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
financial statements and the notes to the financial statement contained within
this Annual Report on Form 10-K. Certain statements contained in this Annual
Report on Form 10-K, 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 SEC. 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 within this Annual Report on Form 10-K are not guarantees of
future performance and in fact, actual results may differ materially from those
results discussed in such forward-looking statements. This material difference
can be a result of various factors, including, but not limited to, any risks
detailed herein, including the"Risk Factors"section contained in Part I, Item 1A
of this Form 10-K, or detailed in our most recent reports on Form 10-Q and Form
8-K and from time to time in our other filings with the SEC and amendments
thereto.Any forward-looking statement speaks only as of the date on which such
statement is made, and we are not undertaking any obligation to publicly update
any forward-looking statements. Readers should not place undue reliance on these
forward-looking statements.
Overview
Throughout Fiscal 2022, sales of drug tests continued to be negatively impacted
as customer pricing continues to decrease as a result of our markets being
saturated with products made outside of the United States; primarily products
made in China. This has resulted in a commoditization of the onsite drug testing
market at a time when costs associated with labor, utilities, materials,
insurance, etc. keep rising. In attempts to retain current customers and/or
attract new customers that require lower pricing, we are offering two drug test
product lines that are manufactured in China.
In addition to the marketing of drug tests, we continue to market various
Covid-19 rapid tests. All of the Covid-19 tests we are offering are being
marketed in accordance with the March 2020 Emergency Use Authorization ("EUA")
policy set forth by the United States Food and Drug Administration (FDA) and in
accordance with the individual EUAs issued for the products. We are currently
offering a number of different rapid antigen tests and rapid antibody tests that
can be used in various different settings, including home use; depending on
their specific EUA issuance.
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In addition to increased costs, the materials used in the manufacture of our
drug test products are the same materials used in the manufacture of lateral
flow Covid-19 tests as well as lateral flow tests for Influenza and RSV, both of
which surged in the latter part of Fiscal 2022. This increased need for the same
materials has resulted in supply chain delays; some of which have negatively
impacted our customer relationships.
Due to limited financial and personnel resources, we are still not marketing our
oral fluid drug test (OralStat®) in the employment and insurance markets in the
United States (under a limited exemption set forth by the FDA). We continue to
believe that OralStat can be effectively marketed in the United States markets
given its superior sensitivity and accuracy if the resources are available to
market the product.
In 2019 we expanded our contract manufacturing operations with two new
customers. Unfortunately, the Covid-19 pandemic halted sales to these customers
throughout 2020 and into 2021 but, in Fiscal 2021 and Fiscal 2022, we started to
ship orders to these customers again as their business started to return to
normal. In the fourth quarter of Fiscal 2022, as the number of RSV infections
rose significantly, we received significantly larger orders from our current
customer and we received a large order from a new customer. These orders are
expected to start shipping in the first quarter of the year ending December 31,
2023. These products are being marketed by our customers under each customer's
private label.
Gross margin has been declining due to the increased costs of manufacturing in
the United States and the fact that overhead costs associated with both of our
facilities cannot be decreased any further. As sales continue to decline, and
these costs cannot be adjusted downward, greater manufacturing inefficiencies
occur. The manufacturing inefficiencies are increasing despite our efforts to
mitigate them. We are also taking steps to obtain materials at the best
available pricing. However, in many cases, we are purchasing at much lower
volumes than the larger diagnostic companies and that results in higher per
piece pricing. We have also been looking into possible production alternatives
in attempts to address these fixed costs.
Operating expenses declined in Fiscal 2022 when compared to Fiscal 2021. We
continuously make efforts to control operational expenses to ensure they are in
line with sales including, but not limited to, consolidating job
responsibilities in certain areas of the Company, securing more cost effective
service providers and reduction of facility hours so they are more in line with
production and administrative needs.
From August 2013 until June 2020 and from April 2022 through the date of this
report, we maintained a salary deferral program for our sole executive officer,
our Chief Executive Officer/Principal Financial Officer Melissa Waterhouse. The
salary deferral program was initiated by Ms. Waterhouse voluntarily in both
August 2013 and April 2022. Another member of senior management participated in
the voluntary 2013 program until his retirement in November 2019. After the
member of senior management retired, we had to make payments on the deferred
compensation (i.e. deferred salary) owed to this individual. In Fiscal 2021, we
made payments totaling $20,000 to this individual and his deferred compensation
was paid in full in May 2021.
Once the deferred compensation was paid in full to this individual in May 2021,
we began to make payments at the same rate to Ms. Waterhouse given the length of
time the amount had been owed and that Ms. Waterhouse had not received any
payments on her deferred compensation since August 2017. We made payments
totaling $10,000 to Ms. Waterhouse in Fiscal 2022 and $33,000 in payments in
Fiscal 2021. We stopped making payments on Ms. Waterhouse's deferred
compensation in April 2022 when Ms. Waterhouse again voluntarily deferred her
salary by 20%. As of December 31, 2022, we had deferred compensation owed to Ms.
Waterhouse in the amount of $87,000 and $7,000 in payroll taxes that are due as
payments are made to Ms. Waterhouse; for a total of $94,000 in deferred
compensation owed to Ms. Waterhouse. In addition, as of December 31, 2022, we
owe Ms. Waterhouse $32,000 in current salary that was not paid.
Beginning in April 2022, another member of senior management participated in the
salary deferral program. As of December 31, 2022, we had deferred compensation
owed to this individual in the amount of $14,000 and $1,000 in payroll taxes
that are due as payments are made to this individual; for a total of $15,000 in
deferred compensation. This individual ceased participating in the salary
deferral program on December 9, 2022 and is receiving their full salary (which
continues through the date of this report).
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Our continued existence is dependent upon several factors, including our ability
to: 1) raise revenue levels even though the drug testing market continues to be
infiltrated by product manufactured outside of the United States as well as
being impacted by supply chain issues and increased costs of material and labor
2) further penetrate the markets (in and outside of the United States) for the
products we manufacture as well as products we offer via distribution, 3) secure
new contract manufacturing customers, 4) control operational costs and
manufacturing inefficiencies to generate positive cash flows, 5) maintain our
current credit facilities or refinance our current credit facilities if
necessary, and 6) if needed, obtain working capital by selling additional shares
of our common stock. Should the Company not be able to achieve positive cash
flows from operations or obtain additional funding, it may be required to
further reduce or terminate operations.
Plan of Operations
We believe the losses we have reported over the last several years and most
recently the significant loss reported for Fiscal 2022 will continue as (i) our
primary business (onsite drugs of abuse tests) has become a commoditized market
where price is the primary consideration for purchase and we cannot compete with
the low pricing offered by our competitors who manufacture outside of the U.S.
when we manufacture our drug testing products completely in the U.S. and (ii) we
have not been able to obtain new business to replace the significant loss of
business (which began in late 2021) from our largest customer. These two issues
are further exacerbated by the continuing impact of the Covid-19 pandemic.
Part of the inability to attain new customers is due to expense reductions that
we have undertaken over the last several years to combat losses. Many of these
expense reductions, such as reduced selling and marketing and research and
development expenditures, along with reduced and deferred salaries of a number
of employees, are incompatible with growing or even maintaining our business
both in the short and the long term. In addition, our cash position has
deteriorated, and continues to deteriorate, due to operating losses and payments
required under our debt facilities.
Over the last several years, we have been able to access loans from shareholders
and raise funds via private equity financings. As time goes on and the financial
results continue to deteriorate, these options are no longer available to the
Company. Ms. Waterhouse has also extended loans to the Company and in addition
to salary deferral; Ms. Waterhouse is owed currently salary.
Given the above, our results of operations and our current financial condition,
on December 19, 2022, we agreed, subject to the approval of our shareholders, to
sell substantially all of our operating assets to Healgen (excluding cash,
accounts receivables and certain other assets).
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America,
or "U.S. GAAP". Part IV, Item 15, Note A to our financial statements describes
the significant accounting policies and methods used in the preparation of our
financial statements. The accounting policies that we believe are most critical
to aid in fully understanding and evaluating the financial statements include
the following:
Inventory and Allowance for Slow Moving and Obsolete Inventory:We maintain an
allowance for slow moving and obsolete inventory. If necessary, actual
write-downs to inventory are made for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the net
realizable value based on historical demand and past sales history of the
products which utilize the inventory. We have reviewed all items within the
allowance at December 31, 2022 and based upon that review, we do not expect any
future additions to the allowance based on obsolescence, however if actual
market conditions are less favorable for our products, additional inventory
allowances or write-downs may be required to address slow-moving materials.
Valuation of Receivables:We estimate an 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. If our customers' economic condition changes, we
may need to increase our allowance for doubtful accounts.
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Estimates of the fair value of stock options and warrants at date of grant:The
fair value of stock options (share-based payment expense) issued to employees,
members of our Board of Directors and consultants 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. Our share-based payment expense in Fiscal 2022 and in Fiscal 2021 was
$0. However, we may issue stock options in the future. If factors change and we
use different assumptions, our equity-based compensation expense could be
materially different in the future. In addition, we are required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to
vest. In estimating our forfeiture rate, we analyzed our historical forfeiture
rate, the remaining lives of unvested options (if applicable), and the amount of
vested options as a percentage of total options outstanding. If our actual
forfeiture rate is materially different from our estimate, or if we reevaluate
the forfeiture rate, equity-based compensation expense could be significantly
different from what we have recorded in the current period.
Use of Estimates:We make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ from those
estimates.
Results of operations for FISCal 2022 compared to Fiscal 2021
Net Sales:Net sales decreased 58.8%, or $1,305,000, in Fiscal 2022 when compared
to Fiscal 2021; primarily as a result in a decline in sales of drugs of abuse
("DOA") tests that we manufacture. The decline in DOA sales stems almost
entirely from decreased sales to our largest customer who has historically been
a significant portion of our revenues. This customer has two segments of their
business for which we supply products. They informed us in February 2022 that
sales to one of those segments (which we supplied exclusively) would decrease as
a result of their desire to have multiple vendors supplying the segment. They
indicated this was to ensure uninterrupted supply as they had experienced
periodic supply interruptions with us in 2021 (as a result of the supply chain
issues we experienced in 2021 and continued to experience into 2022;
particularly with plastics and other materials that are used to manufacture our
drug tests; materials that are also used in the manufacture of lateral flow
Covid-19 and other infectious disease tests). They indicated that the other
segment we supply would remain unchanged but, even in that particular segment;
we saw a decline in sales when comparing Fiscal 2022 to Fiscal 2021. In addition
to the decline in sales to this customer, international sales also declined; the
majority of which is due to lower sales to three of our distributors (two of
which have cited our pricing as being too high as the reason they did not order
from us in Fiscal 2022) that were partially offset by increased sales to another
distributor.
Contract manufacturing sales also declined when comparing Fiscal 2022 to Fiscal
2021; primarily due to decreased sales of the malaria product we manufacture.
RSV test sales decreased also; there was increased demand in early 2022 (which
was connected to the Pandemic) but, as Fiscal 2022 continued, demand decreased;
until late in Fiscal 2022 when we received two large orders due to the surge in
RSV. However, these orders will not ship until the year ending December 31,
2023.
Distribution sales also decreased in Fiscal 2022 when compared to Fiscal 2021.
Most of the decline stems from decreased sales of rapid Covid-19 tests. Sales of
lower cost DOA tests we sell via distribution also declined slightly when
comparing Fiscal 2022 to Fiscal 2021 along with smaller declines in other
products we distribute.
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Gross (Loss) / profit: We recorded a gross (loss) of $103,000 in Fiscal 2022;
this is compared to gross profit of $548,000 in Fiscal 2021. Gross profit began
to dramatically decline in the first quarter of Fiscal 2022 and continued to
decline through the rest of Fiscal 2022 due to even further reduced sales. This
change to a gross (loss) from a gross profit is almost entirely due to decreased
sales to our largest customer in one of their segments (previously discussed in
net sales). In addition, the two segments we were supplying were comprised of
one with low margin sales and one with higher margin sales. This allowed the
Company to maintain an appropriate blended gross profit margin on the sales to
the customer. The segment in which sales have decreased significantly is the
segment in which products were sold at a higher profit margin and this has
significantly reduced the blended gross profit margin on the account. At the
same time, this decline in sales has resulted in greater inefficiencies in
manufacturing. Manufacturing inefficiencies occur when production levels
decrease but, not all costs can be reduced to be in line with production levels
because they are fixed; these costs include but, are not limited to,
depreciation, insurance, interest, taxes, utilities and other costs associated
with running our two facilities.
We have taken steps to reduce manufacturing costs, including but not limited to,
costs associated with labor, to mitigate these inefficiencies; however, the
previously discussed fixed costs cannot easily be decreased. Given the price
sensitivity in our markets and the commoditized nature of drug testing products,
customer pricing is challenging; however, we did implement a price increase to
non-contractual customers in July 2021 however, the customer previously
discussed has a contracted price in place that is not as easily increased.
Operating Expenses:Operating expenses for Fiscal 2022 decreased 34%, or
$588,000, when compared to operating expenses in Fiscal 2021. Selling and
Marketing and General and Administrative expenses decreased, while Research and
Development costs were unchanged. More specifically:
Research and development ("R&D")
R&D expenses for Fiscal 2022 were unchanged, when compared to R&D expenses
incurred in Fiscal 2021. All expenses remained relatively consistent year over
year. Throughout Fiscal 2022, our R&D department continued to focus their
efforts on enhancement of our current products and validations related to drug
testing product components.
Selling and marketing
Selling and marketing expenses for Fiscal 2022 decreased by 54.9%, or $167,000,
when compared to selling and marketing expenses in Fiscal 2021. Reductions in
sales salary expense and benefits (due to the termination of personnel for
performance reasons as well as an employee departure), commissions (due to
decreased sales and no commissions paid on Covid-19 rapid test sales in Fiscal
2022), auto expense, reductions in costs associated with shipping and
promotional expense (due to Fiscal 2021 including fees paid to OTC Markets which
were not paid in Fiscal 2022) were the primary reasons for the decline in
expenses. All other expenses remained relatively consistent when comparing
Fiscal 2022 to Fiscal 2021.
In Fiscal 2022, we continued selling and marketing efforts related to the drug
tests we manufacture and lower cost alternatives for onsite drug testing via
distribution relationships. We also marketed and sold rapid Covid-19 tests via
distribution relationships. These offerings did not result in increased selling
and marketing expenses when comparing Fiscal 2022 with Fiscal 2021. Terminations
of sales personnel have been due to poor performance. While we have taken
efforts to increase the size of our sales team to further penetrate our markets;
no new sales reps were hired in Fiscal 2022 due to lack of qualified candidates
and limited financial resources. We continue to look for contract manufacturing
opportunities or situations in which we can leverage our U.S. based
manufacturing operations.
General and administrative ("G&A")
G&A expense decreased 31.5%, or $421,000, in Fiscal 2022 when compared to G&A
expense in Fiscal 2021. A significant portion of this decrease is due to bank
service fees, which decreased $151,000 when comparing Fiscal 2022 to Fiscal
2021; of which $149,000 was associated with our loans with Cherokee and were in
connection with a penalty related to extension of the Cherokee loans in February
2021.
In addition, quality assurance salaries declined (due to retirement of an
employee, departure of another employee as well as a reduced work week
implemented early in April 2022), general and administrative and manufacturing
and production salaries and benefits declined (due to fewer employees and the
reduced work week implemented in April 2022), accounting fees declined (due to
lower costs from our new accounting firm), expenses associated with intellectual
property declined (due to less international patent maintenance fees paid and
less legal fees incurred), director fees and expenses declined (due to board
members waiving fees for meeting attendance) and payroll service fees declined
(due to change in vendor) along with other smaller declines in other expenses.
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These declines were partially offset by increased costs related to: 1)
consulting fees (due to the execution of the Financial Advisory Agreement with
Landmark Pegasus, Inc. in early Fiscal 2022), 2) legal fees (due to activities
required related to the Asset Sale to Healgen), 3) rent expense (due to
increased rental costs of the New Jersey facility throughout Fiscal 2022 and a
further increase in November 2022) and 4) repairs and maintenance (related to
repairs needed for systems in the New York facility.
There was no expense related to share based payments in either Fiscal 2022 or
Fiscal 2021.
Other income and expense:
Other expense of $166,000 in Fiscal 2022 consisted of interest expense
associated with our credit facilities (our line of credit which was in place
until November 2022), our two loans with Cherokee Financial, LLC and shareholder
loans) partially offset by other income (related to gains on certain
liabilities) and interest income of $3,000 (most of which is interest received
in connection with the ERC refund we received in June 2022).
Other income of $718,000 in Fiscal 2021 consisted of income related to the
forgiveness of our PPP loan in the amount of $335,000, other income of $58,000;
which is $50,000 related to certain non-refundable prepayments (customer
deposits) that were forfeited when the customer did not remit the remaining
amounts due on the order and $8,000 in income related to gains on certain
liabilities, $619,000 in income from the Employee Retention Credit recognized in
Fiscal 2021 (which is $44,000 in credits taken in Q3 2021, $38,000 in credit
taken in Q4 2021 and $537,000 in refunds filed for credits in the first three
quarters of 2021). This income was offset by interest expense associated with
our credit facilities (our line of credit, our two loans with Cherokee
Financial, LLC and a shareholder loan) and a charge related to the impairment of
our patent asset.
LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 2022Our cash requirements depend on numerous factors, including but not limited to
manufacturing costs (such as labor and overhead costs, raw materials, equipment,
etc.), selling and marketing initiatives, product development activities,
regulatory costs, legal costs, and effective management of inventory levels and
production levels in response to sales history and forecasts (if available).
Given our current and historical cash position, such activities would need to be
funded from the issuance of additional equity or additional credit borrowings,
subject to market and other conditions and if available to us.
The following transactions materially impacted our liquidity and cash flow in
Fiscal 2022 and/or Fiscal 2021 or are expected to have an impact on our cash
flow in the year ending December 31, 2023:
Employee Retention Credit ("ERC")
On June 2, 2022, we received a refund for the second quarter of 2021 in the
amount of $199,000. This amount represented the $198,000 claimed as a refund and
$1,000 in interest. We are still expecting to receive one more ERC refund in the
amount of $202,000.
Shareholder Loans
We currently have two shareholder loan facilities; the November 2020 Shareholder
Loan and the December 2021 Shareholder Loan, which consists of two separate
notes with two different shareholders. (See Note E - Line of Credit and Debt).
In Fiscal 2022, we received additional proceeds (through amendment of the
facility with one shareholder) totaling $240,000 under the December 2021
Shareholder Loan and we made payments totaling $90,000 on the December 2021
Shareholder Loan; one of which paid off one of the two notes. We did not receive
any additional proceeds or make any payments on the November 2020 loan.
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Healgen Loan Promissory Note
On September 28, 2022, we entered into a Loan Promissory Note with Healgen (the
"Healgen Loan") and received gross/net proceeds of $400,000. We utilized $34,000
of the loan proceeds to pay off the Crestmark Line of Credit. On November 15,
2022, we amended the Healgen Loan to address an additional $300,000 in principal
received under the Healgen Loan; bringing the total principal due under the
Healgen Loan to $700,000. The Healgen Loan was further amended on December 19,
2022 to address an additional $15,000 in principal received under the Healgen
Loan; bringing the total principal due under the Healgen Loan to $715,000. (See
Note E - Line of Credit and Debt and Note L - Subsequent Events)
Loans from CEO Melissa Waterhouse
Over the course of Fiscal 2022, via expense reports, Ms. Waterhouse extended
various amounts to the Company for expenses including, but not limited to,
amounts for manufacturing materials, services, patent maintenance fees, office
supplies, and equipment. At December 31, 2022, $70,000 was not yet reimbursed to
Ms. Waterhouse in connection with these expenses.
In addition, at December 31, 2022, we owed Ms. Waterhouse $32,000 in current
salary (which is 13 weeks of her non-deferred salary).
Lincoln Park Equity Line
On December 9, 2020, we entered into a Purchase Agreement and a Registration
Rights Agreement with Lincoln Park under which Lincoln Park agreed to purchase
from the Company, from time to time, up to $10,250,000 of shares of our common
stock, par value $0.01 per share, subject to certain limitations set forth in
the Purchase Agreement, over a two year period. On December 29, 2020 we filed a
Form S-1 Registration Statement (the "Registration Statement"). We amended the
Registration Statement on January 7, 2021 and the SEC declared the Registration
Statement effective on January 11, 2021. In Fiscal 2021, the Company sold
6,500,000 shares of common stock to Lincoln Park (including 500,000 shares
required as an initial purchase under the Purchase Agreement) as Regular
Purchases and received proceeds of $639,000. We were not able to sell any shares
to Lincoln Park in Fiscal 2022 due to our stock price being below $0.05. The
agreements with Lincoln Park expired on December 9, 2022.
Securities Purchase Agreement - October 2021
On October 18, 2021, we entered into a Securities Purchase Agreement (the "SPA")
with a non-affiliated, accredited investor (the "Investor"), pursuant to which
we sold to the Investor in a private placement (the "Private Placement"),
2,500,000 shares of our common stock, par value $0.01 per share ("Common
Share"), at a price per Common Share of $0.04 (the "Purchase Price") for gross
(and net) proceeds of $100,000 as there were no costs associated with the
Private Placement.
Going Concern
Our financial statements for Fiscal 2022 were prepared assuming we will continue
as a going concern, which assumes the realization of assets and the satisfaction
of liabilities in the normal course of business. Our current cash balances,
together with cash generated from future operations, ERC refunds already
received and one ERC refund yet to be received, and recent loans from
shareholders and Healgen will not be sufficient to fund operations through March
2024. At December 31, 2022, we have Stockholders' Deficit of $(2,339,000). If we
are not able to increase sales to generate positive cash flows or obtain
additional financing in the form of additional loans or sale of equity, and/or
if shareholders do not approve the Asset Sale to Healgen, we will be required to
reduce or terminate operations.
Debt
Our loan and security agreement and 2019 Term Note with Cherokee for $1,000,000
and $240,000, respectively, expired on February 15, 2022. On June 14, 2022,
Cherokee agreed that they would defer the principal amounts due under the
Cherokee LSA until February 15, 2023 and that any applicable penalties would
also be deferred as long as the Company remains current on the quarterly
interest payments. Furthermore, any penalties will also be waived if the
principal amounts are paid on or prior to February 15, 2023.
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Given the maturity date of these facilities is February 15, 2023, cash from
operations will not be sufficient to pay the amounts due to Cherokee. We intend
to use proceeds from the Asset Sale to Healgen to pay off the Cherokee
facilities when they are due. If shareholders do not approve the Asset Sale to
Healgen, we will be required to refinance the facilities either via a new debt
facility or raising capital through some other means. There is no assurance that
such financing will be available or that we will be able to complete financing
on satisfactory terms, if at all or that we would be able to raise capital via
other means in time to satisfy the Cherokee liabilities and avoid Cherokee
taking possession of the facility in Kinderhook, NY and all of ABMC's machinery
and equipment, thereby making it impossible for ABMC to continue operations.
On September 28, 2022, we entered into a Loan Promissory Note with Healgen (the
"Healgen Loan"). Through a number of amendments, the total principal due under
the Healgen Loan was $715,000 as of December 31, 2022 (see Note L - Subsequent
Event for more information on the Healgen Loan). The first payment under the
Healgen Loan is due on February 15, 2023 (to coincide with the Closing of the
Asset Sale to Healgen). If shareholders do not approve the Asset Sale to Healgen
on February 15, 2023, the Asset Sale to Healgen will not occur at that time
(although the meeting to approve the Asset Sale to Healgen would likely be
adjourned so we could gather more votes in favor of the Asset Sale to Healgen)
but, the first payment under the Healgen Loan will still be due and payable to
Healgen. Given our current financial condition, it is unlikely we could make the
required payment. This inability could result in the Healgen taking possession
of the assets collateralizing the Healgen Loan thereby making it impossible for
the Company to continue operations.
Throughout most of Fiscal 2022, we had a line of credit with Crestmark Bank. The
maximum availability on the line of credit was $1,000,000. However, because the
amount available under the line of credit was based upon our accounts
receivable, the amounts actually available under our line of credit
(historically) have been significantly less than the maximum availability. When
sales levels declined, we had reduced availability on our line of credit due to
decreased accounts receivable balances. On September 29, 2022, using proceeds
from the Healgen Loan, we made a payment to Crestmark Bank in the amount of
$34,000 which paid off the balance on the Crestmark LOC. The payoff of the
Crestmark Line of Credit will result lower interest costs.
As of December 31, 2022, we had the following debt/credit facilities:
Balance as of
Facility Debtor December 31, 2022 Due Date
Loan and
Security Cherokee Financial, LLC February 15, 2023
Agreement $ 1,000,000
Term Loan Cherokee Financial, LLC 240,000 February 15, 2023
Term Loan Individual 50,000 May 4, 2023(1)
Term Loan Individual 225,000 NA(2)
Term Loan Healgen 715,000 February 15, 2023
Total Debt $ 2,230,000
(1) The loan agreement was amended on November 4, 2022 to change the maturity
date to May 4, 2023.
(2) The loan agreement was amended on July 13, 2022; one of the revisions made
was changing the maturity date from June 15, 2022 to no specific maturity date.
Working Capital Deficit
At December 31, 2022, we were operating at a working capital deficit of
$2,826,000. This compares to a working capital deficit of $1,484,000 at December
31, 2021. The increase in the working capital deficit is primarily due to the
decline in cash balances and accounts receivable (both of which are due to
decreased sales) along with a decline in the ERC tax receivable (due to the
receipt of one of the refunds in Fiscal 2022). We have historically satisfied
working capital requirements through cash from operations, bank debt and equity
financings.
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Dividends
We have never paid any dividends on our common shares and we anticipate that all
future earnings, if any, will be retained for use in our business.
Cash Flow, Outlook/Risk
In Fiscal 2022, we had a net loss of $1,410,000 and net cash used in operating
activities of $768,000.
Our cash position increased to $33,000 at December 31, 2022 from $10,000 at
September 30, 2022 but, decreased when compared to $115,000 at December 31,
2021. Cash at December 31, 2021 was positively impacted by an ERC refund in
December 2021 (in the amount of $137,000). We did receive an ERC refund in the
amount of $198,000 in early June 2022 and we received proceeds from several
loans in Fiscal 2022 but, the significant loss of sales from our largest
customer (previously discussed in our MD&A) and the resulting decline in gross
profit is negatively impacting cash flows. We also continue to be impacted by
material delays and cost increases (in both manufacturing and other business
costs).
Over the last several years and throughout Fiscal 2022, we have decreased cash
requirements by implementing cost cutting initiatives. This included expense
reductions in selling and marketing (which included reduced and deferred
salaries of a number of employees) and no additional contributions in research
and development to develop new products. Such reductions, although necessary to
maintain operations, are not compatible with growing or even maintaining our
business both in the short and the long term. Our cash position has
deteriorated, and continues to deteriorate, due to gross losses, fixed labor and
overhead costs and payments required under our debt facilities.
We will continue to take steps to ensure that operating expenses remain in line
with sales levels and make every effort to control manufacturing costs, although
as previously discussed herein; certain overhead costs are fixed and cannot be
reduced to be in line with sales levels. We have consolidated job
responsibilities in multiple areas of the Company and this has enabled us to
implement personnel reductions. We are also promoting alternative products and
service offerings to diversify our revenue stream.
We believe the losses we have reported over the last several years and most
recently the significant loss reported for Fiscal 2022 will continue as (i) our
primary business (onsite drugs of abuse tests) has become a commoditized market
and we cannot compete with the low pricing offered by our competitors who
manufacture outside of the U.S. and (ii) we have not been able to obtain new
business to replace the significant loss of business from our largest customer.
The extent to which the commoditized nature of our markets will continue to
impact our business, liquidity, results of operations and financial condition
will depend on future developments, which are still uncertain and cannot be
predicted. Current levels of sales declines are impacting our business,
liquidity, results of operations and financial condition and our ability to
access the capital markets may also be limited.
Prior to the fourth quarter of the year ended December 31, 2021, we were able to
utilize the Lincoln Park Equity Line; however, the downturn of our common stock
prevented any sales to be initiated in Fiscal 2022 and the Lincoln Park Equity
Line expired on December 9, 2022. Over the last several years, we have been able
to access loans from shareholders and raise funds via private equity financings.
As time goes on and the financial results continue to deteriorate, these options
are no longer available to the Company. Ms. Waterhouse has also extended loans
to the Company and in addition to salary deferral; Ms. Waterhouse is owed
currently salary.
The maturity date of our facilities with Cherokee is February 15, 2023 and cash
from operations will not be sufficient to pay the amounts due to Cherokee. We
have not been able to find alternative debt facilities due to our results of
operations and our deteriorating financial condition.
Given the above, our results of operations and our current financial condition,
on December 19, 2022, we agreed, subject to the approval of our shareholders, to
sell substantially all of our operating assets to Healgen (excluding cash,
accounts receivables and certain other assets).
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We intend to use proceeds from the Asset Sale to Healgen to pay off the Cherokee
facilities when they are due. If shareholders do not approve the Asset Sale to
Healgen, we will be required to refinance the facilities either via a new debt
facility or raising capital through some other means. To date, we have not been
successful in obtaining an alternative debt facility or raising capital via
other means. Therefore, it is unlikely we would be able to find an alternative
in time to satisfy the Cherokee liabilities and avoid Cherokee taking possession
of the facility in Kinderhook, NY and all of ABMC's machinery and equipment,
thereby making it impossible for ABMC to continue operations.
We have also entered into a Loan Promissory Note with Healgen.
Asset Sale to Healgen
Over the last several years, we have retained financial consultants to seek out
alternative solutions; most recently in early Fiscal 2022. The consultants were
seeking solutions including but not limited to potential mergers, acquisitions,
investment in the Company, and strategic relationships. Simultaneously, our
management was seeking alternative solutions and began discussions with Healgen.
With the current financial condition of the Company, we were not able to find a
suitable alternative apart from the Asset Sale to Healgen.
After carefully weighing the facts and circumstances associated with the Asset
Sale to Healgen as well as alternative courses of action, our Board unanimously
concluded that the proposed sale of substantially all of our assets is the best
available alternative to maximize value for shareholders.
Our Board believes our status as a fully reporting public company is an asset
which may be sufficiently attractive to induce others to enter into business
combinations with us. We are exploring strategic transactions which may result
in entering into a new line of business (subject to specific competitive
limitations under the Asset Sale to Healgen). We believe strategic acquisitions
using our publicly traded stock as transaction consideration could enhance
shareholder value. Nonetheless, our Board may later determine to dissolve the
Company and distribute any remaining assets to our shareholders if we are unable
to make any strategic acquisitions.
On December 19, 2022, we entered into an APA with Healgen, pursuant to which we
agreed, subject to the approval of our shareholders, to sell substantially all
of our operating assets (excluding our cash, accounts receivables arising prior
to the closing date, and certain other assets).
Under the New York Business Corporation Law, the Asset Sale to Healgen requires
approval by the affirmative vote of the holders of at least a majority of the
voting power of all outstanding shares of common stock. Accordingly, we
submitted the Asset Sale to Healgen to a shareholder vote via a preliminary
Proxy Statement filed on December 22, 2022 (See Note X - Subsequent Event for
more information on the Proxy Statement filing). The Closing of the Asset Sale
to Healgen would occur when/if the required number of affirmative shareholder
votes is received and customary closing conditions are satisfied (the
"Closing").
The total consideration for the Asset Sale to Healgen is $3 million in cash (the
"Purchase Price"), plus the assumption by Healgen of certain limited liabilities
relating to the business. $300,000 of the Purchase Price will be held back in a
retention fund to cover potential indemnification claims during the six months
following the Closing. The amount of consideration paid in connection with Asset
Sale to Healgen was determined in arm's-length negotiations between the Company
and Healgen.
Through December 31, 2022, Healgen has already advanced $715,000 of the Purchase
Price to us in the form of loans (See Note L - Subsequent Event for more
information on the Healgen Loan). Provided the Asset Sale to Healgen is
completed, at Closing, Healgen will waive any interest that may be due on the
loans. Therefore, excluding the $300,000 hold back, the remaining $2.7 million
of the Purchase Price, less any loans advanced prior to Closing will be paid to
the Company at Closing.
In connection with the Asset Sale to Healgen, Melissa Waterhouse, the Chief
Executive Officer of the Company, has agreed to enter into an employment
agreement with the Healgen effective upon Closing.
The business being acquired by Healgen is the only area of operations in which
we are engaged. If the Asset Sale to Healgen is approved by shareholders and the
sale of the business is completed, we will no longer engage in the development,
manufacturing and selling of point of collection diagnostic products, including
onsite drug test products (the "Business") and instead we intend to pursue
opportunities in other areas. Upon the consummation of the Asset Sale to
Healgen, we will no longer be engaged in the Business, which accounted for all
of our revenues, costs and expenses (with the exception of costs associated with
being a public entity), for Fiscal 2022 and all years prior.
For a more complete description of the terms of the Asset Sale to Healgen and
the Healgen Loan, see our Current Report on Form 8-K filed with the SEC on
December 21, 2022, our preliminary Proxy Statement filed with the SEC on
December 22, 2022 and our definitive Proxy Statement filed with the SEC on
January 11, 2023.
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