General
The following discussion and analysis provides information, which we believe is
relevant to an assessment and understanding of our financial condition and
results of operations. The discussion should be read in conjunction with the
Interim Condensed Financial Statements contained herein and the notes thereto
appearing elsewhere in this Quarterly Report on Form 10-Q. Certain statements
contained in this Quarterly Report on Form 10-Q, including, without limitation,
statements containing the words "believes", "anticipates", "estimates",
"expects", "intends", "projects", and words of similar import, are
forward-looking as that term is defined by the Private Securities Litigation
Reform Act of 1995 ("1995 Act"), and in releases issued by the United State
Securities and Exchange Commission (the "Commission"). These statements are
being made pursuant to the provisions of the 1995 Act and with the intention of
obtaining the benefits of the "Safe Harbor" provisions of the 1995 Act. We
caution that any forward-looking statements made herein are not guarantees of
future performance and that actual results may differ materially from those in
such forward-looking statements as a result of various factors, including, but
not limited to, any risks detailed herein, in our "Risk Factors" section of our
Form 10-K for the year ended December 31, 2020, in our most recent reports on
Form 10-Q and Form 8-K and from time to time in our other filings with the
Commission, and any amendments thereto. Any forward-looking statement speaks
only as of the date on which such statement is made, and we are not undertaking
any obligation to publicly update any forward-looking statements. Readers should
not place undue reliance on these forward-looking statements.
Overview/Plan of Operations
Sales of drug tests continue 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 have continued to market various
Covid-19 rapid tests. All of the Covid-19 tests we are offering are being
marketed in accordance with the March 2020 Emergency Use Authorization ("EUA")
policy set forth by the United States Food and Drug Administration (FDA) and in
accordance with the individual EUAs issued for the products. We are currently
offering a number of different rapid antigen tests and rapid antibody tests that
can be used in various different settings, including home use; depending on
their specific EUA issuance.
In addition to increased costs, the materials used in the manufacture of our
drug tests products are the same materials used in the manufacture of lateral
flow Covid-19 tests and this has resulted in supply chain delays; some of which
have negatively impacted our customer relationships.
Due to the Covid-19 pandemic, we are still not marketing our oral fluid drug
tests (OralStat®) in the employment and insurance markets in the United States
(under a limited exemption set forth by the FDA). We remain hopeful that we can
effectively market our OralStat in the United States markets given its superior
sensitivity and accuracy. Initially we may re-introduce the product in markets
outside the United States via distribution relationships.
In 2019 we expanded our contract manufacturing operations with two new
customers. Unfortunately, the Covid-19 pandemic halted sales to these customers
throughout 2020 and into 2021 but, in the year ended December 31, 2021, we
started to ship orders to them again as their business started to return to
normal. We are hopeful that sales to these customers will improve as we get
further outside of the pandemic.
In our current fiscal year and beyond, we are focusing our efforts on further
penetration of our markets with our current products that we manufacture and
distribute and we are looking into other products to offer via distribution
relationships.
Although the cost of manufacturing drug tests in the United States is proving to
be nearly cost prohibitive, we do believe there are opportunities to capitalize
on our US-based lateral flow manufacturing capabilities; especially for small to
mid-size diagnostic firms that require high quality manufacturing; especially
given the current challenges with getting imports into the United States.
Gross profit margin has been declining due to the increased costs of
manufacturing in the United States (many of which were previously mentioned). We
continually take actions to adjust our production schedules to try to mitigate
manufacturing inefficiencies, and take 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 also have certain overhead costs associated with manufacturing
that are fixed and as sales decline, these costs cannot be adjusted downward and
this results in greater manufacturing inefficiencies. We are currently looking
into possible production alternatives in attempts to address these fixed costs.
Operating expenses declined in the First Quarter 2022 when compared to the First
Quarter 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, 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. Another member of senior management participated in the
program voluntarily until his retirement in November 2019. After the member of
senior management retired, we agreed to make payments on the deferred
compensation owed to this individual. In the First Quarter 2021, we made
payments totaling $13,000 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. In the First Quarter 2022, we made payments totaling $10,000 to Ms.
Waterhouse. We did not make any payments on deferred compensation to Ms.
Waterhouse in the First Quarter 2021. As of March 31, 2022, we had deferred
compensation owed to Ms. Waterhouse in the amount of $64,000 and $5,000 in
payroll taxes that are due as payments are made to Ms. Waterhouse; for a total
of $69,000 in deferred compensation owed to Ms. Waterhouse.
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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 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 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.
Results of operations for the First Quarter 2022 compared to the First Quarter
2021
NET SALES: Net sales for the First Quarter 2022 decreased 38.0% when compared to
net sales in the First Quarter 2021 primarily as a result in a decline in sales
of drugs of abuse ("DOA") test that we manufacture. The decline in DOA sales
stems almost entirely from decreased sales to our largest customer who has
historically been a significant portion of our revenues. This customer has two
segments of their business for which we supply products. They informed us in
February 2022 that sales to one of those segments (which we supplied
exclusively) would decrease as a result of their desire to have multiple vendors
supplying the segment. They indicated this was to ensure uninterrupted supply as
they had experienced periodic supply interruptions with us in 2021 (as a result
of the supply chain issues we experienced in 2021 and continue to experience
into 2022; particularly with plastics and other materials that are used to
manufacture our drug tests; materials that are also used in the manufacture of
lateral flow Covid-19 tests. and other companies as well). They indicated that
the other segment we supply would remain unchanged and in that particular
segment, we actually saw a slight increase in sales when comparing the First
Quarter 2022 with the First Quarter 2021. Nominally offsetting this decline was
an increase in international sales as a few of our distributors start to see a
rebound in business since the pandemic.
Also partially offsetting the decline was an increase in distribution sales;
most of which is due to increased sales of the lower cost DOA tests we are
selling along with a small increase in sales of rapid Covid-19 tests we are
distributing. Contract manufacturing sales also increased when comparing First
Quarter 2022 to the First Quarter 2021. This was primarily a result of increased
sales of our private labeled RSV test due to increased testing since the
Covid-19 pandemic.
GROSS PROFIT: Gross profit decreased to 8% of net sales in the First Quarter
2022 from 18.6% of net sales in the First Quarter 2021. This decline in gross
profit is almost entirely due to decreased sales to our largest customer in one
of their segments (previously discussed in net sales). The two segments we were
supplying were comprised of one with low margin sales and one with higher margin
sales. This allowed the Company to maintain an appropriate blended gross profit
margin on the sales to the customer. The segment in which sales have decreased
significantly is the segment in which products were sold at a higher profit
margin and this has significantly reduced the blended gross profit margin on the
account. At the same time, this decline in sales has resulted in greater
inefficiencies in manufacturing. Manufacturing inefficiencies occur when
production levels decrease but, not all costs can be reduced to be in line with
production levels because they are fixed.
We have taken steps to reduce manufacturing costs, including but not limited to,
costs associated with labor and facility costs, to mitigate these
inefficiencies. Given the price sensitivity in our markets and the commoditized
nature of drug testing products increasing 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 decreased in the First Quarter 2022
compared to the First Quarter 2021. Selling and Marketing and General and
Administrative expenses decreased while Research and Development expenses
increased slightly. More specifically:
Research and development ("R&D")
R&D expense decreased 10.0%, when comparing the First Quarter 2022 with the
First Quarter 2021. Although the increase was 10.0%, the actual change in R&D
expenses was only $2,000. Employment taxes increased slightly along with FDA
compliance costs and certain facility costs. However, overall, expenses were
relatively unchanged. In the First Quarter 2022, our R&D department primarily
focused their efforts on the enhancement of our current products and validations
related to drug testing product components.
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Selling and marketing
Selling and marketing expense in the First Quarter 2022 decreased 49.4% when
compared to the First Quarter 2021. Reductions in sales salary expense and
benefits (due to the termination of personnel for performance reasons) and
reductions in costs associated with shipping were the primary reason for the
decline in expenses. All other expenses were relatively unchanged when comparing
the quarters.
In the First Quarter 2022, we continued selling and marketing efforts related to
the drug tests we manufacture and we promoted 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 First Quarter 2022 with
the First Quarter 2021. Terminations of sales personnel have been due to poor
performance. We are taking steps to increase the size of our sales team to
further penetrate our markets; however, no new sales reps were hired in the
First Quarter 2022. 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 42.3% in the First Quarter 2022 compared to the First
Quarter 2021. The primary reason for the decrease was First Quarter 2022 did not
include any fees associated with our loans with Cherokee while the First Quarter
2021 includes a total of $148,000 in fees incurred in connection with a penalty
related to extension of the Cherokee loans in February 2021 In addition, quality
assurance salaries declined (due to retirement of an employee), general and
administrative salaries and benefits declined due to fewer employees, accounting
fees declined due to lower costs from our new accounting firm, and patent fees
declined (due to timing of patent maintenance fees) along with other smaller
declines in other expense areas. These declines were partially offset by
increased costs associated with SEC filing fees and annual meeting expense (due
to timing of fees), increased consulting fees (due to the execution of the
Financial Advisory Agreement with Landmark Pegasus, Inc. in the First Quarter
2022) and increased utility and repair costs. There was no expense related to
share based payments in either the First Quarter 2022 or the First Quarter 2021.
Other income / (expense):
Other expense in the First Quarter 2022 and the First Quarter 2021 consisted of
interest expense associated with our credit facilities (our line of credit with
Crestmark Bank, our loans with Cherokee Financial, LLC and our loans with two
shareholders).
Liquidity and Capital Resources as of March 31, 2022Our cash requirements depend on numerous factors, including but not limited to
manufacturing costs (such as raw materials, labor, 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. We expect to devote capital resources
related to selling and marketing initiatives. We are examining other growth
opportunities including strategic alliances and contract manufacturing. 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.
The following transactions materially impacted our liquidity and cash flow in
the First Quarter 2022 and/or the First Quarter 2021 or are expected to have an
impact on our cash flow in the year ending December 31, 2022:
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 the First Quarter 2022, we were not
able to sell any shares of common stock to Lincoln Park due to the market price
of our common shares (i.e. they are not closing at or above $0.05 per share and
have not closed at that price since the latter part of the year ended December
31, 2021). In the First Quarter 2021, the Company sold 2,100,000 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 $381,000.
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Employee Retention Credit ("ERC")
As discussed in Note F to our financial statements for the First Quarter 2022,
we are expecting to receive two ERC refunds totaling $400,000. The receipt of
these two refunds will have a positive impact on our cash flow.
Going Concern
Our financial statements for the First Quarter 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
and amounts available under our credit facilities may not be sufficient to fund
operations through May 2023. At March 31, 2022, we have Stockholders' Deficit of
$(1,308,000).
Debt
Our loan and security agreement and 2019 Term Note with Cherokee for $900,000
and $220,000, respectively, expired on February 15, 2021; however, on February
24, 2021, the we completed a transaction related to another one-year Extension
of both facilities dated February 14, 2021 (the "Second Extension") with
Cherokee under which Cherokee extended the due date of the Cherokee LSA and the
2019 Term Note to February 15, 2022.
Under the terms of the Second Extension, the Cherokee LSA was increased to
$1,000,000 to include a $100,000 penalty that was due as a result of the Company
being unable to pay back the principal balance to Cherokee on February 15, 2021
and the 2019 Term Note was increased to $240,000 to include a $20,000 penalty.
Under this Second Extension, the annual interest rate on the Cherokee LSA was
increased to a fixed rate of 10% (the prior fixed rate was 8%) plus a 1% annual
oversight fee (that remained unchanged). The interest rate on the 2019 Tern More
remained at 18%. Interest on both facilities and the oversight fee on the
Cherokee LSA are due quarterly. If the Company didn't pay off the principal on
the Cherokee LSA and the 2019 Term Note before February 15, 2022, Cherokee could
impose an 8% delinquent fee. This delinquent fee applies to the principal
balance due on each facility on February 15, 2022. Although the facilities were
not paid off on February 15, 2022, Cherokee has not imposed the delinquent fees
or increased the interest rates.
We do not expect cash from operations within the next 12 months to be sufficient
to pay the amounts due under these credit facilities, which were due in full on
February 15, 2022. We were not able to these pay off the credit facilities when
they were due and we are currently in discussions with Cherokee related to
possible payoff of the loans (via a refinance or other means) or to extend the
due date of the loans. See Note I - Subsequent Events for information related to
the status of the Cherokee loans.
Throughout the First Quarter 2022, we had a line of credit with Crestmark Bank.
The maximum availability on the line of credit is $1,000,000. However, because
the amount available under the line of credit is 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 decline, we have reduced availability on our line of credit due to
decreased accounts receivable balances. As of March 31, 2022, based on our
availability calculation, there were no additional amounts available under the
line of credit because we draw any balance available on a daily basis. Upon
completion of the initial 5 year term, the Crestmark line of credit
automatically renews for additional one (1) year terms unless notice of
termination from the Company is received by Crestmark not less than sixty (60)
days prior to the end of the renewal term. We did not provide Crestmark with a
notice of non-renewal and therefore, the Crestmark line of credit will
automatically renew on June 22, 2022 for another one year term, or until June
22, 2023.
If availability under our line of credit (from sales) and/or cash received as
refunds under the ERC program are not sufficient to satisfy our working capital
and capital expenditure requirements, we will be required to seek additional
credit facilities or sell additional equity securities, or delay capital
expenditures which could have a material adverse effect on our business. There
is no assurance that such financing will be available or that we will be able to
complete financing on satisfactory terms, if at all.
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As of March 31, 2022, we had the following debt/credit facilities:
Balance as of
Facility Debtor March 31, 2022 Due Date
Loan and Security Agreement Cherokee February 15,
Financial, LLC $ 1,000,000 2022(1)
Revolving Line of Credit Crestmark Bank June 22,
$ 93,000 2023
Term Loan Cherokee February 15,
Financial, LLC $ 240,000 2022(1)
Term Loan Individual November 4,
$ 50,000 2022
Term Loan Individuals June 15,
$ 75,000 2022
Total Debt $ 1,458,000(1) Facility was not repaid on February 15, 2022 and we are currently in
discussions with Cherokee related to possible payoff of the facility (via a
refinanceor other means) or to extend the due date of the facility.
Working Capital Deficit
At the end of the First Quarter 2022, we were operating at a working capital
deficit of $1,833,000. This compares to a working capital deficit of $1,484,000
at December 31, 2021. The increase in the working capital deficit between the
First Quarter 2022 and the year ended December 31, 2021 is primarily due to
decline in cash balances and accounts receivable (due to decreased sales). We
have historically satisfied working capital requirements through cash from
operations, bank debt and equity financings.
Dividends
We have never paid any dividends on our common shares and anticipate that all
future earnings, if any, will be retained for use in our business, and
therefore, we do not anticipate paying any cash dividends.
Cash Flow, Outlook/Risk
In the First Quarter 2022, we had a net loss of $379,000 and net cash used in
operating activities of $13,000.
Our cash position decreased to $17,000 at March 31, 2022 from $115,000 at
December 31, 2021 and $63,000 at March 31, 2021. Cash at December 31, 2021 was
positively impacted by an ERC refund in December 2021 (in the amount of
$137,000) and cash at March 31, 2021 was positively impacted by $381,000
received from sales of shares of our common stock to Lincoln Park. There were no
similar cash infusions in the First Quarter 2022 and sales continued to decline.
In February 2022 we were informed by our largest customer that sales to one of
their segments (which we supplied exclusively) would decrease as a result of
their desire to have multiple vendors supplying the segment. This decrease in
sales to the one segment of their business also negatively impacts gross profit
as this segment is the more profitable segment from a margin perspective. This
has resulted in less profit to the Company which is negatively impacting cash
flows. While the Covid-19 pandemic is seemingly winding down, we continue to be
impacted by it in the form of material delays and cost increases (in both
manufacturing and other business costs); as evidenced by the one customer's
decision to decrease sales to the Company in one of their market segments.
The extent to which the pandemic and 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 already 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 starting in the
third quarter of 2021 has prevented any further sales to be initiated.
In December 2021, we received one of our ERC refunds (in the amount of $137,000)
from the IRS. In the year ending December 31, 2022, we are expecting two more
refunds; totaling $400,000.
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Our ability to repay our current debt and other liabilities may also be affected
by general economic, financial, competitive, regulatory, legal, business and
other factors beyond our control, including those discussed herein. If we are
unable to meet our credit facility obligations and we continue to be unable to
facilitate purchases under our Purchase Agreement with Lincoln Park, we will be
required to raise money through new equity and/or debt financing(s) and, there
is no assurance that we would be able to find new financing, or that any new
financing would be at favorable terms.
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. We have
consolidated job responsibilities in certain areas of the Company and this has
enabled us to implement personnel reductions. We are also promoting new products
and service offerings to diversify our revenue stream, including new Covid-19
tests.
If we are forced to refinance our debt on less favorable terms, our results of
operations and financial condition could be adversely affected by increased
costs and rates. There is also no assurance that we could obtain alternative
debt facilities. We may also be forced to pursue one or more alternative
strategies, such as restructuring, selling assets, reducing or delaying capital
expenditures or seeking additional equity capital. There can be no assurances
that any of these strategies could be implemented on satisfactory terms, if at
all.
If events and circumstances occur such that 1) we do not meet our current
operating plans to increase sales, 2) we are unable to raise sufficient
additional equity or debt financing, 3) we are unable to effect sales under the
Lincoln Park Equity Line, 4) we are unable to utilize equity as a form of
payment in lieu of cash or 5) our credit facilities are insufficient or not
available, we may be required to further reduce expenses or take other steps
which could have a material adverse effect on our future performance.
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