THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2022

THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

Note A – The Company and its Significant Accounting Policies

The Company:

American Bio Medica Corporation (the “Company”) 1) manufactures and sells lateral flow immunoassay tests, primarily for the immediate detection of drugs in urine, 2) provides strip manufacturing and assembly and packaging services for unaffiliated third parties and 3) sells (via distribution) a number of other products related to the immediate detection of drugs in urine and oral fluid, point of care diagnostic products and rapid Covid-19 tests (the “Business”).

Going Concern:

The Company’s financial statements were prepared assuming the Company will continue as a going concern, which assumes the realization of assets and the satisfaction of liabilities in the normal course of business. For the year ended December 31, 2022 (“Fiscal 2022”), the Company’s 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 Scientific Limited Liability Company (“Healgen”) will not be sufficient to fund operations through February 2024. For Fiscal 2022, the Company had a net loss of $1,410,000, cash used in operating activities of $769,000 and Stockholders’ Deficit of $(2,339,000). These results are compared to a net loss of $463,000, net cash used in operating activities of $673,000 and Stockholders’ Deficit of $(944,000) for the year ended December 31, 2021 (“Fiscal 2021”).

The Company’s cash position decreased $81,000 to $34,000 at December 31, 2022 from $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). The Company did receive an ERC refund in the amount of $198,000 in early June 2022 and received proceeds from several loans in Fiscal 2022 but, the significant loss of sales from its largest customer (previously discussed in the Company’s MD&A) and the resulting decline in gross profit negatively impacted cash flows.

The Company had a working capital deficit of $(2,833,000) at December 31, 2022 compared to a working capital deficit of $(1,519,000) at December 31, 2021. This increase in 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).

As of December 31, 2022, the Company had an accumulated deficit of $25,223,000. Over the course of the last several fiscal years, the Company has implemented a number of expense and personnel cuts, consolidated certain manufacturing operations of the Company, refinanced debt, consummated private placements of shares of Company common stock and entered into an equity line of credit with Lincoln Park Capital Fund, LLC.

From August 2013 until June 2020 and from April 2022 through the date of this report, the Company maintained a salary deferral program for its sole executive officer; 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, the Company had to make payments on the deferred compensation (i.e. deferred salary) owed to this individual. In Fiscal 2021, the Company 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, the Company 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. The Company made payments totaling $10,000 to Ms. Waterhouse in Fiscal 2022 and $33,000 in payments in Fiscal 2021. The Company 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, the Company 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, the Company owes 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, the Company 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).

The Company’s loan and security agreement and 2019 Term Note with Cherokee Financial LLC (“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. There were no penalties imposed by Cherokee and the Cherokee LSA was paid in full on February 28, 2023. See Note L – Subsequent Events for more information on the Cherokee LSA payoff.

On December 19, 2022, the Company entered into an Asset Purchase Agreement (“APA”) with Healgen, pursuant to which the Company agreed, subject to the approval of its shareholders, to sell substantially all of the Company’s operating assets (excluding our cash, accounts receivables arising prior to the closing date, and certain other assets); hereinafter referred to as the “Asset Sale to Healgen”. See Note K for more information on the Asset Sale to Healgen.

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, the Company submitted the Asset Sale to Healgen to a shareholder vote via a preliminary Proxy Statement filed on December 22, 2022 (See Note L – Subsequent Events for more information on the Proxy Statement filing and the Closing of the Asset Sale to Healgen).

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 the Company in the form of loans (See Note L – Subsequent Events 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 and therefore no interest was accrued on the loan from Healgen at December 31, 2022. 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 the Company is engaged. If the Asset Sale to Healgen is approved by shareholders and the sale of the Business is completed, the Company will no longer be engaged in the “Business” and instead the Company intends to pursue opportunities in other areas. Upon the consummation of the Asset Sale to Healgen, the Company 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.                                                                                                                                                                                     

Given the maturity date of our facilities with Cherokee is February 15, 2023, cash from operations will not be sufficient to pay the amounts due to Cherokee. The Company intends 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, the Company 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 the Company 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 the Company’s machinery and equipment, thereby making it impossible for the Company 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 E – Debt and Line of Credit and Note L- Subsequent Event for more information on the Healgen Loan). The first payment under the Healgen Loan was due on February 15, 2023 (to coincide with the Closing of the Asset Sale to Healgen). See Note L – Subsequent Events for more information on the Closing of the Asset Sale to Healgen.

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 the line of credit (historically) have been significantly less than the maximum availability. When sales levels declined, the Company had reduced availability on the line of credit due to decreased accounts receivable balances. On September 29, 2022, using proceeds from the Healgen Loan, the Company made a payment to Crestmark Bank in the amount of $34,000 which paid off the balance on the Crestmark LOC.

Over the last several years and throughout Fiscal 2022, the Company 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 the Company’s business both in the short and the long term. The Company’s cash position has deteriorated, and continues to deteriorate, due to gross losses, fixed labor and overhead costs and payments required under our debt facilities.

The Company 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. The Company has consolidated job responsibilities in multiple areas of the Company and this has enabled the Company to implement personnel reductions.

The Company believes the losses reported over the last several years and most recently the significant loss reported for Fiscal 2022 will continue as (i) its primary business (onsite drugs of abuse tests) has become a commoditized market and the Company cannot compete with the low pricing offered by its competitors who manufacture outside of the U.S. and (ii) the Company has not been able to obtain new business to replace the significant loss of business from its largest customer.

The extent to which the commoditized nature of the Company’s markets will continue to impact its 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 the Company’s business, liquidity, results of operations and financial condition and its ability to access the capital markets may also be limited.

Prior to the fourth quarter of the year ended December 31, 2021, the Company was able to utilize the Lincoln Park Equity Line; however, the downturn of the Company’s common stock prevented any sales to be initiated in Fiscal 2022 and the Lincoln Park Equity Line expired on December 31, 2022. Over the last several years, the Company has 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.

If shareholders do not approve the Asset Sale to Healgen and the Company is not able to increase sales to generate positive cash flows or obtain additional financing in the form of additional loans or sale of equity, the Company will be required to reduce or terminate operations.

Significant Accounting Policies:

[1] Cash equivalents: The Company considers all highly liquid financial instruments purchased with a maturity of three months or less to be cash equivalents.

[2] Accounts Receivable: Accounts receivable consists of mainly trade receivables due from customers for the sale of our products. Payment terms vary on a customer-by-customer basis, and currently range from cash on delivery to net 60 days. Receivables are considered past due when they have exceeded their payment terms. Accounts receivable have been reduced by an estimated allowance for doubtful accounts. The Company estimates its allowance for doubtful accounts based on facts, circumstances and judgments regarding each receivable. Customer payment history and patterns, length of relationship with the customer, historical losses, economic and political conditions, trends and individual circumstances are among the items considered when evaluating the collectability of the receivables. Accounts are reviewed regularly for collectability and those deemed uncollectible are written off. At December 31, 2022 and December 31, 2021, the Company had an allowance for doubtful accounts of $2,000 and $3,000, respectively.

[3] Inventory: Inventory is stated at the lower of cost or net realizable value. Work in process and finished goods are comprised of labor, overhead and raw material costs. Labor and overhead costs are determined on a rolling average cost basis and raw materials are determined on an average cost basis. At December 31, 2022 and December 31, 2021, the Company established an allowance for slow moving and obsolete inventory of $235,000 and $278,000, respectively.

[4] Income taxes: The Company applies Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) ASC 740 Income Taxes (“ASC 740”) which prescribes the asset and liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, provided for operating loss carryforwards and are measured using the enacted laws and tax rates that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are not expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. Under ASC 740, tax benefits are recorded only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. ASU 2019-12, issued in December 2019 was adopted by the Company on January 1, 2021. ASU 2019-12 reduced the complexity of ASC 740 by removing exemptions and simplifying the accounting for franchise taxes, deferred taxes and taxes related to employee’s stock ownership plan.

[5] Advertising expense: Advertising costs are expensed as incurred.

[6] Leases: The Company applies FASB ASC 842 – Leases (Topic 842) and recognizes a lease “right of use” asset and a lease liability on its balance sheet related to its operating leases, and discloses key information about its leasing arrangements. At December 31, 2022, the Company’s current lease asset was $7,000 and its current lease liability was $4,000. At December 31, 2022, the Company’s long-term lease asset was $6,000 and its long-term lease liability was $6,000.

[7] Depreciation and amortization: Property, plant and equipment are depreciated utilizing the straight-line method over their estimated useful lives; generally 3-5 years for equipment and 30 years for buildings. Leasehold improvements and capitalized lease assets are amortized by the straight-line method over the shorter of their estimated useful lives or the term of the lease. Intangible assets include the cost of patent applications, which are deferred and charged to operations over 19 years. At December 31, 2021, the Company determined that its patent asset was impaired and recorded a $100,000 write off of the patent asset. Due to the write-off, no future amortization expense is expected related to the specific patents within the asset.

[8] Revenue recognition: The Company recognizes revenue in accordance with FASB ASC Topic 606. The Company’s revenues result from the sale of goods and reflect the consideration to which the Company expects to be entitled. For its customer contracts, the Company’s performance obligations are identified; which is delivering goods at a determined transaction price, allocation of the contract transaction price with performance obligations (when applicable), and recognition of revenue when (or as) the performance obligation is transferred to the customer. Goods are transferred when the customer obtains control of the goods (which is upon shipment to the customer). The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped.

Product returns, discounts and allowances are variable consideration and are recorded as a reduction of revenue in the same period that the related sale is recorded. The Company has reviewed the overall sales transactions for variable consideration and has determined that these costs are not significant. The Company has not experienced any impairment losses, has no future performance obligations and does not capitalize costs to obtain or fulfill contracts.

[9] Shipping and handling: Shipping and handling fees charged to customers are included as a reduction to revenue, and shipping and handling costs incurred by the Company, to the extent of those costs charged to customers, are included in cost of sales.

[10] Research and development: Research and development (“R&D”) costs are charged to operations when incurred. These costs include salaries, benefits, travel expense, costs associated with regulatory applications, supplies, depreciation of R&D equipment and other miscellaneous expenses.

[11] Net loss per common share: Basic loss per common share is calculated by dividing net loss by the weighted average number of outstanding common shares during the period.

Potential common shares outstanding as of December 31, 2022 and 2021:

	December 31, 2022		December 31, 2021
Options		1,736,000		1,937,000
Total		1,736,000		1,937,000

For Fiscal 2022 and Fiscal 2021, the number of securities not included in the diluted loss per share was 1,736,000 and 1,937,000, respectively, as their effect was anti-dilutive due to a net loss in each year.

[12] Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our management believes the major estimates and assumptions currently impacting our financial statements are the following:

· Allowance for doubtful accounts;

· Allowance for slow moving and obsolete inventory;

· Estimates of accruals and liabilities; and

· Deferred income tax valuation allowance.

Estimates are determined using available information. Considerable judgment is required to interpret the specific data used to develop the estimates. The use of different assumptions and/or different valuation techniques may have a material effect on the value of our assets, liabilities and taxes. Actual results may differ from estimates and assumptions of future events.

[13] Impairment of long-lived and intangible (patent) assets: When the carrying balance of the Company’s patents is more than what it could be sold for on the open market and/or is not recoverable through future use, the Company decreases its value. In determining whether the carrying value is not recoverable, the Company estimates the sum of the undiscounted expected cash flows from the use of the patent or its possible sale. If the results in an amount less that the patents’ value on the financial statements, the Company will deem the patent’s carrying value on the balance sheet to be impaired by the amount that the carrying value exceeds the fair market value of the asset. The decrease in the patent’s value will then be included as a loss in the Company’s profit and loss statement. Because it is difficult to determine and support what our patents could be sold for on the open market, we performed an expected cash flow analysis to determine impairment. Due to the nature of the patents included in the Company’s patent asset and expected revenue specifically related to the patents known at the time of the analysis, the Company determined the patent asset was impaired at December 31, 2021 and recorded a loss of $100,000 in its statement of operations for Fiscal 2021. The Company believes the carrying values of its fixed assets are recoverable and impairment does not exist.

[14] Financial Instruments: The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short and long-term debt. The fair values of these financial instruments approximate their stated amounts because of the short maturity of the instruments.

The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy under ASC 820 are described below:

Level 1: Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3: Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities

The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash —The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value due to the short-term maturity of these instruments.

Line of Credit and short term and long-term debt—The carrying amounts of the Company’s borrowings under its line of credit (for Fiscal 2021 and in Fiscal 2022 until the line of credit was paid off) and other long-term debt approximates fair value, based upon current interest rates, some of which are variable interest rates.

Other Asset/liabilities– The carrying amounts reported in the balance sheet for other current assets and liabilities approximates their fair value, based on the nature of the assets and liabilities.

[15] Accounting for share-based payments and stock warrants: The Company accounts for stock-based compensation in accordance with ASC No. 718, “Compensation-Stock Compensation.” ASC No. 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an Option-Pricing Model. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and warrants and recognizes compensation expenses starting on the date of the grant and over the vesting period of the stock option/warrant. There were 1,736,000 stock options issued and outstanding as of December 31, 2022, all of which are completely vested.

[16] Concentration of credit risk: The Company sells products primarily to United States customers and distributors. Credit is extended based on an evaluation of the customer’s financial condition.

At December 31, 2022, one customer accounted for 35.4% of accounts receivable and one customer accounted for 17.24% of accounts receivable. A substantial portion of these balances was collected in the first quarter of the year ending December 31, 2023. Due to the long standing nature of the Company’s relationship with these customers and contractual obligations, the Company is confident it will recover these amounts.

At December 31, 2021, one customer accounted for 64.5%, one customer accounted for 12.7% and one customer accounted for 10.4% of accounts receivable. These balances were collected in Fiscal 2022.

The Company has established an allowance for doubtful accounts of $2,000 and $3,000 at December 31, 2022 and December 31, 2021, respectively, based on factors surrounding the credit risk of our customers and other information.

The Company maintains certain cash balances at financial institutions that are federally insured and at times the balances have exceeded federally insured limits.

[17] New accounting pronouncements:

In the year ended December 31, 2022, we adopted the following accounting standards set forth by the Financial Accounting Standards Board (“FASB”):

ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), issued in May 2021, addresses an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2021-04 on January 1, 2022 and the adoption did not have an impact on the Company’s financial condition or results of operations.

ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, issued in November 2021 requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The Company adopted ASU 2021-10 on January 1, 2022 and the adoption did not have an impact on the Company’s financial condition or results of operations as ASU-2021-10 only impacts annual financial statement footnote disclosures.

ASU 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, issued in September 2022, requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about obligations outstanding at the end of the reporting period, including a rollforward of those obligations. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. ASU 2022-04 became effective on January 1, 2023. The Company adopted ASU 2022-04 on January 1, 2023 and the adoption did not have an impact on the Company’s financial condition or results of operations as the Company does not (and has not historically) utilized supplier finance programs in connection with the purchase of goods and services.

Accounting Standards Issued; Not Yet Adopted

ASU 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, issued in June 2022, clarifies that a contractual restriction on the sale of an equity security is not considered in measuring the security's fair value. The standard also requires certain disclosures for equity securities that are subject to contractual restrictions. ASU 2022-03 becomes effective on January 1, 2024. Early adoption is permitted. The Company is evaluating the impact of ASU 2022-03.

Any other new accounting pronouncements recently issued, but not yet effective, have been reviewed and determined to be not applicable or were related to technical amendments or codification. As a result, the adoption of such new accounting pronouncements, when effective, is not expected to have a material effect on the Company’s financial position or results of operations.