Note A - The Company and its Significant Accounting
Policies
The Company:
American Bio Medica
Corporation (the “Company”) is in the business of
developing, manufacturing, and marketing point of collection
testing products for drugs of abuse, as well as performing contract
manufacturing services for third parties.
Going Concern:
The
Company’s financial statements have been prepared assuming
the Company will continue as a going concern, which assumes the
realization of assets and the satisfaction of liabilities in the
normal course of business. For the year ended December 31, 2017
(“Fiscal 2017”), the Company had a net loss of
$545,000, and net cash provided by operating activities of
$181,000, compared to a net loss of $345,000 and net cash provided
by operations of $241,000 in Fiscal 2016. The Company’s cash
balances decreased by $120,000 in Fiscal 2017 and decreased by
$2,000 in Fiscal 2016.
As of
December 31, 2017, the Company had an accumulated deficit of
$20,845,000. Over the course of the last several fiscal years, the
Company has implemented a number of expense and personnel cuts,
implemented a salary and commission deferral program, consolidated
certain manufacturing operations of the Company, and refinanced
debt. The salary and commission deferral program through Fiscal
2017 consisted of a 20% salary deferral for the Company’s
executive officer (Melissa Waterhouse), and a non-executive VP
Operations. As of December 31, 2017, the Company had total deferred
salary/commission of $257,000. Over the course of the program, the
Company has paid portions of the deferred salary/commissions (with
payments totaling $27,000 in Fiscal 2017). As cash flow from
operations allows, the Company intends to continue to make payments
related to the salary and commission deferral program, however the
deferral program is continuing and the Company expects it will
continue for up to another 12 months.
The
Company’s current cash balances, together with cash generated
from future operations and amounts available under its credit
facilities may not be sufficient to fund operations through April
2019. The Company’s current line of credit expires on June
22, 2020 and has a maximum availability of $1,500,000. However, the
amount available under the line of credit is based upon the balance
of the Company’s accounts receivable and inventory so the
maximum amount is not available to borrow. As of December 31, 2017,
based on the Company’s availability calculation, there were
no additional amounts available under the line of credit because
the Company draws any balance available on a daily basis. If sales
levels continue to decline, the Company will have reduced
availability on the line of credit due to decreased accounts
receivable balances. In addition, the Company would expect its
inventory levels to decrease if sales levels decline further, which
would result in further reduced availability on the line of credit.
If availability under the line of credit is not sufficient to
satisfy the Company’s working capital and capital expenditure
requirements, the Company will be required to obtain additional
credit facilities or sell additional equity securities, or delay
capital expenditures which could have a material adverse effect on
its business. 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.
The
Company’s ability to remain compliant with obligations under
its current credit facilities will depend on the Company’s
ability to replace lost sales and further increase sales. The
Company’s ability to repay its current debt may also be
affected by general economic, financial, competitive, regulatory,
business and other factors beyond its control, including those
discussed herein. If the Company is unable to meet its credit
facility obligations, the Company would be required to raise money
through new equity and/or debt financing(s) and, there is no
assurance that the Company would be able to find new financing, or
that any new financing would be at favorable terms.
The
Company was not in compliance with the TNW covenant as of December
31, 2017; however, the Company received a waiver from Crestmark
Bank. As consideration for the granting of the waiver, Crestmark
Bank increased the interest rate on the Crestmark Line of Credit
from the current Wall Street Journal Prime Rate (the “Prime
Rate”) plus 2% to the Prime Rate plus 3%. The increase in
interest rate will be effective as of May 1, 2018. The
Company’s failure to comply with the TNW covenant under its
Crestmark Line of Credit (a failure that is not waived) could
result in an event of default, which, if not cured or waived, could
result in the Company being required to pay much higher costs
associated with the indebtedness. If the Company is forced to
refinance debt on less favorable terms, results of operations and
financial condition could be adversely affected by the increased
costs and rates. The Company 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.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
The
Company’s history of operating cash flow deficits, its
current cash position and lack of access to capital raise doubt
about its ability to continue as a going concern and its continued
existence is dependent upon several factors, including its` ability
to raise revenue levels and control costs to generate positive cash
flows, to sell additional shares of the Company’s common
stock to fund operations and obtain additional credit facilities.
Selling additional shares of the Company’s common stock and
obtaining additional credit facilities may be more difficult as a
result of limited access to equity markets and the tightening of
credit markets. 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. The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or the amount of or classification of
liabilities that might be necessary as a result of this
uncertainty.
Significant Accounting Policies:
[1]
Cash
equivalents:
The Company considers all highly liquid
financial instruments purchased with a maturity of three months or
less to be cash equivalents.
[2]
Accounts Receivable:
Accounts receivable consists of mainly trade receivables due from
customers for the sale of our products. Payment terms vary on
a customer-by-customer basis, and currently range from cash on
delivery to net 60 days. Receivables are considered past due
when they have exceeded their payment terms. Accounts
receivable have been reduced by an estimated allowance for doubtful
accounts. The Company estimates its allowance for doubtful accounts
based on facts, circumstances and judgments regarding each
receivable. Customer payment history and patterns, length of
relationship with the customer, historical losses, economic and
political conditions, trends and individual circumstances are among
the items considered when evaluating the collectability of the
receivables. Accounts are reviewed regularly for collectability and
those deemed uncollectible are written off. At December 31, 2017
and December 31, 2016, the Company had an allowance for doubtful
accounts of $52,000
and
$49,000, respectively.
[3]
Inventory:
Inventory is
stated at the lower of cost or net realizable value. Work in
process and finished goods are comprised of labor, overhead and raw
material costs. Labor and overhead costs are determined on a
rolling average cost basis and raw materials are determined on an
average cost basis. At December 31, 2017 and December 31, 2016, the
Company established an allowance for slow moving and obsolete
inventory of $500,000 and $449,000, respectively.
[4]
Income taxes:
The Company
follows ASC 740 “Income Taxes” (“ASC 740”)
which prescribes the asset and liability method whereby deferred
tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted laws and tax rates
that will be in effect when the differences are expected to
reverse. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits that are
not expected to be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period
that such tax rate changes are enacted. Under ASC 740, tax benefits
are recorded only for tax positions that are more likely than not
to be sustained upon examination by tax authorities. The amount
recognized is measured as the largest amount of benefit that is
greater than 50 percent likely to be realized upon ultimate
settlement. Unrecognized tax benefits are tax benefits claimed in
the Company’s tax returns that do not meet these recognition
and measurement standards.
On
December 22, 2017, the Tax Reform Act was signed into law. This
legislation significantly changes U.S. tax law by, among other
things, lowering corporate income tax rates, implementing a
territorial tax system and imposing a repatriation tax on deemed
repatriated earnings of foreign subsidiaries. The Tax Reform Act
permanently reduces the U.S. corporate income tax rate from a
maximum of 35% to a flat 21% rate, effective January 1,
2018.
On
December 22, 2017, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 118 to address the application of
GAAP in situations when a registrant does not have the necessary
information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for
certain income tax effects of the Tax Reform Act. Although the
Company is unable to make a reasonable estimate on the full effect
on our income taxes as of the date of this report, the Company has
recognized the provisional tax impact related to the revaluation of
deferred tax assets and liabilities and included these amounts in
its financial statements for Fiscal 2017. Deferred income tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. As a result of the
reduction in the U.S. corporate income tax rate from 35% to 21%
under the Tax Reform Act, the Company revalued its net U.S.
deferred income tax assets and liabilities at December 31, 2017
from $5,400,000 to $3,600,000, a decrease of $1,800,000. In
addition, the deferred income tax asset valuation allowance
increased by $1,800,000 as a result of the reduction in the
corporate income tax rate.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
The
ultimate impact may differ from the provisional amounts, possibly
materially, due to, among other things, additional analysis,
changes in interpretations and assumptions the Company has made,
additional regulatory guidance that may be issued, and actions the
Company may take as a result of the Tax Reform Act. The accounting
is expected to be complete when the Company’s 2017 U.S.
corporate income tax return is filed in 2018.
[5]
Depreciation and
amortization:
Property, plant and equipment are depreciated
on the straight-line method over their estimated useful lives;
generally 3-5 years for equipment and 30 years for buildings.
Leasehold improvements and capitalized lease assets are amortized
by the straight-line method over the shorter of their estimated
useful lives or the term of the lease. Intangible assets include
the cost of patent applications, which are deferred and charged to
operations over 19 years. The accumulated amortization of patents
is $175,000 and $171,000 at December 31, 2017 and December 31,
2016, respectively. Annual amortization expense of such intangible
assets is expected to be $7,000 per year for the next 5
years.
[6]
Revenue recognition:
The
Company recognizes revenue upon shipment to the customer. The
Company's price is fixed and determinable at the date of sale. The
Company does not have any obligation for customer acceptance. In
the case of distributors, the Company does not have any obligation
to bring about the resale of the product. All customers have
payment terms that range from payment with order and net 60 days
from the date of invoice. In all cases, the Company expects to
receive payment as the customer is billed. There is no variable or
contingent component to the Company’s sales. Our contract
manufacturing customers also have fixed prices and the Company
expects to receive payment as the customer is billed.
ASU 2014-09, “Revenue from
Contracts with Customers
” was issued in May 2014 and
it provides guidance for revenue recognition. The core principle of
ASU 2014-09 is that a company will recognize revenue when it
transfers promised goods or services to customers in an amount that
reflects the consideration to which the company expects to be
entitled in exchange for those goods or services. In doing so,
companies will need to use more judgment and make more estimates
than under current guidance. Examples of the use of judgments and
estimates mayinclude identifying performance obligations in the
contract, estimating the amount of variable consideration to
include in the transaction price and allocating the transaction
price to each separate performance obligation. The update also
requires more detailed disclosures to enable users of financial
statements to understand the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with
customers. ASU 2014-09 provides for two transition methods to the
new guidance: a retrospective approach and a modified retrospective
approach. In August 2015, ASU 2015-14, “Revenue from
Contracts with Customers: Deferral of the Effective Date” was
issued as a revision to ASU 2014-09. ASU 2015-14 revised the
effective date to fiscal years, and interim periods within those
years, beginning after December 15, 2017. Subsequently, additional
updates were issued related to this topic, ASU 2016-08, ASU
2016-10, ASU 2016-12 and ASU 2016-20. Early adoption of ASU 2014-09
is permitted but not prior to periods beginning after December 15,
2016 (i.e. the original adoption date per ASU No. 2014-09). The
Company is adopting ASU 2014-09 in the first quarter of Fiscal 2018
and it will not have an impact on our financial position or results
of operations.
[7]
Shipping and handling:
Shipping and handling fees charged to customers are included in net
sales, and shipping and handling costs incurred by the Company, to
the extent of those costs charged to customers, are included in
cost of sales.
[8]
Research and development:
Research and development (“R&D”) costs are charged
to operations when incurred. These costs include salaries,
benefits, travel, costs associated with regulatory applications,
supplies, depreciation of R&D equipment and other miscellaneous
expenses.
[9]
Net loss per common share:
Basic loss per common share is calculated by dividing net loss by
the weighted average number of outstanding common shares during the
period.
Potential common
shares outstanding as of December 31, 2017 and 2016:
|
|
|
|
|
Warrants
|
2,060,000
|
2,060,000
|
|
Options
|
2,147,000
|
2,107,000
|
|
Total
|
4,207,000
|
4,167,000
|
For
Fiscal 2017 and Fiscal 2016, the number of securities not included
in the diluted loss per share was 4,207,000 and 4,167,000,
respectively, as their effect was anti-dilutive due to net loss in
each year.
[10]
Use of estimates:
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Our management believes the major estimates
and assumptions impacting our financial statements are the
following:
●
estimates of the
fair value of stock options and warrants at date of grant;
and
●
estimates of
accounts receivable reserves; and
●
estimates of the
inventory reserves; and
●
deferred tax
valuation.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
The fair value of
stock options and warrants issued to employees, members of our
Board of Directors, and consultants in connection with debt
financings is estimated on the date of grant based on the
Black-Scholes options-pricing model utilizing certain assumptions
for a risk free interest rate; volatility; and expected remaining
lives of the awards. The assumptions used in calculating the fair
value of share-based payment awards represent management's best
estimates, but these estimates involve inherent uncertainties and
the application of management judgment.
As a
result, if factors change and the Company uses different
assumptions, the Company's equity-based compensation expense could
be materially different in the future. In addition, the Company is
required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. In estimating
the Company's forfeiture rate, the Company analyzed its historical
forfeiture rate, the remaining lives of unvested options, and the
amount of vested options as a percentage of total options
outstanding.
If the
Company's actual forfeiture rate is materially different from its
estimate, or if the Company reevaluates the forfeiture rate in the
future, the equity-based compensation expense could be
significantly different from what we have recorded in the current
period.
Actual
results may differ from estimates and assumptions of future
events.
[11]
Impairment of long-lived assets:
The
Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of
those assets.
[12]
Financial Instruments:
The
carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses, and other liabilities
approximate their fair value based on the short term nature of
those items.
Estimated fair
value of financial instruments is determined using available market
information. In evaluating the fair value information, considerable
judgment is required to interpret the market data used to develop
the estimates. The use of different market assumptions and/or
different valuation techniques may have a material effect on the
estimated fair value amounts.
Accordingly, the
estimates of fair value presented herein may not be indicative of
the amounts that could be realized in a current market
exchange.
ASC
Topic 820, “Fair Value Measurements and Disclosures”
(“ASC Topic 820”) establishes a hierarchy for ranking
the quality and reliability of the information used to determine
fair values. ASC Topic 820 requires that assets and liabilities
carried at fair value be classified and disclosed in one of the
following three categories:
Level
1: Unadjusted quoted market prices in active markets for identical
assets or liabilities.
Level
2: Unadjusted quoted prices in active markets for similar assets or
liabilities, unadjusted quoted prices for identical or similar
assets or liabilities in markets that are not active, or inputs
other than quoted prices are observable for the asset or
liability.
Level
3: Unobservable inputs for the asset or liability.
The
Company endeavors to utilize the best available information in
measuring fair value. Financial assets and liabilities are
classified based on the lowest level of input that is significant
to the fair value measurement. The following methods and
assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
Cash
and Cash Equivalents—The carrying amount reported in the
balance sheet for cash and cash equivalents approximates its fair
value due to the short-term maturity of these
instruments.
Line of
Credit and Long-Term Debt—The carrying amounts of the
Company’s borrowings under its line of credit agreement and
other long-term debt approximates fair value, based upon current
interest rates, some of which are variable interest
rates.
[13]
Accounting
for share-based payments and stock warrants:
In accordance
with the provisions of ASC Topic 718, “Accounting for Stock
Based Compensation”, the Company recognizes share-based
payment expense for stock options and warrants. The weighted
average fair value of options issued and outstanding in Fiscal 2017
and Fiscal 2016 was $0.13 in each year. (See Note H [2] –
Stockholders’ Equity)
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
The
Company accounts for derivative instruments in accordance with ASC
Topic 815 “Derivatives and Hedging” (“ASC Topic
815”). The guidance within ASC Topic 815 requires the Company
to recognize all derivatives as either assets or liabilities on the
statement of financial position unless the contract, including
common stock warrants, settles in the Company’s own stock and
qualifies as an equity instrument. A contract designated as an
equity instrument is included in equity at its fair value, with no
further fair value adjustments required; and if designated as an
asset or liability is carried at fair value with any changes in
fair value recorded in the results of operations. The weighted
average fair value of warrants issued and outstanding was $0.18 in
both Fiscal 2017 and Fiscal 2016. (See Note H [3] –
Stockholders’ Equity)
[14]
Concentration of credit
risk:
The Company sells products primarily to United States
customers and distributors. Credit is extended based on an
evaluation of the customer’s financial
condition.
At
December 31, 2017, one customer accounted for 38.4% of the
Company’s net accounts receivable. A substantial portion of
this balance was collected in the first quarter of the year ending
December 31, 2018. Due to the long standing nature of the
Company’s relationship with this customer and contractual
obligations, the Company is confident it will recover these
amounts.
At
December 31, 2016, one customer accounted for 31.5% of the
Company’s net accounts receivable. These amounts were
collected in Fiscal 2017.
The
Company has established an allowance for doubtful accounts of
$52,000 and $49,000 at December 31, 2017 and December 31, 2016,
respectively, based on factors surrounding the credit risk of our
customers and other information.
Two of
the Company’s customers accounted for 35.1% and 14.6% of net
sales of the Company in Fiscal 2017.
Two of
the Company’s customers accounted for 30.9% and 15.5% of net
sales of the Company in Fiscal 2016.
The
Company maintains certain cash balances at financial institutions
that are federally insured and at times the balances have exceeded
federally insured limits.
[15]
Reporting comprehensive
income:
The Company reports comprehensive income in
accordance with the provisions of ASC Topic 220, “Reporting
Comprehensive Income” (“ASC Topic 220”). The
provisions of ASC Topic 220 require the Company to report the
change in the Company's equity during the period from transactions
and events other than those resulting from investments by, and
distributions to, the shareholders. For Fiscal 2017 and Fiscal
2016, comprehensive income was the same as net income.
[16]
Reclassifications:
Certain
items have been reclassified from the prior years to conform to the
current year presentation.
[17]
New accounting pronouncements:
In the
year ended December 31, 2017, we adopted the following accounting
standards set forth by the Financial Accounting Standards Board
(“FASB”):
ASU 2015-11, “Simplifying the
Measurement of Inventory”.
ASU 2015-11 was issued in
July 2015. ASU 2015-11 applies to inventory measured using the
first-in, first-out (“FIFO”) or average cost methods.
Under the updated guidance, an entity should measure inventory that
is within scope at the lower of cost and net realizable value,
which is the estimated selling prices in the ordinary course of
business, less reasonably predictable costs of completion, disposal
and transportation. The Company adopted ASU 2015-11 in the quarter
ended March 31, 2017, and it did not have a material impact on our
financial position or results of operations.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
ASU 2016-09, “Improvements to
Employee Share-Based Payment Accounting”.
ASU 2016-09
was issued in March 2016 and it simplifies several aspects of
accounting for share-based payment transactions, including the
income tax consequences, forfeitures, classification of awards as
either equity or liabilities, and classification on the statement
of cash flows. The guidance is effective for annual reporting
periods beginning after December 15, 2016, including interim
periods. Early adoption is permitted. An entity that elects early
adoption of the amendment under ASU 2016-09 must adopt all aspects
of the amendment in the same period. The Company adopted ASU
2016-09 in the quarter ended March 31, 2017 and it did not have a
material effect on our financial position or results of
operations.
ASU 2015-17, “Income
Taxes”.
ASU 2015-17 was issued in December 2015 and
addresses simplification of the presentation of deferred income
taxes. The amendments in ASU 2015-17 require that deferred tax
liabilities and assets be classified as noncurrent in a classified
statement of financial position. The amendments in this update
apply to all entities that present a classified statement of
financial position. The current requirement is that deferred tax
liabilities and assets, net of a tax-paying component of an entity
be offset and presented as two amounts; one current and one
long-term. ASU 2015-17 is effective for financial statements issued
for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. Early adoption was permitted.
The Company adopted ASU 2015-17 in the quarter ended March 31, 2017
and it did not have a material impact on our financial position or
results of operations.
The
following accounting standards have been issued prior to the end of
Fiscal 2017 but, did not require adoption as of Fiscal
2017:
ASU 2017-11, “Earnings Per
Share, Distinguishing Liabilities from Equity, Derivatives and
Hedging”.
ASU 2017-11 was issued in July 2017. The
amendments in ASU 2017-11 change the classification analysis of
certain equity-linked financial instruments (or embedded features)
with down round features. When determining whether certain
financial instruments should be classified as liabilities or equity
instruments, a down round feature will no longer preclude equity
classification when assessing whether the instrument is indexed to
an entity’s own stock. The amendments also clarify existing
disclosure requirements for equity-classified instruments. As a
result, a freestanding equity-linked financial instrument (or
embedded conversion option) would not be accounted for as a
derivative liability at fair value as a result of the existence of
a down round feature. For freestanding equity classified financial
instruments, the amendments require entities that present earnings
per share (EPS) in accordance with Topic 260 to recognize the
effect of the down round feature when it is triggered. That effect
is treated as a dividend and as a reduction of income available to
common shareholders in basic EPS. Convertible instruments with
embedded conversion options that have down round features are now
subject to the specialized guidance for contingent beneficial
conversion features (in Subtopic 470-20, Debt—Debt with
Conversion and Other Options), including related EPS guidance (in
Topic 260). ASU 2017-11 is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2018. Early adoption is permitted. The Company is evaluating the
impact of ASU 2017-11.
ASU 2017-09, “Compensation
– Stock Compensation (Topic 718)”.
ASU 2017-09
was issued in May 2017. The amendments in ASU 2017-09 provide
guidance about which changes to the terms or conditions of a
share-based payment award require an entity to apply modification
accounting. More specifically, that an entity should account for
the effects of modification unless all the following are met: 1)
the fair value, calculated or intrinsic value of the modified award
is the same fair value, calculated or intrinsic value of the
original award immediately before the original award is modified,
2) the vesting conditions of the modified award are the same as the
vesting conditions of the original award immediately before the
original award is modified and 3) the classification of the
modified award as an equity instrument or a liability instrument is
the same as the classification of the original award immediately
before the original grant is modified. The current disclosure
requirements in Topic 718 apply regardless of whether accounting
modification is applied. ASU 2017-09 is effective for annual
periods and interim periods within those annual periods; beginning
after December 15, 2017.The Company expects to adopt ASU 2017-09 in
the first quarter of Fiscal 2018 and does not believe it will have
an impact on our financial position or results of
operations.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
ASU 2017-01, “Business
Combinations (Topic 805)”
. ASU 2017-01 was issued in
January 2017. The amendments in ASU 2017-01 clarify the definition
of a business with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted
for as acquisitions or disposals of assets or businesses. The
definition of a business affects many areas of accounting including
acquisitions, disposals, goodwill, and consolidation. The guidance
is effective for interim and annual periods beginning after
December 15, 2017 and should be applied prospectively on or after
the effective date. The Company expects to adopt ASU 2017-01 in the
first quarter of Fiscal 2018 and does not believe it will have an
impact on our financial position or results of
operations.
ASU 2016-02,
“Leases”.
ASU 2016-02 was issued in February
2016 and it requires a lessee to recognize a lease liability and a
right-of-use asset on its balance sheet for all leases, including
operating leases, with a term greater than 12 months. Lease
classification will determine whether a lease is reported as a
financing transaction in the income statement and statement of cash
flows. ASU 2016-02 does not substantially change lessor accounting,
but it does make certain changes related to leases for which
collectability of the lease payments is uncertain or there are
significant variable payments. Additionally, ASU 2016-02 makes
several other targeted amendments including a) revising the
definition of lease payments to include fixed payments by the
lessee to cover lessor costs related to ownership of the underlying
asset such as for property taxes or insurance; b) narrowing the
definition of initial direct costs which an entity is permitted to
capitalize to include only those incremental costs of a lease that
would not have been incurred if the lease had not been obtained; c)
requiring seller-lessees in a sale-leaseback transaction to
recognize the entire gain from the sale of the underlying asset at
the time of sale rather than over the leaseback term; and d)
expanding disclosures to provide quantitative and qualitative
information about lease transactions. ASU 2016-02 is effective for
all annual and interim periods beginning January 1, 2019, and is
required to be applied retrospectively to the earliest period
presented at the date of initial application, with early adoption
permitted. The Company is currently evaluating the impact of ASU
2016-02.
ASU 2014-09, “Revenue from
Contracts with Customers
”, issued in May 2014,
provides guidance for revenue recognition. The core principle of
ASU 2014-09 is that a company will recognize revenue when it
transfers promised goods or services to customers in an amount that
reflects the consideration to which the company expects to be
entitled in exchange for those goods or services. In doing so,
companies will need to use more judgment and make more estimates
than under current guidance. Examples of the use of judgments and
estimates may include identifying performance obligations in the
contract, estimating the amount of variable consideration to
include in the transaction price and allocating the transaction
price to each separate performance obligation. The update also
requires more detailed disclosures to enable users of financial
statements to understand the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with
customers. ASU 2014-09 provides for two transition methods to the
new guidance: a retrospective approach and a modified retrospective
approach. In August 2015, ASU 2015-14, “Revenue from
Contracts with Customers: Deferral of the Effective Date” was
issued as a revision to ASU 2014-09. ASU 2015-14 revised the
effective date to fiscal years, and interim periods within those
years, beginning after December 15, 2017. Subsequently, additional
updates were issued related to this topic, ASU 2016-08, ASU
2016-10, ASU 2016-12 and ASU 2016-20. Early adoption of ASU 2014-09
is permitted but not prior to periods beginning after December 15,
2016 (i.e. the original adoption date per ASU No. 2014-09). The
Company adopted ASU 2014-09 in the first quarter of Fiscal 2018 and
it did not have an impact on our financial position or results of
operations.
Any
other new accounting pronouncements recently issued, but not yet
effective, have been reviewed and determined to be not applicable
or were related to technical amendments or codification. As a
result, the adoption of such new accounting pronouncements, when
effective, is not expected to have a material effect on the
Company’s financial position or results of
operations.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
NOTE B - INVENTORY
Inventory is
comprised of the following:
|
|
|
|
|
Raw
Materials
|
$
1,023,000
|
$
1,028,000
|
|
Work In
Process
|
403,000
|
385,000
|
|
Finished
Goods
|
547,000
|
618,000
|
|
Allowance for
slow moving and obsolete inventory
|
(500,000
)
|
(449,000
)
|
|
|
$
1,473,000
|
$
1,582,000
|
NOTE C – PROPERTY, PLANT AND EQUIPMENT
Property, plant and
equipment, at cost, are as follows:
|
|
|
|
|
|
|
|
|
Land
|
$
102,000
|
$
102,000
|
|
Buildings
and improvements
|
1,352,000
|
1,352,000
|
|
Manufacturing
and warehouse equipment
|
2,108,000
|
2,064,000
|
|
Office
equipment (incl. furniture and fixtures)
|
412,000
|
412,000
|
|
|
3,974,000
|
3,930,000
|
|
Less
accumulated depreciation
|
(3,182,000
)
|
(3,106,000
)
|
|
|
$
792,000
|
$
824,000
|
Depreciation
expense was $76,000 and $86,000 in Fiscal 2017 and Fiscal 2016,
respectively.
NOTE D – ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
Accrued
expenses and other current liabilities consisted of the
following:
|
|
|
|
|
Accounting
fees
|
$
75,000
|
$
68,000
|
|
Interest
payable
|
11,000
|
18,000
|
|
Accounts
receivable credit balances
|
11,000
|
5,000
|
|
Sales tax
payable
|
89,000
|
67,000
|
|
Deferred
compensation
|
113,000
|
72,000
|
|
Other current
liabilities
|
12,000
|
46,000
|
|
|
$
311,000
|
$
276,000
|
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
NOTE E – DEBT AND LINE OF CREDIT
The
Company’s Line of Credit and Debt consisted of the following
as of December 31, 2017 and December 31, 2016:
|
|
|
|
|
Loan and Security Agreement with Cherokee
Financial, LLC
: 5 year note at an annual interest rate of 8%
plus a 1% annual oversight fee, interest only and oversight fee
paid quarterly with first payment being made on May 15, 2015,
annual principal reduction payment of $75,000 due each year
beginning on February 15, 2016, with a final balloon payment being
due on February 15, 2020. Loan is collateralized by a first
security interest in building, land and property
|
$
1,050,000
|
$
1,125,000
|
|
Crestmark Line of Credit:
3 year line of
credit maturing on June 22, 2020 with interest payable at a
variable rate based on WSJ Prime plus 2% with a floor of 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.
|
446,000
|
639,000
|
|
Crestmark Equipment Term Loan:
38 month
equipment loan related to the purchase of manufacturing equipment,
at an interest rate of WSJ Prime Rate plus 3%; or 7.50% as of the
date of this report.
|
31,000
|
0
|
|
|
1,527,000
|
1,764,000
|
|
|
|
|
|
Less debt
discount & issuance costs (Cherokee Financial, LLC
loan)
|
(203,000
)
|
(297,000
)
|
|
Total debt,
net
|
$
1,324,000
|
$
1,467,000
|
|
|
|
|
|
Current
portion
|
$
533,000
|
$
714,000
|
|
Long-term
portion, net of current portion
|
$
791,000
|
$
753,000
|
At
December 31, 2017, the following are the debt maturities for each
of the next five years:
|
2018
|
533,000
(1)
|
|
2019
|
87,000
|
|
2020
|
704,000
|
|
2021
|
0
|
|
2022
|
0
|
|
|
$
1,324,000
|
(1)
Although the Crestmark Line of Credit does not mature until June
22, 2020, the balance on the line of credit is included in the debt
maturity for 2018 given the “demand” nature of the line
of credit.
LOAN AND SECURITY AGREEMENT WITH CHEROKEE FINANCIAL, LLC.
(“CHEROKEE”)
On
March 26, 2015, the Company entered into a LSA with Cherokee
Financial, LLC (the “Cherokee LSA”). The purpose of 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. The Cherokee loan is collateralized
by a first security interest in real estate and machinery and
equipment. Under the Cherokee LSA, the Company was provided the sum
of $1,200,000 in the form of a 5-year Note at an annual interest
rate of 8%. The Company is making interest only payments quarterly
on the Cherokee Note, with the first interest payment paid on May
15, 2015. The Company is also required to make an annual principal
reduction payment of $75,000 on each anniversary of the date of the
closing; with the first principal reduction payment being made on
February 15, 2016 and the most recent principal reduction payment
being made on February 15, 2018 (see Note K – Subsequent
Event). 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
loan at any time with no penalty; except that a 1% administration
fee would be required to be paid to Cherokee to close out all
participations.
The
Company issued 1.8 million restricted shares of the Company’s
common stock to Cherokee for payment of fees. In addition, because
the loan was not repaid in full as of March 19, 2016, the Company
issued another 600,000 restricted shares of common stock to
Cherokee in March 2016.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
As
placement agent for the transaction, Cantone Research, Inc.
(“CRI”) received a 5% cash fee on the $1.2 million, or
$60,000, and 200,000 restricted shares of the Company’s
common stock. In addition, because the loan was not repaid in full
as of March 19, 2016, the Company issued another 196,000 restricted
shares of common stock to CRI in March 2016.
The
Company received net proceeds of $80,000 after $1,015,000 of debt
payments, and $105,000 in other expenses and fees. With the
adoption of ASU No. 2015-03 in the First Quarter of Fiscal 2016,
these transaction costs (with the exception of the interest
expense) are now being deducted from the balance on the Cherokee
LSA and are being amortized over the term of the debt.
From
these net proceeds, in April 2015, the Company also paid $15,000 in
interest expense related to 15% interest on $689,000 in Series A
Debentures and CAM Bridge Loan for the period of February 1, 2015
through March 25, 2015.
The
Company recognized $173,000 in interest expense related to the
Cherokee LSA in Fiscal 2017 (of which $94,000 is debt issuance cost
amortization recorded as interest expense) and $186,000 in interest
expense related to the Cherokee LSA in Fiscal 2016 (of which
$90,000 is debt issuance cost amortization recorded as interest
expense).
The
Company had $11,000 in accrued interest expense at December 31,
2017, and $18,000 at December 31, 2016.
As of
December 31, 2017, the balance on the Cherokee LSA is $1,050,000;
however the discounted balance is $847,000. As of December 31,
2016, the balance on the Cherokee LSA was $1,125,000; however the
discounted balance is $828,000.
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. On May 1, 2017, the
Company entered into term loan with Crestmark in the amount of
$38,000 related to the purchase of manufacturing equipment (See
“Equipment Loan with Crestmark”), and in connection
with this equipment loan, the Company executed an amendment to its
LSA and Promissory Note with Crestmark. The amendments addressed
the inclusion of the equipment loan into the Crestmark LSA and an
extension of the Company’s line of credit with Crestmark.
Apart from the extension of the LSA, no terms of the line of credit
were changed in the amendment. The termination date of the
Crestmark line of credit was changed from June 22, 2018 to June 22,
2020 under the amendments.
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. At December 31, 2017, the
Company did not meet this minimum loan balance requirement as our
balance was $446,000. Under the LSA, Crestmark has the right to
calculate (and is calculating) interest on the minimum balance
requirement rather than the actual balance on the Line of Credit.
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 $350,000
(“Inventory Sub-Cap Limit”), or 100% of the Eligible
Accounts Receivable.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
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 was not in compliance with this covenant at December 31,
2017; however, we received a waiver from Crestmark. As
consideration for the granting of the waiver, Crestmark increased
our interest rate on the Crestmark Line of Credit from current
Prime Rate plus 2% to the Prime Rate plus 3%. The increase in
interest rate will be effective as of May 1, 2018.
If the
Company terminates the LSA prior to June 22, 2020, an early exit
fee of 2% of the Maximum Amount (plus any additional amounts owed
to Crestmark at the time of termination) would be due.
In the
event of a default of the LSA, which includes but is not limited
to, failure of the Company to make any payment when due and
non-compliance with the TNW covenant (that is not waived by
Crestmark), 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 and through December 31, 2017, interest on the Crestmark
Line of Credit is at a variable rate based on the Prime Rate plus
2% with a floor of 5.25%. As of the date of this report, the
interest only rate on the Crestmark Line of Credit is 6.50%. In
addition to the interest rate, on the Closing Date and on each
one-year anniversary date thereafter, the Company will pay
Crestmark a Loan Fee of 0.50%, or $7,500, and a Monthly Maintenance
Fee of 0.30% of the actual average monthly loan balance from the
prior month will be paid to Crestmark. As of the date of this
report, the interest rate in effect is 11.18% (with all fees;
including the weighted annual fee, which is charged on the closing
date anniversary and is $7,500 regardless of our balance on the
line of credit).
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 other
fees in the amount of $90,000. With the exception of the early term
fee ($50,000) paid to Imperium (which was fully expensed in the
year ended December 31, 2015), these expenses are all being
amortized over the initial term of the Crestmark Line of Credit, or
three years. The Company recognized $32,000 of this expense in
Fiscal 2017 and $32,000 of this expense in Fiscal
2016.
The
Company recognized $98,000 in interest expense related to the
Crestmark Line of Credit in Fiscal 2017, of which $32,000 was debt
issuance costs related to interest expense. The Company recognized
$98,000 in interest expense related to the Crestmark Line of Credit
in Fiscal 2016, of which $32,000 was debt issuance costs related to
interest expense.
Given
the nature of the administration of the Crestmark Line of Credit,
at December 31, 2017, 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
December 31, 2017, the balance on the Crestmark Line of Credit was
$446,000, and as of December 31, 2016, the balance on the Crestmark
Line of Credit was $639,000.
EQUIPMENT LOAN WITH CRESTMARK
On May
1, 2017, the Company entered into term loan with Crestmark in the
amount of $38,000 related to the purchase of manufacturing
equipment. The equipment loan is collateralized by a first security
interest in a specific piece of manufacturing equipment. The
Company executed an amendment to its LSA and Promissory Note with
Crestmark. The amendments addressed the inclusion of the term loan
into the LSA and an extension of the Company’s line of credit
with Crestmark. No terms of the line of credit were changed in the
amendment. The interest rate on the term loan is the WSJ Prime Rate
plus 3%; or 7.5% as of the date of this report. The termination
date of the Crestmark line of credit was changed from June 22, 2018
to June 22, 2020 under the amendments. The balance on the equipment
loan was $31,000 as of December 31, 2017. The Company incurred
$1,000 in interest expense related to the Equipment Loan in Fiscal
2017. There was no balance on the equipment loan as of December 31,
2016 as the credit facility was not in place.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
NOTE F – INCOME TAXES
On
December 22, 2017, the Tax Reform Act was signed into law. This
legislation significantly changes U.S. tax law by, among other
things, lowering corporate income tax rates, implementing a
territorial tax system and imposing a repatriation tax on deemed
repatriated earnings of foreign subsidiaries. The Tax Reform Act
permanently reduces the U.S. corporate income tax rate from a
maximum of 35% to a flat 21% rate, effective January 1,
2018.
On
December 22, 2017, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 118 to address the application of
GAAP in situations when a registrant does not have the necessary
information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for
certain income tax effects of the Tax Reform Act. Although the
Company is unable to make a reasonable estimate on the full effect
on our income taxes as of the date of this report, the Company has
recognized the provisional tax impact related to the revaluation of
deferred tax assets and liabilities and included these amounts in
its financial statements for Fiscal 2017. Deferred income tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. As a result of the
reduction in the U.S. corporate income tax rate from 35% to 21%
under the Tax Reform Act, the Company revalued its net U.S.
deferred income tax assets and liabilities at December 31, 2017
from $5,400,000 to $3,600,000, a decrease of $1,800,000. In
addition, the deferred income tax asset valuation allowance
increased by $1,800,000 as a result of the reduction in the
corporate income tax rate.
The
ultimate impact may differ from the provisional amounts, possibly
materially, due to, among other things, additional analysis,
changes in interpretations and assumptions the Company has made,
additional regulatory guidance that may be issued, and actions the
Company may take as a result of the Tax Reform Act. The accounting
is expected to be complete when the Company’s 2017 U.S.
corporate income tax return is filed in 2018.
A
reconciliation of the U.S. Federal statutory income tax rate to the
effective income tax rate is as follows:
|
|
Year
Ended
December
31,
2017
|
Year
Ended
December
31,
2016
|
|
Tax expense at
federal statutory rate
|
34
%
|
34
%
|
|
State tax
expense, net of federal tax effect
|
0
%
|
(1
%)
|
|
Permanent timing
differences
|
0
%
|
0
%
|
|
Deferred income
tax asset valuation allowance
|
298
%
|
(34
%)
|
|
Effective change
in tax rate due to Tax Reform Act
|
(332
%)
|
0
%
|
|
Effective income
tax rate
|
0
%
|
(1
%)
|
Significant
components of the Company’s deferred income tax assets are as
follows:
|
|
|
|
|
|
13,
|
|
|
Inventory
|
$
13,000
|
$
21,000
|
|
Inventory
allowance
|
130,000
|
175,000
|
|
Allowance for
doubtful accounts
|
13,000
|
19,000
|
|
Accrued
compensation
|
18,000
|
32,000
|
|
Stock based
compensation
|
165,000
|
230,000
|
|
Deferred wages
payable
|
29,000
|
28,000
|
|
Depreciation
– Property, Plant & Equipment
|
(10,000
)
|
(12,000
)
|
|
Sales tax
reserve
|
0
|
5,000
|
|
Net operating
loss carry-forward
|
3,261,000
|
4,704,000
|
|
Total gross
deferred income tax assets
|
3,619,000
|
5,202,000
|
|
Less deferred
income tax assets valuation allowance
|
(3,619,000
)
|
(5,202,000
)
|
|
Net deferred
income tax assets
|
$
0
|
$
0
|
The
valuation allowance for deferred income tax assets as of December
31, 2017 and December 31, 2016 was $3,619,000 and $5,202,000,
respectively. The net change in the deferred income tax assets
valuation allowance was $1,583,000 for Fiscal 2017. The net change
in the deferred income tax assets valuation allowance was $136,000
for Fiscal 2016. The Company believes that it is more likely than
not that the deferred tax assets will not be realized.
As of
December 31, 2017, the prior three years remain open for
examination by the federal or state regulatory agencies for
purposes of an audit for tax purposes.
At
December 31, 2017, the Company had Federal net operating loss
carry-forwards for income tax purposes of approximately $3,261,000.
The Company’s net operating loss carry-forwards begin to
expire in 2019 and continue to expire through 2035. In assessing
the realizability of deferred income tax assets, management
considers whether or not it is more likely than not that some
portion or all deferred income tax assets will be realized. The
ultimate realization of deferred income tax assets is dependent
upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning
strategies in making this assessment.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
The
Company’s ability to utilize the operating loss
carry-forwards may be subject to an annual limitation in future
periods pursuant to Section 382 of the Internal Revenue Code of
1986, as amended, if future changes in ownership
occur.
The
Company recognizes potential interest and penalties related to
income tax positions as a component of the provision for income
taxes on operations. The Company does not anticipate that total
unrecognized tax benefits will materially change in the next twelve
months.
NOTE G – OTHER INCOME / EXPENSE
Other
income in Fiscal 2017 consisted of gains on certain liabilities.
Other income in Fiscal 2016 consisted primarily of payments
received under a Strategic Manufacturing and Cooperation Agreement
with a contract-manufacturing customer.
NOTE H – STOCKHOLDERS’ EQUITY
[1]
Stock option plans:
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.
[2]
Stock options:
During Fiscal
2017, the Company issued options to purchase 40,000 shares of
common stock and, in Fiscal 2016, the Company issued options to
purchase 830,000 shares of common stock. Option issues in Fiscal
2017 were all issued under the 2001 Plan and were issued to two
non-employee members of our board of directors. Options issued in
Fiscal 2016 were all issued under the 2001 Plan; 80,000 options
were issued to non-employee members of our board of directors and
750,000 options were issued to our Chief Executive Officer, Melissa
Waterhouse.
As of
December 31, 2017, there were 2,147,000 options issued and
outstanding under the 2001 Plan. There were no options issued under
the 2013 Plan, making the total issued and outstanding options
2,147,000 as of December 31, 2017. Of the total options issued and
outstanding, 1,647,000 were fully vested as of December 31, 2017.
As of December 31, 2017, there were 1,570,000 options available for
issuance under the 2001 Plan and 4,000,000 options available under
the 2013 Plan.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
Stock
option activity for Fiscal 2017 and Fiscal 2016 is summarized as
follows: (the figures contained within the tables below have been
rounded to the nearest thousand)
|
|
Year Ended
December 31,2017
|
Year Ended
December 31, 2016
|
|
|
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic
Value as of December 31, 2017
|
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value as of December 31, 2016
|
|
Options
outstanding at beginning of year
|
2,107,000
|
$
0.13
|
|
1,435,000
|
$
0.14
|
|
|
Granted
|
40,000
|
$
0.13
|
|
830,000
|
$
0.11
|
|
|
Exercised
|
0
|
|
|
0
|
|
|
|
Cancelled/expired
|
0
|
|
|
(158,000
)
|
$
0.17
|
|
|
Options
outstanding at end of year
|
2,147,000
|
$
0.13
|
$
10,000
|
2,107,000
|
$
0.13
|
$
15,000
|
|
Options
exercisable at end of year
|
1,647,000
|
$
0.13
|
|
1,109,000
|
$
0.14
|
|
The
following table presents information relating to stock options
outstanding as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.07 - $0.11
|
955,000
|
$
0.10
|
6.97
|
580,000
|
$
0.10
|
|
$
0.12 - $0.15
|
815,000
|
$
0.13
|
6.78
|
690,000
|
$
0.13
|
|
$
0.16 - $0.26
|
377,000
|
$
0.19
|
4.30
|
377,000
|
$
0.19
|
|
|
2,147,000
|
$
0.13
|
6.43
|
1,647,000
|
$
0.13
|
The
following table summarizes weighted-average assumptions using the
Black-Scholes option-pricing model used on the date of the grants
issued during Fiscal 2017 and Fiscal 2016:
|
|
|
Year Ended
December 31
|
|
|
|
2017
|
|
2016
|
|
Volatility
|
|
81%
|
|
62%-66%
|
|
Expected term
(years)
|
|
10
years
|
|
10
years
|
|
Risk-free
interest rate
|
|
2.16%
|
|
1.57%-1.94%
|
|
Dividend
yield
|
|
0%
|
|
0%
|
The
Company recognized $43,000 in share based payment expense related
to stock options in Fiscal 2017 and $61,000 in share based payment
expense related to stock options in Fiscal 2016. As of December 31,
2017, there was approximately $6,000 of total unrecognized share
based payment expense related to stock options. This cost is
expected to be recognized over 5 months.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
Warrant
activity for Fiscal 2017 and Fiscal 2016 is summarized as follows.
Any common shares issued as a result of the exercise of warrants
would be new common shares issued from our authorized issued
shares.
|
|
Year Ended
December 31, 2017
|
Year Ended
December 31, 2016
|
|
|
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic
Value as of December 31, 2017
|
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value as of December 31, 2016
|
|
Warrants
outstanding at beginning of year
|
2,060,000
|
$
0.18
|
|
2,385,000
|
$
0.16
|
|
|
Granted
|
0
|
|
|
0
|
|
|
|
Exercised
|
0
|
|
|
0
|
|
|
|
Cancelled/expired
|
0
|
|
|
(325,000
)
|
$
0.14
|
|
|
Warrants
outstanding at end of year
|
2,060,000
|
$
0.18
|
|
2,060,000
|
$
0.18
|
|
|
Warrants
exercisable at end of year
|
2,060,000
|
$
0.18
|
|
2,060,000
|
$
0.18
|
|
The
Company recognized $0 in debt issuance and deferred finance costs
related to the issuance of these warrants outstanding in Fiscal
2017 and Fiscal 2016 due to accelerated amortization of expense in
the second quarter of Fiscal 2015 (as a result of early termination
of the Imperium line of credit). As of December 31, 2017, there was
$0 of total unrecognized debt issuance costs associated with the
issuance of the above warrants outstanding.
NOTE I – COMMITMENTS, CONTINGENCIES AND OTHER
MATTERS
[1]
Operating leases:
The Company leases
office and R&D/production facilities in New Jersey under a 2
year, non-cancellable operating leases. In November 2017, the
Company extended the lease for the New Jersey facility through
December 31, 2019.
The
future minimum rent due in 2018 and 2019 is $32,000 each year. At
December 31, 2017, the future minimum rental payments under these
operating leases are as follows:
|
2018
|
$
32,000
|
|
2019
|
32,000
|
|
|
|
|
|
$
64,000
|
Rent
expense was $46,000 in Fiscal 2017 and $44,000 in Fiscal
2016.
[2]
Employment agreements:
The
Company has an employment agreement in place with its Chief
Executive Officer/Principal Financial Officer, Melissa Waterhouse.
The employment agreement with Ms. Waterhouse provides for a
$160,000 annual salary and is for a term of one year. It
automatically renews unless either party gives advance notice of 60
days. The employment agreement contains severance provisions; in
the event the Company terminates Ms. Waterhouse’s employment
for any reason other than cause (which is defined under the
employment agreement), Ms. Waterhouse would receive severance pay
equal to 12 months of her base salary at the time of termination,
with continuation of all medical benefits during the twelve-month
period at the Company’s expense. In addition, Ms. Waterhouse
may tender her resignation and elect to exercise the severance
provision if she is required to relocate more than 50 miles from
the Company’s New York facility as a continued condition of
employment, if there is a substantial change in the
responsibilities normally assumed by her position, or if she is
asked to commit or conceal an illegal act by an officer or member
of the board of directors of the Company. In the case of a change
in control of the Company, Ms. Waterhouse would be entitled to
severance pay equal to two times her base salary under certain
circumstances.
[3]
Legal:
ABMC v. Premier Biotech, Inc., Todd Bailey, et al.
In
February 2017, the Company filed a complaint in the Supreme Court
of the State of New York in Columbia County against Premier Biotech
Inc., Premier Biotech Labs, LLC and its principals, including its
President Todd Bailey (“Bailey”), and Peckham
Vocational Industries, Inc. (together the
“Defendants”).Bailey formerly served as the
Company’s Vice President of Sales and Marketing and as a
sales consultant until December 23, 2016. The complaint seeks
preliminary and permanent injunctions and a temporary restraining
order against Bailey (for his benefit or the benefit of another
party or entity) related to the solicitation of Company customers
as well as damages related to any profits and revenues that would
result from actions taken by the Defendants related to Company
customers.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
In
March 2017, the complaint was moved to the federal court in the
Northern District of New York. In April 2017, the Defendants filed
a motion to dismiss on the basis of jurisdiction, to which the
Company responded on April 21, 2017.
In July
2017, the Company was notified that it was not awarded a contract
with a state agency for which it has held a contract in excess of
10 years. The contract in question is included in the February 2017
complaint. The Company believes that the Defendants actions related
to this customer and a RFP that was issued by the state agency
resulted in the loss of the contract award to the Company and the
award of the contract to Peckham and Premier Biotech. This contract
historically accounted for 10-15% of the Company’s annual
revenue. The Company continued to hold a contract with the agency
through September 30, 2017. The Company did protest the award of
the contract to Peckham and Premier Biotech, and the state agency
advised the Company on July 26, 2017 that they denied the
Company’s protest of the award.
The
Company amended its complaint against the Defendants to show actual
damages caused by the Defendants and to show proprietary and
confidential information (belonging to the Company) used by the
Defendants in their response to the RFP. This confidential
information belonging to the Company enabled the Defendants to
comply with specifications of the RFP. The Defendants filed a
response to the court opposing the Company’s supplemental
motion and the Company filed reply papers to the Defendants
response on November 2, 2017.
In
January 2018, the court ruled on the motion to dismiss (that was
filed by the Defendants in April 2017). The court found that there
was jurisdiction over Bailey only. In the Company’s opinion,
this ruling does not diminish its standing in the case against
Bailey, who again in the Company’s opinion, has always been
the primary defendant. The court did not rule on the other motions
before them. In February 2018, the Company filed a motion for
reconsideration and for leave to serve a supplemental/amended
complaint. The new filing asks for reconsideration in the
jurisdiction ruling regarding Premier Biotech Inc. and addresses
the Company’s intent to further supplement its complaint
based on additional (subsequent) damage alleged by ABMC on the part
of Bailey and Premier Biotech, Inc. Given the stage of the
litigation, management is not yet able to opine on the outcome of
the case.
Todd Bailey v. ABMC
On
October 20, 2017, the Company received notice that Bailey, its
former Vice President of Sales & Marketing and sales consultant
(and the same “Bailey” discussed above) filed a
complaint against the Company in the State of Minnesota seeking
deferred commissions of $164,000 that Bailey alleges is owed to him
by the Company. On November 2, 2017, the Company filed a Notice of
Removal in this action to move the matter from state to federal
court. On November 9, 2017, the Company filed a motion to dismiss
or, in the alternative to transfer venue and consolidate, the
Bailey complaint with our litigation filed previously against
Bailey and others.
In
January 2018, the judge in the Minnesota case requested additional
briefing on the impact of ruling in the New York case that
determined there was personal jurisdiction over Bailey. The Company
filed the requested briefing as requested by the court. Given the
stage of the litigation, management is not yet able to opine on the
outcome of the case. As of the date of this report, the action in
Minnesota has been stayed while the New York motions are
decided.
[4]
Financial Advisory
Agreement:
The Company has entered into a Financial Advisory
Agreement with Landmark Pegasus, Inc. (‘Landmark”).
Under the Financial Advisory Agreement, Landmark provides certain
financial advisory services to the Company for a minimum period of
6 months (which period originally commenced on January 17, 2014 and
through a number of extensions and agreements, was extended through
May 31, 2018. As consideration for these services within this
latest extension, the Company paid Landmark a retainer fee
consisting of 485,437 restricted shares of common stock and the
Company will pay Landmark a “success fee” for the
consummation of each and any transaction closing during the term of
the Financial Advisory Agreement and for 24 months thereafter,
inclusive of a sale or merger, between the Company and any party
first introduced to the Company by Landmark, or for any other
transaction not originated by Landmark but for which Landmark
provides substantial support in completing during the term of the
Agreement. For certain transactions, the success fee will be paid
part upon consummation of a transaction and part paid over a term
of not more than five years; all other transactions would be paid
upon consummation of the transaction.
AMERICAN BIO MEDICA CORPORATION
Notes
to financials
As a
result of the retainer fees being paid in restricted shares and the
resulting percentage of common share ownership, Landmark filed a
Schedule 13G in October 2016 related to its ownership of the
Company’s common stock and its principal John Moroney has
continued to file required Section 16(a) forms; with the latest
being filed on February 14, 2018. Apart from his status as a
shareholder and with respect to the Agreement, there is no material
relationship between the Company and Landmark
NOTE J - RELATED PARTY NOTE PAYABLE
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, the Company’s
line of credit lender; 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.
NOTE K – SUBSEQUENT EVENT
On
March 2, 2018 (the “Closing Date”), the Company entered
into a one-year Loan Agreement (the “Agreement”) with
Cherokee Financial, LLC (“Cherokee”) under which
Cherokee will provide the Company with $150,000. The proceeds from
the loan will be used by the Company to pay a $75,000 principal
reduction payment to Cherokee and $1,000 in legal fees in
connection with the financing. Net proceeds to the Company are
$74,000 and, they will be used for working capital and general
business purposes.
The
annual interest rate under the Loan Agreement is 12% paid quarterly
in arrears with the first interest payment being due on May 15,
2018. The loan is required to be paid in full on February 15, 2019
unless paid off earlier (with no penalty) at the Company’s
sole discretion. In connection with the Loan Agreement, the Company
is required to issue 150,000 restricted shares of common stock to
Cherokee within thirty (30) days of the Closing Date.
In the
event of default, this includes, but is not limited to, the
Company’s inability to make any payments due under the Loan
Agreement, Cherokee has the right to increase the interest rate on
the financing to 18% and the Company would be required to issue and
additional 150,000 restricted shares of common stock to
Cherokee
.
On
April 11, 2018, Crestmark provided the Company with a waiver
related to its non-compliance with the TNW covenant in the
Crestmark LSA. As consideration for the granting of the waiver,
Crestmark increased the interest rate on the Crestmark Line of
Credit from Prime Rate plus 2% to Prime Rate plus 3%. The increase
in interest rate will be effective as of May 1, 2018.
NOTE L- SEGMENT AND GEOGRAPHIC INFORMATION
The
Company operates in one reportable segment.
Information
concerning net sales by principal geographic location is as
follows:
|
|
Year
Ended
December
31,
2017
|
Year
Ended
December
31,
2016
|
|
United
States
|
$
4,344,000
|
$
5,045,000
|
|
North America
(not domestic)
|
102,000
|
129,000
|
|
Europe
|
127,000
|
141,000
|
|
Asia/Pacific
Rim
|
30,000
|
51,000
|
|
South
America
|
309,000
|
242,000
|
|
Africa
|
2,000
|
1,000
|
|
|
$
4,914,000
|
$
5,609,000
|