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, 2021, 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 are continuing 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 test 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.
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 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.
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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 continually 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; specifically 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 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 are currently looking into possible production alternatives in
attempts to address these fixed costs.
Operating expenses declined in the nine months ended September 30, 2022 when
compared to the nine months ended September 30, 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 the nine months
ended September 30, 2021, we made payments totaling $22,000 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 the nine months ended September 30, 2022
and $20,000 in payments in the nine months ended September 30, 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 September 30,
2022, we had deferred compensation owed to Ms. Waterhouse in the amount of
$79,000 and $6,000 in payroll taxes that are due as payments are made to Ms.
Waterhouse; for a total of $85,000 in deferred compensation owed to Ms.
Waterhouse. In addition, as of September 30, 2022, we owe Ms. Waterhouse $30,000
in current salary that was not paid.
Beginning in April 2022, another member of senior management participated in the
salary deferral program. As of September 30, 2022, we had deferred compensation
owed to this individual in the amount of $9,000 and $1,000 in payroll taxes that
are due as payments are made to this individual; for a total of $10,000 in
deferred compensation.
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 continue to achieve
positive cash flows from operations or raise additional funding, it may be
required to further reduce or terminate operations.
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Results of operations for the nine months ended September 30, 2022 compared to
the nine months ended September 30, 2021NET SALES: Net sales for nine months ended September 30, 2022 decreased by
56.3%, when compared to net sales in the nine months ended September 30, 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 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).
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 the nine
months ended September 30, 2022 with the nine months ended September 30, 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 one of our distributors
along with a backorder at September 30, 2022.
Contract manufacturing sales also declined when comparing the two nine-month
periods; primarily due to decreased sales of the malaria product we manufacture.
This decrease was partially offset by increased sales of the RSV test we
manufacture and private label to an unaffiliated third party, the private label
Rapid TOX® product we manufacture and contract assembly work we performed on a
limited basis in the nine months ended September 30, 2022.
Distribution sales increased in the nine months ended September 30, 2022 when
compared to the nine months ended September 30, 2021. This increase stems from
increased sales of the lower cost DOA tests that we sell via distribution which
was primarily offset by decreased sales of rapid Covid-19 tests we have been
distributing. We still believe that given the continued downward trend of
pricing of Covid-19 tests and the fact that we are distributing these tests
(which requires further markup); sales of Covid-19 tests will not have a
significant impact on our sales going forward.
GROSS (LOSS) / PROFIT: Once again we recorded a gross (loss) in the nine months
ended September 30, 2022 of $(53,000); this is compared to gross profit of
$425,000 in the nine months ended September 30, 2021. Gross profit began to
dramatically decline in the first quarter of 2022 and further declined in the
second and third quarter of 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). 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 decreased 35.8% in the nine months ended September 30, 2022
compared to the nine months ended September 30, 2021. Expenses in Selling and
Marketing and General and Administrative expenses decreased and Research and
Development expenses remained unchanged. More specifically:
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Research and development ("R&D")
R&D expense was unchanged when comparing the nine months ended September 30,
2022 with the nine months ended September 30, 2021. Although salary expense
decreased slightly due to the timing of pay periods, other expenses did increase
slightly. More specifically, expenses related to utilities and FDA compliance
increased slightly. All other expenses remained relatively consistent when
comparing the two nine-month periods. In the nine months ended September 30,
2022, our R&D department continued to focus their efforts on the enhancement of
our current products and validations related to drug testing product components.
Selling and marketing
Selling and marketing expense in the nine months ended September 30, 2022
decreased 53.2% when compared to the nine months ended September 30, 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), auto expense, reductions in costs associated with
shipping and promotional expense (due to the nine months ended September 30,
2021 including fees paid to OTC Markets) were the primary reasons for the
decline in expenses. All other expenses remained relatively consistent when
comparing the two nine-month periods.
In the nine months ended September 30, 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 the nine
months ended September 30, 2022 with the nine months ended September 30, 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 the nine months ended September 30,
2022 due to lack of qualified candidates. 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 34.2% in the nine months ended September 30, 2022 when
compared to G&A expense in the nine months ended September 30, 2021. A primary
reason for the decline is that the nine months ended September 30, 2022 did not
include any fees associated with our loans with Cherokee while the nine months
ended September 30, 2021 included 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, departure of another employee as well as a reduced work week
implemented early in April 2022), general and administrative 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), and payroll service fees declined (due to change in vendor) along
with other smaller declines in other expenses. These declines were partially
offset by increased consulting fees (due to the execution of the Financial
Advisory Agreement with Landmark Pegasus, Inc. in the nine months ended
September 30, 2022), increased utility expenses and repairs and maintenance
expense. There was no expense related to share based payments in either the nine
months ended September 30, 2022 or the nine months ended September 30, 2021.
OTHER INCOME AND EXPENSE: Other expense of $151,000 in the nine months ended
September 30, 2022 consisted of interest expense associated with our credit
facilities (our line of credit, our two loans with Cherokee Financial, LLC and
shareholder loans) and interest income of $2,000 (most of which is interest
received in connection with the ERC refund we received in June 2022).
Other income of $821,000 in the nine months ended September 30, 2021 consisted
of income related to the forgiveness of our PPP loan in the amount of $335,000,
other income of $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, $581,000 in income from the Employee Retention Credit
recognized in the nine months ended September 30, 2021 (which is $44,000 in
credits taken in Q3 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).
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Results of operations for the three months ended September 30, 2022 compared to
the three months ended September 30, 2021NET SALES: Net sales for the three months ended September 30, 2022 decreased
66%, when compared to net sales in the three months ended September 30, 2021
primarily as a result in a decline in sales of 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
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). 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 the three months ended September 30,
2022 with the three months ended September 30, 2021. In addition to the decline
in sales to this customer, international sales also declined; most of which is
due to a backorder at September 30, 2022.
Contract manufacturing sales also decreased when comparing the three-month
periods. This decrease stems from decreased sales of the malaria product we
manufacture; partially offset by increased sales of the private label Rapid TOX®
product we manufacture and contract assembly work we performed on a limited
basis in the three months ended September 30, 2022.
Distribution sales also decreased when comparing the three months ended
September 30, 2022 to the three months ended September 30, 2021. This decrease
stems primarily from lower sales of rapid Covid-19 tests we have been
distributing; partially offset by increased sales of the lower cost DOA tests
were are distributing. In the three months ended September 30, 2022, we did not
have sales of Covid-19 tests. Market pricing of Covid-19 tests has continued to
decline and demand has decreased somewhat. Going forward, this will make it
difficult for the Company to sell these tests given we are only distributing
them (which requires further mark up to customers), therefore, we still believe
that sales of Covid-19 tests will not have a significant impact on our sales
going forward.
GROSS (LOSS) / PROFIT:
Once again we recorded a gross (loss) in the three months ended September 30,
2022 of $(9,000) ; this is compared to gross profit of $185,000 in the three
months ended September 30, 2021. Gross profit began to dramatically decline in
the first quarter of 2022 and further declined in the second and third quarter
of 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). 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.
There was some improvement in the gross loss between the second and third
quarter of 2022 (from a gross loss of $(45,000) in the three months ended June
30, 2022 to a gross loss of $(9,000) in the three months ended September 30,
2022) as we continue to take steps to reduce manufacturing costs. These
manufacturing costs include, but are not limited to, costs associated with
labor. However, fixed costs cannot easily be decreased. Given the price
sensitivity in our markets and the commoditized nature of drug testing products,
customer pricing is also 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.
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OPERATING EXPENSES: Operating expenses decreased 35% in the three months ended
September 30, 2022 compared to the three months ended September 30, 2021.
Selling and Marketing and General and Administrative expenses decreased while
R&D Expense nominally increased. More specifically:
Research and development ("R&D")
R&D expense in the three months ended September 30, 2022 increased 4.8% when
compared to the three months ended September 30, 2021. The actual increase was
$1,000 and this was due to higher salary expense which, was due to timing of pay
periods. All other expenses remained relatively consistent when comparing the
two three-month periods.
Selling and marketing
Selling and marketing expense in the three months ended September 30, 2022
decreased 67.1% when compared to the three months ended September 30, 2021.
Reductions in sales salary expense and benefits (due to the termination of
personnel for performance reasons as well as an employee departure), auto
expense, and costs associated with shipping are the primary reasons for the
decline. Other expenses remained relatively unchanged.
General and administrative ("G&A")
G&A expense decreased 29.1% in the three months ended September 30, 2022 when
compared to G&A expense in the three months ended September 30, 2021. Decreased
costs associated with general and administrative salaries and benefits (due to
fewer employees and the reduced work week implemented in April 2022), quality
assurance salaries (due to retirement of an employee, departure of another
employee as well as a reduced work week implemented early in April 2022), and
intellectual property (due to less international patent maintenance fees paid
and less legal fees incurred) were partially offset by increased costs
associated with increased legal fees. There was no expense related to share
based payments in either the three months ended September 30, 2022 or the three
months ended September 30, 2021.
OTHER INCOME AND EXPENSE:
Other expense of $52,000 in the three months ended September 30, 2022 consisted
of interest expense associated with our credit facilities (our line of credit,
our two loans with Cherokee Financial, LLC and shareholder loans) and interest
income of $1,000. Other income of $867,000 in the three months ended September
30, 2021 consisted of income related to the forgiveness of our PPP loan in the
amount of $335,000 and $581,000 in income from the Employee Retention Credit
recognized in the three months ended September 30, 2021 (which is $44,000 in
credits taken in Q3 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).
Liquidity and Capital Resources as of September 30, 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). We
are examining 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 nine months ended September 30, 2022 and/or the nine months ended September
30, 2021 or are expected to have an impact on our cash flow in the year ending
December 31, 2022:
Employee Retention Credit ("ERC")
As discussed in Note F to our financial statements, 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.
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Shareholder Loans
We currently have two shareholder loan facilities; the November 2020 Shareholder
Loan and the December 2021 Shareholder Loan (See Note E - Line of Credit and
Debt). In the nine months ended September 30, 2022, we received proceeds
totaling $240,000 under the December 2021 Shareholder Loan and we made payments
totaling $50,000 on the December 2021 Shareholder Loan.
September 2022 Loan and Promissory Note
On September 28, 2022, we entered into a Loan and Promissory with an
unaffiliated third party (the "September 2022 Loan") and received gross/net
proceeds of $40,000. We utilized $34,000 of the loan proceeds to pay off the
Crestmark Line of Credit (See Note E - Line of Credit and Debt).
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. In the nine months ended
September 30, 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 nine months ended
September 30, 2021, the Company sold 6,300,000 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 $632,000.
Going Concern
Our financial statements for the nine months ended September 30, 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 refund, and recent loans from shareholders and other third
parties will not be sufficient to fund operations through November 2023. At
September 30, 2022, we have Stockholders' Deficit of $(2,022,000). Should the
Company not be able to increase sales to generate positive cash flows or obtain
additional financing in the form of additional loans or sale of equity, it 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.
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 are due in full on
February 15, 2023. Given this, 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.
Throughout most of the nine months ended September 30, 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 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. Through the nine months ended September 30,
2022, we recognized $35,000 in interest expense related to the Crestmark Line of
Credit and in the nine months ended September 30, 2021, we recognized $38,000 in
interest expense.
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If cash generated from operations, cash received from a refund under the ERC
program and loan proceeds are not sufficient to satisfy our working capital and
capital expenditure requirements, we will be required to seek additional credit
facilities, 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 or that alternative
strategies will be available.
As of September 30, 2022, we had the following debt/credit facilities:
Balance as
of
September
Facility Debtor 30, 2022 Due Date
Loan and Security Agreement Cherokee February
Financial, 15, 2023
LLC $ 1,000,000
Term Loan Cherokee February
Financial, 15, 2023
LLC 240,000
Term Loan Individual May 4,
50,000 2023(1)
Term Loan Individual 265,000 NA(2)
Term Loan Unaffiliated January
Third Party 40,000 28, 2023
Total Debt $ 1,595,000(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 September 30, 2022, we were operating at a working capital deficit of
$2,522,000. 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 the nine months ended September 30, 2022). 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 nine months ended September 30, 2022, we had a net loss of $1,093,000 and
net cash used in operating activities of $157,000.
Our cash position decreased to $10,000 at September 30, 2022 from $115,000 at
December 31, 2021 and $41,000 at September 30, 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. In the year ending December 31, 2022, we are expecting one more ERC refund
in the amount of $202,000
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. We also continue to be impacted by material delays and cost increases (in
both manufacturing and other business costs).
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 starting in the third
quarter of 2021 has prevented any further sales to be initiated.
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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. Given the
current state of our business and the current stock price, it is unlikely we
will be able to facilitate purchases under our Purchase Agreement with Lincoln
Park in the near future before it expires in December 2022. If we are unable to
meet our credit facility obligations 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, 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.
If we are forced to refinance our debt on less favorable terms, our results of
operations and financial condition would be further 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 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 including reducing or terminating operations.
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