June 30, 2014 (because the effect would have been anti-dilutive) were 4,850,000 and 5,803,000, respectively.
Note D – Litigation/Legal Matters
From time to time, the Company is named in legal proceedings in connection with matters that arose during the normal course of business. While the ultimate result of any such litigation cannot be predicted, if the Company is 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. The Company is 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
Our Line of Credit and Debt consisted of the following as of June 30, 2015 and December 31, 2014:
| June 30, 2015 | December 31, 2014 | |||||||
First Niagara: Mortgage payable in equal monthly installments of $13,199 including interest at 8.25% until May 1, 2017 (“Maturity”), collateralized by the building, land and personal property(1) | $ | 0 | $ | 348,000 | ||||
Debenture financing $523,000 in principal amount of Series A Debentures; interest at 15% per annum from August 1, 2013 through January 31, 2015, payable quarterly; maturity date of February 1, 2015(2). | 0 | 523,000 | ||||||
Bridge Loan with Cantone Asset Management, LLC(3): Interest rate of 15% payable upon loan maturity; maturity date of February 1, 2015(3). | 0 | 200,000 | ||||||
| Loan and Security Agreement with Cherokee Financial, LLC(4): 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 on the anniversary of the closing date with a final balloon payment being due on March 26, 2020. Loan is collateralized by a first security interest in building, land and property. | 1,200,000 | 0 | ||||||
Imperium Line of Credit(5): Interest payable in arrears for the preceding calendar month on the first day of each calendar month at a rate of 8% per annum plus “PIK” interest at a 2% per annum. Unused line fee equal to 2% of the maximum amount available under the line, less the aggregate amounts outstanding to Imperium, payable on the first day of each calendar month. Collateral Monitoring Fee of $2,500 due on the first day of each month. Success fee of $175,000 if Imperium terminates due to an event of default, or if we terminate and pre-pay all amounts due to Imperium prior to the stated expiration date of January 16, 2016. | 0 | 1,076,000 | ||||||
| Crestmark Line of Credit(6): 3 year line of credit 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 term 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 receivable and inventory. | 1,072,000 | 0 | ||||||
| 2,272,000 | 2,147,000 | |||||||
| Less debt discount (Cherokee Financial, LLC Loan) | (202,000 | ) | (97,000 | ) | ||||
| Total debt | $ | 2,070,000 | $ | 2,050,000 | ||||
| Current portion | $ | 1,147,000 | $ | 1,837,000 | ||||
| Long-term portion | $ | 923,000 | $ | 213,000 | ||||
| (1) | The mortgage through First Niagara Bank was satisfied in full on March 27, 2015 via a refinancing with Cherokee Financial, LLC. |
| (2) | The Series A Debentures were satisfied in full on March 27, 2015 via a refinancing with Cherokee Financial, LLC. |
| (3) | The Bridge Loan with Cantone Asset Management, LLC was satisfied in full on March 27, 2015 via a refinancing with Cherokee Financial, LLC. |
| (4) | On March 26, 2015, the Company entered into a Loan and Security Agreement with Cherokee Financial, LLC (the “Cherokee LSA”). The purpose of the Cherokee LSA was to refinance the Series A Debentures and Cantone Asset Management LLC Bridge Loan (both of which matured on February 1, 2015) and the Mortgage Consolidation Loan with First Niagara Bank at a better interest rate. |
| (5) | On June 29, 2015, the Imperium Line of Credit was satisfied in Full via a refinancing with Crestmark Bank. |
| (6) | On June 29, 2015, the Company entered into a Loan and Security Agreement with Crestmark Bank. The purpose of the Crestmark LSA was to refinance the Company’s line of credit with Imperium at a better interest rate. |
| 8 |
FIRST NIAGARA: MORTGAGE CONSOLIDATION LOAN
On April 28, 2014, the Company entered into a Third Amendment to Loan Agreement (the “Third Mortgage Consolidation Loan Amendment”) with First Niagara Bank. The Mortgage Consolidation Loan continued to be secured by the Company’s facility in Kinderhook, New York as well as various pieces of machinery and equipment. Under the Third Mortgage Consolidation Loan Amendment, the Mortgage Consolidation Loan was recast into a 3-year fully amortizing note through May 1, 2017. The interest rate of the amended facility was decreased from 9.25% to 8.25%, and the monthly payment was reduced from $14,115 to $13,199. The Company was required to pay First Niagara a renewal fee of 1% of the principal balance as of April 1, 2014, or $4,200. No principal reduction payment was required. All other terms of the Mortgage Consolidation Loan remained unchanged, including compliance with a covenant. The Mortgage Consolidation Loan was satisfied in full on March 27, 2015 via a refinancing with Cherokee Financial, LLC.
The balance on the Mortgage Consolidation Loan was $0 at June 30, 2015 and $348,000 at December 31, 2014, respectively. Interest expense recognized was $5,000 in the six months ended June 30, 2015, and $17,000 in the six months ended June 30, 2014. Interest expense recognized was $0 in the three months ended June 30,2015, and $10,000 in the three months ended June 30, 2014.
DEBENTURE FINANCING
In August 2008, the Company completed an offering of Series A Debentures (“Series A Debentures”) and received gross proceeds of $750,000. The Series A Debentures’ original maturity date was August 1, 2012, but this original maturity date was extended in 2012 (with $645,000 in Series A Debentures extending) and extended again in October 2013 (the “2013 Debenture Extension”). One of the Series A Debenture Holders (representing $10,500 in Series A Debentures) did not wish to extend so the balance on the Series A Debentures was again decreased to $634,500.
Cantone Research, Inc. (“CRI”) again acted as the Company’s Placement Agent in the 2013 Debenture Extension. CRI received 1) a cash fee of $39,750, 2) a 3-year warrant to purchase 75,000 shares of the Company’s common stock at an exercise price of $0.14, and 3) a non-accountable expense allowance paid with 115,000 restricted shares of ABMC common stock (in lieu of cash). The Company also paid $4,000 in legal fees incurred by CRI. The fair value of the CRI warrant was $10,000 and the Company recognized 100% of this expense on the date of the grant in the year ended December 31, 2013.
Under the 2013 Debenture Extension, the term of $634,500 in Series A Debentures was extended to reflect a maturity date of either February 1, 2014 or August 1, 2014, at the election of the Series A Debenture Holder. The interest rate during the extension period remained 15% per annum, due quarterly in arrears and all other terms of the Series A Debentures remained the same. As previously indicated, the extension period of either 6 or 12 months was at the election of the Series A Debenture Holders. There were 27 of the 30 Series Debenture Holders (representing $543,500 of Series A Debentures), which elected to extend for a period of 12 months so they were granted 2-year warrants to purchase 543,500 shares of the Company’s common stock at an exercise price of $0.14. The other 3 (representing $91,000 in Series A Debentures) elected to extend for a period of 6 months and did not receive warrant grants. The fair value of the Debenture Holder warrants was $76,000.
The six months ended June 30, 2015 includes $0 in expense related to the 2013 Debenture Extension, and the six months ended June 30, 2014 includes $38,000 in expense. The three months ended June 30, 2015 includes $0 in expense related to the 2013 Debenture Extension, and the three months ended June 30, 2014 includes $19,000 in expense.
As of June 30, 2015, there was $0 in unrecognized expense with 0 months remaining related to the 2013 Debenture Extension.
BRIDGE LOAN WITH CANTONE ASSET MANAGEMENT, LLC.
When the Series A Debentures originally matured in 2012, there were certain holders (representing $100,000 in Debentures) that did not wish to extend the term of their Series A Debentures. Given this, the Company entered into a Bridge Loan with Cantone Asset Management, LLC (“CAM”) in the amount of $150,000 ($100,000 was used to pay those Holders of Series A Debentures that did not wish to extend the Series A Debentures and $50,000 was used to pay placement agent fees and expenses associated with the extension). The CAM Bridge Loan originally matured on August 1, 2013 with simple interest in advance of 15%.
On October 7, 2013, the Company entered into a new Bridge Loan with CAM (the “2013 Bridge Loan”). The 2013 Bridge Loan was in the amount of $200,000 and was used to pay off the existing Bridge Loan with CAM ($150,000) and the remaining $50,000 was used to pay placement agent fees and expenses associated with the 2013 Bridge Loan.
The maturity date of the 2013 Bridge Loan was August 1, 2014, with simple interest of 15% paid in advance in the form of 300,000 restricted common shares of ABMC stock. In addition to the interest, as inducement to enter into the 2013 Bridge Loan, the Company issued 153,486 restricted shares of the Company’s common stock, and the Company issued CAM a 3-year warrant to purchase 250,000 shares of the Company’s common stock at an exercise price of $0.14. The CAM warrant was valued at $35,000 and the Company recognized 100% of this expense in the year ended December 31, 2013.
| 9 |
2014 Forbearance
On February 7, 2014, the Company paid $91,000 to the 6-month extension Debenture Holders; bringing the balance due to Debenture Holders to $543,000.The Series A Debentures and the 2013 Bridge Loan matured on August 1, 2014 and the Company was unable to pay back the principal amount of $543,000 related to the Series A Debentures and $200,000 related to the 2013 Bridge Loan (together the “Debenture Debt”). The Company was however able to continue to make interest payments on the Debenture Debt. On July 30, 2014, the Company entered into a term sheet to once again engage CRI to solicit existing holders of the Debenture Debt to forbear from exercising remedies of default related to the non-payment of principal until February 1, 2015. All but one of the 27 Series A Debenture holders agreed to forbear. The Company repaid the principal of $20,000 to this one Series A Debenture holder bringing the balance on the Debentures to $523,000. The maturity of the 2013 Bridge Loan was also extended to February 1, 2015.
The Company paid CRI a fee for assisting the Company in obtaining forbearance agreements from the Holders. The fee was 2% of the forbearing principal amount, and was paid $7,000 in cash and 1% in 58,575 restricted shares of the Company’s common stock. A stock price of $0.12 per share was used to determine the number of restricted shares to be issued to CRI. The Company also reimbursed CRI’s legal fees of $1,000. The Company amortized these costs (totaling $15,000) over the course of the forbearance period, or over 6 months. The Company recognized $2,000 in expense in the six months ended June 30, 2015, and $0 in expense in the six months ended June 30, 2014. The Company recognized $0 in costs in the three months ended June 30, 2015, and $0 in costs in the three months ended June 30, 2014. As of June 30, 2015, there is $0 in unrecognized expense with 0 month remaining.
The Company recognized $22,000 in interest expense in the six months ended June 30, 2015 related to the Series A Debentures and the CAM Bridge Loan, and $42,000 in interest expense in the six months ended June 30, 2014. The Company recognized $0 in interest expense in the three months ended June 30, 2015 related to the Series A Debentures and the CAM Bridge Loan, and $20,000 in interest expense in the three months ended June 30, 2014. We had $10,000 in accrued interest expense at June 30, 2015 related to the Series A Debentures and CAM Bridge Loan.
As of June 30, 2015, the balance on the Series A Debenture and the CAM Bridge Loan is $0.
LOAN AND SECURITY AGREEMENT WITH CHEROKEE FINANCIAL, LLC.
On March 26, 2015, the Company entered into a Loan and Security Agreement with Cherokee Financial, LLC (the “Cherokee LSA”). The purpose of the Cherokee LSA was to refinance the Company’s Series A Debentures and CAM Bridge Loan (both of which matured on February 1, 2015) and the Company’s Mortgage Consolidation Loan with First Niagara Bank at a better interest rate. The loan is collateralized by a first security interest in the same assets as the First Niagara Bank loan (i.e. 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 will make interest only payments quarterly on the Cherokee Note, with the first interest payment being due (and paid) on May 15, 2015. The Company will also 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 due on March 26, 2016. A final balloon payment is due on March 26, 2020. In addition to the 8% interest, the Company will pay Cherokee Financial, LLC a 1% annual fee (in cash and paid contemporaneously with payment of quarterly interest) for oversight and administration of the loan. The Company can call the Cherokee Note at anytime with no penalty; except that a 1% administration fee would be required to be paid to Cherokee Financial, LLC to close out all participations.
The Company issued 1.8 million restricted shares of the Company’s common stock to Cherokee Financial LLC. The Company will also issue an additional 0.5 restricted shares of the Company’s common stock, or 600,000 restricted shares, to Cherokee Financial LLC on March 26, 2016, however, if the Company has repaid the Cherokee Note in full prior to this date, the Company is not obligated to issue these additional shares.
As placement agent for the transaction, 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. The Company will also issue an additional 196,000 restricted shares of the Company’s common stock to CRI on March 26, 2016 as an additional placement agent fee and expense allowance, however, if the Company has repaid the Cherokee Note in full prior to this date, the Company is not obligated to issue these additional shares.
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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 exception of the interest expense, the Company will be amortizing these expenses over the term of the Cherokee LSA, or 5 years as deferred finance and debt issuance costs. 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 six months ended June 30, 2015 includes $27,000 in expense related to the Cherokee LSA, and the six months ended June 30, 2014 includes $0 in expense. The three months ended June 30, 2015 includes $17,000 in expense related to the Cherokee LSA, and the three months ended June 30, 2014 includes $0 in expense.
The Company recognized $25,000 in interest expense in the six months ended June 30, 2015, and $0 in interest expense in the six months ended June 30, 2014. The Company recognized $25,000 in interest expense in the three months ended June 30, 2015, and $0 in interest expense in the three months ended June 30, 2014. At June 30, 2015, the Company had $12,000 in accrued interest expense related to the Cherokee LSA.
As of June 30, 2015, the balance on the Cherokee LSA was $1,200,000.
Line of Credit with Imperium Commercial Finance, LLC (“Imperium”)
On January 16, 2013 (the “Imperium Closing Date”), the Company entered into a 3-year Loan and Security Agreement (“LSA”) with Imperium, a Senior Lender.
Under the LSA, the Company was provided with a revolving loan facility (the “Imperium Line of Credit”), which was secured by a first security interest in all receivables, inventory, and intellectual property rights along with a second security interest in machinery and equipment (together the “Collateral”). On March 6, 2014, Imperium amended the Borrowing Base of the Imperium Line of Credit. More specifically, the amount available under the Imperium Line of Credit was capped to the lower of (i) $1,000,000, or (ii) 100% of the eligible outstanding accounts receivable. As of the date of this report, the Borrowing Base of the Imperium Line of Credit is based solely on Eligible Receivables. The Imperium facility also originally included a supplemental advance that was a discretionary facility secured by the same Collateral as the Imperium Line of Credit.
Under the LSA, so long as any obligations were due to Imperium, the Company was required to maintain certain minimum EBITDA (Earnings Before Interest, Taxes Depreciation and Amortization) requirements. The Company did not comply with this covenant starting in the First Quarter of 2013. The Company received a waiver from Imperium for the three months ended March 31, 2013 (for which the Company paid a fee of $10,000), but no further formal waivers were issued.
The Company incurred $435,000 in costs related to the Imperium Line of Credit, and these costs were being amortized over the term of the facility (3 years). On June 29, 2015, all indebtedness due to Imperium was paid in full and Imperium’s security in the Company’s assets was terminated. The Company was required to pay fee of $50,000 to Imperium in the form of an early termination fee.
The Company recognized $137,000 of costs in the six months ended June 30, 2015 related to the Imperium Line of Credit, and $68,000 in costs in the six months ended June 30, 2014. The six months ended June 30, 2015 included accelerated amortization costs of $69,000 due to the early termination of the Imperium Line of Credit. The Company recognized $103,000 of costs in the three months ended June 30, 2015 related to the Imperium Line of Credit, and $34,000 in costs in the three months ended June 30, 2014. The three months ended June 30, 2015 included the same accelerated amortization costs due to early termination of the Imperium Line of Credit.
The Company incurred $48,000 in interest expense in the six months ended June 30, 2015, and $52,000 in interest expense in the six months ended June 30, 2014. The Company incurred $22,000 in interest expense in the three months ended June 30, 2015 and $25,000 in interest expense in the three months ended June 30, 2014. As of June 30, 2015, the Company had $0 in accrued interest related to the Imperium Line of Credit, and the balance on the Imperium Line of Credit was $0.
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 Bank (“Crestmark”), a new Senior Lender, to refinance the Company’s Line of Credit with imperium. The Crestmark Line of Credit is used for working capital and general corporate purposes.
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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. The Inventory Sub-Cap Limit will be reduced by $10,000 per month starting August 1, 2015 until the Inventory Sub-Cap Limit is permanently reduced to $350,000.
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 of June 30, 2015 and at all times thereafter, the Company must maintain a TNW of at least $1,650,000. 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 remains 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 receivables, (ii) prepaid expenses, (iii) deposits, (iv) net lease hold improvements, (v) goodwill and (vi) any other intangible asset, plus Subordinated Debt. For purposes of the TNW covenant calculation, the Company’s Mortgage with Cherokee Financial LLC (See Current Report on Form 8-K filed with the Commission on March 30, 2015) is considered to be subordinated debt given Crestmark’s first security interest in inventory and receivables is not affected by Cherokee Financial LLC’s security interest in other Company assets.
If the Company terminates the LSA prior to its 3 year term, an early exit fee is due as follows: 3% of the Maximum Amount (plus any additional amount owed to Crestmark at time of termination) if terminated in year 1, and 2% if terminated in year 2 or anytime thereafter.
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, permits Crestmark 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 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. These expenses are all being amortized over the term of the Crestmark Line of Credit, or three years. The Company incurred $2,000 of these costs in the three and six months ended June 30,2015, and $0 of costs in the three and six months ended June 30, 2014.
As of the Closing Date, the Company’s loan availability under the Crestmark Line of Credit was $1,072,000. From the loan availability, the Company drew $1,018,000 to pay off the Imperium Line of Credit. The payoff to Imperium consisted of $200,000 owed on the Imperium Supplemental Advance, $22,000 in collateral monitoring fees due to Imperium, principal and interest of $746,000 and the $50,000 early termination fee. An additional $5,000 was drawn to pay the balance (after the partial refund on the Company’s due diligence fee) on the Loan Fee due to Crestmark at closing. Additional Loan Availability of $49,000 was remitted to the Company on the Closing Date.
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As a condition to the financing, the Company’s Chief Executive Officer, Melissa Waterhouse (“Waterhouse”) was required to execute a Validity Guarantee (the “VG”). Under the Validity Guarantee, Waterhouse provides representations and warranties with respect to the validity of the Company’s receivables as well as guaranteeing the accuracy of the Company’s reporting to Crestmark related to the Company’s receivables. As compensation for her execution of the VG, on June 29, 2015, Waterhouse was awarded an option grant representing 250,000 common shares of the Company under the Company’s Fiscal 2001 stock option plan, at an exercise price of $0.12, the closing price of the Company’s common shares on the date of the grant (the “Waterhouse VG Option Grant”). The Waterhouse VG Option Grant vests over three (3) years in equal installments. See Note F below for more information related to the Waterhouse VG Option Grant.
Note F – Stock Options and Warrants
The Company currently has three non-statutory stock option plans, the Fiscal 2000 Non-statutory Stock Option Plan (the “2000 Plan”), the Fiscal 2001 Non-statutory Stock Option Plan (the “2001 Plan”) and the 2013 Equity Compensation Plan (the “2013 Plan”).
During the three months ended June 30, 2015, the Company issued options to purchase 20,000 shares of common stock to each of its four non-employee board members as an annual stock option grant (for a total of 80,000 options), under the 2001 Plan. The Company also issued the Waterhouse VG Option Grant. During the three months ended June 30, 2014, the Company issued options to purchase 20,000 shares of common stock to each of its four non-employee board members as an annual stock option grant (for a total of 80,000 options), under the 2001 Plan.
Stock option activity for the six months ended June 30, 2015 and the six months ended June 30, 2014 is summarized as follows (the figures contained within the tables below have been rounded to the nearest thousand):
| Six months ended June 30, 2015 | Six months ended June 30, 2014 | |||||||||||||||||||||||
| Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value as of June 30, 2015 | Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value as of June 30, 2014 | |||||||||||||||||||
| Options outstanding at beginning of period | 1,295,000 | $ | 0.23 | 3,316,000 | $ | 0.43 | ||||||||||||||||||
| Granted | 340,000 | $ | 0.12 | 80,000 | $ | 0.12 | ||||||||||||||||||
| Exercised | 0 | NA | 0 | NA | ||||||||||||||||||||
| Cancelled/expired | (88,000 | ) | $ | 0.95 | (817,000 | ) | $ | 1.07 | ||||||||||||||||
| Options outstanding at end of period | 1,547,000 | $ | 0.19 | $ | 9,000 | 2,579,000 | $ | 0.23 | $ | 9,000 | ||||||||||||||
| Options exercisable at end of period | 1,105,000 | $ | 0.22 | 2,197,000 | $ | 0.24 | ||||||||||||||||||
The following table summarizes weighted-average assumptions using the Black-Scholes option-pricing model used on the date of the grants issued during the six months ended June 30, 2015 and the six months ended June 30, 2014:
| Six months ended | ||||
| 2015 | 2014 | |||
| Volatility | 63% - 64% | 73% | ||
| Expected term (years) | 10 | 10 | ||
| Risk-free interest rate | 1.92% - 2.33% | 2.64% | ||
| Dividend yield | 0% | 0% | ||
The Company recognized $18,000 in share based payment expense in the six months ended June 30, 2015, and $19,000 in share based payment expense in the six months ended June 30, 2014. The Company recognized $8,000 in share based payment expense in the three months ended June 30, 2015, and $12,000 in share based payment expense in the three months ended June 30, 2014. As of June 30, 2015, there was approximately $49,000 of total unrecognized compensation expense related to vested, and non-vested stock options. This cost is expected to be recognized over a period ranging from 2 to 35 months.
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Warrants
Warrant activity for the six months ended June 30, 2015 and the six months ended June 30, 2014 is summarized as follows (the figures contained within the tables below have been rounded to the nearest thousand):
| Six months ended June 30, 2015 | Six months ended June 30, 2014 | |||||||||||||||||||||||
| Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value as of March 31, 2015 | Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value as of March 31, 2014 | |||||||||||||||||||
| Warrants outstanding at beginning of period | 3,303,000 | $ | 0.17 | 3,224,000 | $ | 0.17 | ||||||||||||||||||
| Granted | 0 | NA | 0 | NA | ||||||||||||||||||||
| Exercised | 0 | NA | 0 | NA | ||||||||||||||||||||
| Cancelled/expired | 0 | NA | 0 | NA | ||||||||||||||||||||
| Warrants outstanding at end of period | 3,303,000 | $ | 0.17 | $ | 0 | 3,224,000 | $ | 0.17 | $ | 0 | ||||||||||||||
| Warrants exercisable at end of period | 3,303,000 | $ | 0.17 | 3,224,000 | $ | 0.17 | ||||||||||||||||||
The Company recognized $100,000 and $20,000 in debt issuance and deferred finance costs related to the issuance of the above warrants outstanding in the six months ended June 30, 2015 and June 30, 2014, respectively. The Company recognized $75,000 and $8,000 in debt issuance and deferred finance costs related to the issuance of the above warrants outstanding in the three months ended June 30, 2015 and June 30, 2014, respectively. The increase in costs from an annual comparison perspective is related to the accelerated amortization of the expense due to the early termination of the Imperium Line of Credit. As of June 30, 2015, there is $0 in total unrecognized expense associated with the issuance of the above warrants outstanding.
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, 2014, 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.
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Overview/Plan of Operations
Sales in the six and three months ended June 30, 2015 decreased when compared to the three and six months ended June 30, 2014. During the six months ended June 30, 2015, we recorded an operating loss of $82,000 and a net loss of $128,000; this compares to an operating profit of $85,000 and a net loss of $32,000 in the six months ended June 30, 2014. During the three months ended June 30, 2015, we recorded an operating loss of $31,000 and a net loss of $83,000; this compares to operating income of $23,000 and a net loss of $41,000 in the three months ended June 30, 2014. We had cash provided by operating activities of $91,000 and $213,000 for the six months ended June 30, 2015 and June 30, 2014, respectively.
In the fourth quarter of 2014, we partially consolidated some of our manufacturing operations. More specifically, we closed down 2 of the 3 units we were leasing in Logan Township, New Jersey and we moved certain manufacturing operations up to our (owned) facility in Kinderhook, New York. The manufacturing operations moved are consistent with operations already occurring in the New York facility. The 1 remaining unit in New Jersey continues to house bulk strip manufacturing and research and development. The cost of the partial consolidation was approximately $92,000 and most of this expense was incurred in the fourth quarter of 2014. We began to see savings (in site costs, shipping, etc) on January 1, 2015. We expect to see a 100% return on this investment by the end of the year ending December 31, 2015. The six months ended June 30, 2015 does include increased manufacturing efficiency resulting in better profit margins, as a result of this partial consolidation.
We continuously examine all expenses in efforts to achieve profitability (if sales levels improve) or to minimize losses going forward (if sales continue to decline). The salary and commission deferral program, (started in August 2013) continued through throughout the six months ended June 30, 2015. 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, and a 50% commission deferral of employee commissions. As of June 30, 2015, we have deferred salary compensation owed of $40,000 and deferred commision owed of $90,000. Over the course of the program, we have repaid portions of the deferred salaries and commissions (with payments totaling $77,000 in the six months ended June 30, 2015, and $24,000 in the six months ended June 30, 2014). 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.
And finally, as part of our debt restructuring initiatives, in the six months ended June 30, 2015, we refinanced substantially all of our existing debt in efforts to decrease our interest costs and increase cash flow. In March 2015, we entered into a $1,200,000 Loan and Security Agreement with Cherokee Financial, LLC (the “Cherokee LSA”). The Cherokee LSA refinanced our Series A Debenture, CAM Bridge Loan and our Mortgage Consolidation Loan with First Niagara Bank. The interest rate on the Cherokee loan facility is 8% with a 1% oversight fee while the interest rate on the Series A Debentures and CAM Bridge Loan was 15%, and the interest rate on the Fist Niagara loan was 8.25%. In June 2015, we entered into a n up to $1,500,000 Loan and Security Agreement with Crestmark Bank that refinanced our line of credit with Imperium. The annual all-in rate (including interest and fees) on the Crestmark Line of Credit is currently 9.35% (the interest rate component is variable based on WSJ prime). The Imperium line of credit annual all-in rate was 12%.
General and Administrative expense in the three and six months ended June 30, 2015 does include increased debt issuance costs and deferred finance costs as a results of accelerated amortization of costs associated with the Imperium Line of Credit. Since the Imperium Line of Credit was terminated early, we were required to record all of the expense (approximately $69,000) in the three months ended June 30, 2015 that was originally going to be amortized until January 2016.
We continue to believe that new products and our ability to sell those markets in new markets will be the primary growth driver in 2015 and beyond. To that end, in the fourth quarter of 2014, we filed an application with the U.S. Food and Drug Administration to receive a marketing clearance that will enable us to sell our urine-based, all-inclusive drug test to the clinical (specifically the CLIA-waived market) and possibly consumer market. In early 2015, we also began development on a new assay that is now nearly complete and barring any unexpected issues; product launch is expected later in 2015. We also have a number of new assays planned in research and development. We remain focused on selling our point of collection drugs of abuse tests, and growing our business through direct sales and select distributors. We are also making efforts to identify and secure new contract work and possible diversification alternatives.
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RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2015
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2014
Net Sales: Net sales in the six months ended June 30, 2015 declined 15.2% when compared to net sale in the six months ended June 30, 2014. Government sales declined in the six months ended June 30, 2015 when compared to the six months ended June 30, 2014 primarily due to the loss of two state contracts (both of which switched to using a product manufactured outside of the United States. In addition, contract-manufacturing sales declined as a result of an inventory surplus at one of our contract-manufacturing customers. The surplus has been used contract-manufacturing levels have returned to a level more in line with historical sales. While we have had periods in which government sales improve, price competition with foreign manufacturers remains. Early indications are that our urine-based, all-inclusive drug test (launched in the early part of the six months ended June 30, 2015) is allowing us to be more cost competitive in this market. National account (U.S.) sales improved when comparing the two periods.
International sales were also down in the six months ended June 30, 2015 when compared to the six months ended June 30, 2014. Deceased sales in other parts of the world were offset by an increase in sales in Latin America in the six months ended June 30, 2015 when compared to the six months ended June 30, 2014.
COST OF GOODS SOLD/GROSS PROFIT: Cost of goods decreased to 52.6% of net sales in the six months ended June 30, 2015 from 56.7% of net sales in the six months ended June 30, 2014. Gross profit increased to 47.3% of net sales in the six months ended June 30, 2015 from 43.3% of net sales in the six months ended June 30, 2014. Expense reductions made, and the partial consolidation of manufacturing operations have enabled us to somewhat overcome the continued price pressures in our markets, resulting in increased gross profit from sales. We continuously monitor manufacturing and inventory levels to ensure they are appropriate to meet current and anticipated sales demands.
OPERATING EXPENSES: Operating expenses increased by 6.2% in the six months ended June 30, 2015 (when compared to the six months ended June 30, 2014). This is the first time in several quarters that operating expenses have increased. Increased selling and marketing and general administrative expenses were partially offset by a decrease in research and development expenses. More specifically:
Research and Development (“R&D”) expense
R&D expense decreased 12.1% when comparing the six months ended June 30, 2015 with the six months ended June 30, 2014. Decreases in utility costs (as a result of the consolidation of our New Jersey facility) and supplies were partially offset by an increase in FDA compliance costs. The increase in FDA compliance costs stems from actions we have been taking related to an FDA marketing application and new assay development. Our R&D department continues to focus their efforts on the enhancement of current products, development of new testing assays, new product platforms and exploration of contract manufacturing opportunities. In the six months ended June 30, 2015, development of a new drug assay continued. We expect to launch the new assay in the year ending December 31, 2015.
Selling and Marketing expense
Selling and marketing expense in the six months ended June 30, 2015 increased by 8.8% when compared to selling and marketing expense in the six months ended June 30, 2014. Throughout the six months ended June 30, 2015, we made investments in selling and marketing. More specifically, we hired two new regional sales managers, attended more trade shows, continued the redesign of marketing materials and purchased new trade show equipment. These investments resulted in increases to salaries, employee benefits, travel and auto expense, telephone expense, advertising expense and trade show expense. These increases were partially offset by decreased commissions, postage and marketing consulting fees. We expect to make additional investments in selling and marketing throughout the year ending December 31, 2015. Our direct sales force continues to focus their selling efforts in our target markets, which include, but are not limited to, Workplace and Government, as well as focusing on the physician and pain management clinic market with our CLIA waived Rapid TOX product line, and focusing on the forensic and international markets for our OralStat® product.
General and Administrative (“G&A” expense)
G&A expense for the six months ended June 30, 2015 increased 1.1% when compared to the six months ended June 30, 2014. Increases in consulting fees, broker, legal fees and other fees associated with debt refinancing in the six months ended June 30, 2015, outside service fees (associated with our ISO recertification audit) and repairs and maintenance were partially offset by decreased investor relations costs, rental expense, patent and licenses, utilities and bank service fees. Share based payment expense was $18,000 in the six months ended June 30, 2015 compared to $19,000 in the six months ended June 30, 2014.
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RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2015
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2014
Net Sales: Net sales in the three months ended June 30, 2015 declined 2.4% when compared to net sales in the three months ended June 30, 2014. Government sales in the three months ended June 30, 2015 were still impacted by the loss of two state contracts (both of which switched to using a product manufactured outside of the United States). In addition, due to budget constraints, one of our government accounts started to use our all-inclusive urine cup when they previously were using a more expensive ABMC product line so, while the amount of product being purchased has not changed, the revenues received from this account have somewhat declined. These declines were nearly offset by an increase in contract manufacturing and international sales. The increase in contract manufacturing is due to the fact that purchases by one of our customers are back in line with historical levels after an inventory surplus issue. For international sales, European sales increased while sales to Latin America where basically unchanged. National accounts (domestic U.S.) were also basically unchanged.
COST OF GOODS SOLD/GROSS PROFIT: Cost of goods decreased to 51.9% of net sales in the three months ended June 30, 2015 from 56.4% of net sales in the three months ended June 30, 2014. Gross profit increased to 48.1% of net sales in the three months ended June 30, 2015 from 43.7% of net sales in the three months ended June 30, 2014. While price pressures from foreign manufacturers and overall market conditions continue to impact sales margins, expense reductions made, and the partial consolidation of our manufacturing operations, have enabled us to somewhat overcome these issues and become more profitable from a manufacturing perspective. Production personnel levels, product manufacturing levels and inventory are continuously monitored to ensure they are adequate to meet current and anticipated sales demands.
OPERATING EXPENSES: Operating expenses increased 14.6% in the three months ended June 30, 2015, compared to the three months ended June 30, 2014. This is the first time in several quarters that operating expenses have increased. Increased expenses were recognized in all divisions. More specifically:
Research and Development (“R&D”) expense
R&D expense increased 13.3% when comparing the three months ended June 30, 2015 with the three months ended June 30, 2014. An increase in FDA compliance costs related to actions we are taking related to an FDA marketing application and new assay development were partially offset by a decrease in utility costs (as a result of the consolidation of our New Jersey facility). Our R&D department continues to focus their efforts on the enhancement of current products, development of new testing assays, new product platforms and exploration of contract manufacturing opportunities. In the three months ended June 30, 2015, development of a new drug assay continued. We expect to launch the new assay in the year ending December 31, 2015.
Selling and Marketing expense
Selling and marketing expense in the three months ended June 30, 2015 increased 15.7% when compared to the three months ended June 30, 2014. Starting in early 2015, we began to make investments in selling and marketing and those investments impacted expenses in the three months ended June 30, 2015. More specifically, we hired two new regional sales managers, attended more trade shows, continued the redesign of marketing materials and purchased new trade show equipment. These investments resulted in increases salaries, employee benefits, travel expense, and auto expense. These increases were partially offset by a decline in postage expense and marketing consulting fees. We expect to continue to make appropriate investments in selling and marketing throughout the year ending December 31, 2015. Our direct sales force continues to focus their selling efforts in our target markets, which include, but are not limited to, Workplace and Government, as well as focusing on the physician and pain management clinic market with our CLIA waived Rapid TOX product line, and focusing on the forensic and international markets for our OralStat product.
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General and Administrative (“G&A” expense)
G&A expense for the three months ended June 30, 2015 increased 14.0% when compared to the three months ended June 30, 2014. Increased consulting fees, broker, legal fees and other fees associated with debt refinancing in the three months ended June 30, 2015, insurance costs, outside service fees (associated with our ISO recertification audit) and repairs and maintenance were partially offset by decreased investor relations costs, rental expense and bank service fees. Share based payment expense was $8,000 in the three months ended June 30, 2015 compared to $11,000 in the three months ended June 30, 2014.
Liquidity and Capital Resources as of June 30, 2015
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, 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 will examine other growth opportunities including strategic alliances and expect such activities will be funded from existing cash and cash equivalents, issuance of additional equity or additional borrowings, subject to market and other conditions. Our financial statements for the year ended December 31, 2014 were prepared assuming we will continue as a going concern. Although our financial condition has improved when comparing the six months ended June 30, 2015 with the six months ended June 30, 2014, 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. If cash generated from operations is not sufficient to satisfy our working capital and capital expenditure requirements, we will be required to sell additional equity or obtain additional credit facilities. There is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms, if at all.
As of June 30, 2015, we had the following debt/credit facilities:
| Facility | Debtor | Balance as of June 30, 2015 | ||||
| Loan and Security Agreement | Cherokee Financial, LLC | $ | 1,200,000 | |||
| Revolving Line of Credit | Crestmark Bank | $ | 1,072,000 | |||
Working Capital
Our working capital increased $736,000 at June 30, 2015 when compared to working capital at December 31, 2014 primarily as a result of an increase in cash and inventory and a decrease in the current portion of our long-term debt (as a result of our refinancing completed in March 2015). We have historically satisfied net working capital requirements through cash from operations and bank debt.
Dividends
We have never paid any dividends on our common shares and anticipate that all future earnings, if any, will be retained for use in our business, and therefore, we do not anticipate paying any cash dividends.
Cash Flows
Cash provided by operating activities is largely comprised of the net loss of $128,000 for the six months ended June 30, 2015, an increase of $144,000 in inventory and an increase in accounts payable. The increase in inventory stems primarily from new components related to the Company’s all-inclusive drug test cup launched in early 2015 and increased inventory of standard product configurations in anticipation of expected sales.
Net cash used in investing activities in the six months ended June 30, 2015 and in the six months ended June 30, 2014 was for the purchase of property, plant and equipment and patent application costs.
Net cash used in financing activities in the six months ended June 30, 2015 consisted of proceeds from our refinancing offset by debt payments, deferred finance costs and net proceeds from our lines of credit. Net cash used in financing activities in the six months ended June 30, 2015 consisted of payments on debt financing and payments on our line of credit, offset by proceeds from our line of credit.
At June 30, 2015, we had cash and cash equivalents of $433,000.
Outlook/Risk
Although our financial condition has improved over previous recent fiscal years, if events and circumstances occur such that we do not meet our current operating plans, we are unable to raise sufficient additional equity or debt financing, or our credit facilities are insufficient or not available, we may be required to further reduce expenses or take other steps which could have a material adverse effect on our future performance.
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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 covenants 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 effected 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)/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.
See Part I; Item 1; Note D - Litigation in the Notes to interim Financial Statements included in this report for a description of pending legal proceedings in which we may be a party.
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, 2014.
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.
None.
| 31.1/31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer/Principal Financial Officer |
| 32.1/32.2 | Certification of the Chief Executive Officer/Principal 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 June 30, 2015, 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. |
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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: August 14, 2015
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