·5 | · | Also in October 2015, Chembiowe signed an agreement with opTricon (Berlin, Germany), a leading developer of mobile analysis devices for rapid diagnostic tests. Through this exclusive agreement, subject to certain terms, and covering the fields of sexually transmitted diseases, certain "fever" diseases, and a specific form of cancer, Chembio willwe expect to launch the DPP® Micro Reader, a point-of-care instrument designed specifically to complement Chembio'sour patented DPP® technology as applied to those diseases. The DPP® Micro Reader will include an innovative image sensor to provide a quantitative interpretation of diagnostic results when combined with Chembio'sour proprietary DPP® immunoassay technology. Using a state-of-the-art camera system, the DPP® Micro Reader is designed to provide definitive diagnostic results for low analyte concentrations, which may otherwise result in faint or ambiguous test results. In addition, the DPP® Micro Reader will provide customers with various options to capture, record, transmit and store test results. With one-button operation, the palm-sized and battery-operated DPP® Micro Reader is simple, fast, portable and cost-effective. |
PARTNERS INVOLVED IN MARKETING OUR PRODUCTS
Alere
On September 29, 2006, we executed marketing and license agreements with Alere. The marketing agreements (the Barrel Agreement and the Cassette Agreement) provide Alere with a 10-year exclusive right (until May 31, 2016) to market our rapid HIV tests in the United States under Alere's brands. The agreements also provide Chembious with a non-exclusive license to certain Alere lateral flow patents that may be applicable to our lateral flow products, including for manufacture of the HIV tests in the United States for sales outside the United States and even for sale in the United States should Alere enter the U.S. market with a competitive rapid HIV test product and in such case we choose to market our products directly as provided in the agreements in such event of a competitive rapid HIV test product. Simultaneous with the execution of the agreements, we also settled litigation with StatSure Diagnostics, Inc. (SDS), that had been ongoing relating to the proprietary barrel device which is incorporated into one of our two FDA-approved rapid HIV tests (See Lateral Flow HIV Tests above). SDS, pursuant to the settlement, is a party to the 3-way Barrel Agreement. As a result, until now,the dates described below and elsewhere in this report, it is through the agreements with Alere that we have beenwere participating in the growth of the rapid HIV test market in the United States.
In late July 2013, we received notice from Alere that it intendsintended to commercialize its own rapid HIV test (see Competition), which test had just received FDA approval as a moderate complexity product (i.e. not CLIA-waived though this was granted in late 2014), in the United States. Under the Barrel Agreement and the Cassette Agreement, such product is considered to be a Permitted Competing Product (PCP). Each of the two aforementioned agreements provides that, in the case of notice of a PCP, Chembiowe may make certain elections (jointly with SDS in the case of the Barrel Agreement), or elect to continue each agreement without taking any further action. Under the Cassette Agreement, Chembiowe may, at any time, terminate such agreement, which termination would become effective 60 days after the date notice was made. Under the Barrel Agreement, Chembiowe and SDS may jointly issue a non-exclusivity notice, which notice shall be effective immediately. In the event that Chembio makeswe make this election with respect to the cassette product, or that both Chembiowe and SDS make this election with respect to the cassette product, then the electing party or parties could sell that respective product in the United States market under its own brand, and in such case, the lateral flow license that Chembio haswe have from Alere for international sales would be expanded to include sales in the United States. See Lateral Flow Technology and Reagent Licenses. In April 2014, the Companywe gave notice to Alere of itsour intent to terminate the Cassette Agreement and 60 days later, the Companywe began marketing the cassette product in the United States under the Chembio brand of HIV 1/2 STAT-PAK® assay. The barrel product continues to be marketed exclusively by Alere in the U.S only, although onOn May 31, 2016, the Barrel Agreement will expireexpired pursuant to its terms, and, Chembio will alsogiven our January 2015 agreement with SDS, we now market the barrel product in the U.S. under the brand of SureCheck® HIV 1/2 Assay.
We have developed our own sales and marketing departments for the sales of our products in the U.S. and internationally. We also have appointed distributors in the U.S. and internationally for our lateral flow HIV tests. Our largest markets outside the U.S. for our lateral flow HIV rapid tests are certain countries in Africa, Asia, and South America, as well as Mexico. Internationally, most of the demand for our products is based on governmental and non-governmental prevention and treatment efforts. Given this, these programs can and do often result in large orders, but also can result in periods of relatively lower demand, based on the variations associated with this kind of demand. OEM DPP® Products
Oswaldo Cruz Foundation OEM DPP® Agreements
During 2008-2010 we signed five separate agreements, each of which is titled and constitutes a "Technology Transfer Agreement", with the Oswaldo Cruz Foundation (FIOCRUZ) in Brazil. FIOCRUZ includes the Institute of Technology on Immunobiologicals/Bio- Manguinhos, which is the FIOCRUZ unit that produces vaccines and diagnostic kits. FIOCRUZ and Bio-Manguinhos are referred to herein interchangeably. Each of the five agreements relates to a different specific product or group of products based on our DPP® technology. FIOCRUZ is the leading public health organization in Brazil, and it is affiliated with Brazil's Ministry of Health, which is its principal client. It has extensive research, educational and manufacturing facilities for drugs and vaccines, as well as for diagnostic products.
Each of the agreements grants to FIOCRUZ the right, but not the obligation, to earn the right to request a technology transfer to be able to license and manufacture that product on its own. FIOCRUZ is not required to earn this right, but if it desires to do so, then it needs to purchase a stated amount of the product as set forth in the respective agreement for that product.
During 2010 and 2011, all of the initial products contemplated under the five agreements were approved for marketing by the applicable regulatory agencies in Brazil. The agreements between the Companyus and FIOCRUZ are unique examples of technology transfer collaborations between a private sector rapid test manufacturer and a public health organization. The five products categories for which FIOCRUZ can earn a separate right to request a technology transfer for that product only are: DPP® products for HIV screening, HIV Confirmatory, Leishmaniasis, Leptospirosis and Syphilis. Each technology transfer, and the provision by Chembious of the information and training that is required for this to occur, will occur only if FIOCRUZ purchases from Chembious the amount of that product that is specified in the respective agreement for that product. The actual amount of purchases for each product is totally at the discretion and option of FIOCRUZ and may be more or less than the amount needed to qualify for a technology transfer.
More specifically, the five agreements, although separate and independent of one another, are structurally similar according to the following: | · | Each agreement states: "the object of this Agreement is for the Transfer of Technology from Chembio to Bio-Manguinhos, the license by Chembio to Bio-Manguinhos for the Chembio Patents applied or granted in Brazil or other Mercosur countries for the term of the patents and the transfer of all the technical information related to the DPP® technology and the process to obtain the product by the DPP® technology. This Agreement contemplates the scientific and technological co-operation between Chembio and Bio-Manguinhos for such activities so that Bio-Manguinhos will be able to manufacture the Product in Brazil." |
| · | Each agreement provides that Chembiowe will supply free of charge to Bio-Manguinhos prototypes of the product to demonstrate performance characteristics that are necessary for evaluation by the Brazilian Ministry of Health and for registration with ANVISA. ANVISA is the Agencia Nacional de Vigilancia Sanitaria, or the National Sanitary Vigilance Agency. The number of prototypes ranges from 15,000 to 45,000 in the various agreements. |
| · | Each agreement provides that the prototypes will be utilized both for a performance study that follows a protocol prepared and approved by Bio-Manguinhos and the Brazilian Ministry of Health, and also will be used for studies in Brazil for the registration procedures at ANVISA. Bio-Manguinhos will then apply to ANVISA to register the product. Within 120 days of the registration of the product with ANVISA, Bio-Manguinhos will make an advance technology transfer payment to Chembious (the "Advance Payment"), in an amount specified in that particular agreement. All five of the Advance Payments provided for in the agreements were made in 2010 and 2011. |
| · | At such time, if any, that the product for a particular agreement has been successfully registered with ANVISA, then Bio-Manguinhos has the right to qualify for the full technology transfer for that product by purchasing the amount of the product, and at the price, specified in the agreement. |
| · | Bio-Manguinhos is not required to purchase any amount of any product. For each product, it only needs to purchase that product, in the amount specified in the agreement, only if it desires to be able to complete the technology transfer process in order to manufacture and sell that product on its own. Chembio doesWe do not have recourse against Bio-Manguinhos if Bio-Manguinhos does not purchase the qualifying purchase amount of any product. In that case, Chembiowe can only suspend further phases of the technology transfer, attempt to renegotiate the agreement, and/or retain any amounts previously paid by Bio-Manguinhos. ChembioWe cannot force Bio-Manguinhos to purchase any amount of any product. |
| · | As a result of the terms of these agreements, Bio-Manguinhos has never been required to, and is not now required to, purchase any amount of any of the products. |
| · | As of December 31, 20152016, Bio-Manguinhos had earned the status described below with respect to each of the five products: |
1.
| 1. | With respect to Chembio'sour DPP® HIV1/2 Screen test, Bio-Manguinhos had qualified to request the technology transfer. It has requested, and has received, the technology transfer information. Bio-Manguinhos purchased $880,175, $4,990,840 and $291,235 of this product in 2011, 2012 and 2013, respectively, all of which applied to the qualifying amount to obtain the right to the technology transfer (the "Qualifying Amount") for this product. In 2013, 2014, 2015 and 2015,2016 Bio-Manguinhos made $3,320,010, $4,799,250, $5,410,350 and $5,410,350,$5,900, respectively, of purchases in excess of the Qualifying Amount. |
| 2. | With respect to Chembio'sour Canine Leishmania test, Bio-Manguinhos had qualified to request the technology transfer and did so request. Submission of the technology transfer information is in process at this time. Bio-Manguinhos purchased $2,000,817 and $99,183 of this product in 2011 and 2012 respectively, of this product in that applied to the Qualifying Amount. In addition, Bio-Manguinhos made purchases in excess of the Qualifying Amount equal to $1,314,117, $1,736,700, $2,394,000, $3,772,482 and $3,772,482$4,221,000 in 2012, 2013, 2014, 2015 and 2015,2016, respectively. |
5
| a. | With respect to the three variations of Chembio'sour DPP® Syphilis test, all of which are covered by a single agreement, Bio-Manguinhos had qualified to request the technology transfer with respect to Trep only, and intends to do so in the near future. Bio-Manguinhos purchased $1,194,250, $165,750 of this product in 2011 and 2012, respectively that applied to the Qualifying Amount. In addition, Bio-Manguinhos made purchases in excess of the Qualifying Amount equal to $2,817,750, $646,340, $4,617,891 and $833,631 in 2012, 2013, 2014 and 2015, respectively.respectively no purchases of this product were made in 2016. |
| b. | With respect to the two variations of Chembio'sour Screen & Confirm Test, Bio-Manguinhos had not made any purchases in 2011, 2012, 2013, 2014, 2015 or 2015,2016, and therefore had not qualified to request the technology transfer for either of them. This agreement was terminated in December 2015. |
| c. | This syphilis agreement was terminated during the fourth quarter of 2015. |
| 4. | With respect to Chembio'sour DPP® Confirmatory test, Bio-Manguinhos had nothas qualified to request the technology transfer. Bio-Manguinhos made purchases of $560,000, $819,000, $390,000, $390,000, $156,000 and $156,000$39,000 of this product in 2011, 2012, 2013, 2014, 2015 and 20152016 respectively, all of which applied to the Qualifying Amount. In orderaddition, Bio-Manguinhos made purchases in excess of the Qualifying Amount equal to qualify for the technology transfer, Bio-Manguinhos would need to purchase an additional $39,000 of this product.$485,940 in 2016. |
| 5. | With respect to Chembio'sour DPP® Leptospirosis test, Bio-Manguinhos had not qualified to request the technology transfer. Bio-Manguinhos made purchases of $135,000 of this product in 2011, and it made -0- purchases in 2012, $45,000 in 2013 and it made -0- purchases in 2014, 2015 and -0- in 2015.2016. In order to qualify for the technology transfer, Bio-Manguinhos would need to purchase an additional $225,000 of this product. |
| · | As stated above, Bio-Manguinhos is not obligated to make any purchases. After the specified level of sales for a particular product has been achieved, FIOCRUZ may request that the technology for that product be transferred to FIOCRUZ together with an exclusive license to produce and sell that product in a defined territory. The license is to provide that Chembiowe will receive a royalty on all sales. Chembio doesWe do not release the amount of this royalty because it could have an adverse effect on negotiations concerning royalties in potential transactions with other parties. |
| · | All the agreements expire five years after the date of the technology transfer. If terminated earlier by default of FIOCRUZ, FIOCRUZ must stop all activity; if terminated earlier bybecause of our default, of Chembio, or if terminated by natural expiry, FIOCRUZ can continue to produce and commercialize the product without paying royalties. |
Other OEM And License Agreements Related to DPP® Technology
In addition to our agreements with FIOCRUZ, we have entered into certain OEM and license agreements with other parties with respect to certain products that we have developed based on our DPP® technology. In 2008 we entered into a product development and license agreement with Bio-Rad Laboratories, Inc. (Bio-Rad), a leading multinational life sciences company, for the first ever POC test for the confirmation of HIV (reflex test used after initial screening test(s) are positive). This product utilizes our DPP® technology, capitalizing on its multiplexing advantages, and is much simpler to perform than the legacy confirmatory platform, known as western blot, which requires a substantial amount of technical training and hands-on time and which is more expensive to manufacture and distribute. This product was CE marked and was launched by Bio-Rad in the second quarter of 2013 in Europe under their Geenius® brand; and an FDA PMA approval was received in 2014.
In 2013 we entered into collaboration with Labtest, a private company in Brazil, for the distribution of a number of products in Brazil that would be co-branded with Labtest and Chembio trademarks. Under this agreement, upon request from Labtest, for which there is no requirement, Chembiowe will sell the appropriate DPP® components to Labtest for further manufacture and assembly in Brazil.
In February 2014, Chembiowe entered into a technology transfer and license agreement with RVR Diagnostics SDN BHD ("RVR"), a privately-held company in Malaysia. The agreement supports Chembio'sour strategy of establishing a market presence in Asia, in collaboration with RVR as a licensee, distributor, and contract manufacturer, depending on the circumstances. The agreements grant exclusive distribution rights to RVR in certain countries in the region and enable RVR to manufacture Chembio'sour DPP® HIV 1/2 Assay and DPP® HIV-Syphilis Assay, and potentially other products that are developed by Chembio,us, such as Dengue, incorporating its patented DPP® technology as indicated in the DPP® Technology & Development section above. As indicated elsewhere, we acquired RVR in January 2017.
Our Rapid Test Technologies
All of our commercially available current products employ either in-licensed lateral flow technology or our own patented Dual Path Platform (DPP®) technology. Both lateral flow technology and DPP® allow the development of accurate, low cost, easy-to-perform, single-use diagnostic tests for rapid, visual detection of specific antigen-antibody complexes on a test strip. These formats provide a test that is simple (requires neither electricity nor expensive equipment for test execution or reading, nor skilled personnel for test interpretation), rapid (turnaround time approximately 15 minutes), safe (minimizes handling of potentially infected specimens), non-invasive (requires 5-20 micro liters of whole blood easily obtained with a finger prick, or alternatively, serum or plasma), stable (24 months at room temperature storage in the case of our HIV tests), and highly reproducible.
We believe that products developed using DPP® technology can provide superior diagnostic performance as compared with products that use lateral flow technology. The reason for this is that one of the major differences between the two platforms is that in DPP® samples are allowed to incubate with the target analyte in the test zone before introduction of the labeling reagent/conjugate, whereas in lateral flow, samples are combined with the labeling reagent to form a complex before coming in contact with the target analyte. We believe that this complex can compromise test performance. Also, because of the usage in DPP® of a separately connected sample strip, the control and delivery of sample material is substantially improved. This feature is critical in the development of multiplex tests, as well as tests that involve viscous sample material (such as oral fluid) that can be impeded when forced to combine with labeling reagents before migration on the test strip to the test zone area.
Multiplexing is significantly improved as a result of the design of DPP® and this provides a significant advantage. For example, the HIV confirmatory test we developed for Bio-Rad that is described above employs six different markers related to various epitopes of the HIV antigen. We have a number of other products in development, including those being developed in sponsored development programs that involve the use of multiple (e.g. eight) test bands. Although all of these products could be visually read, we can also use handheld and desktop readers with our DPP® products to objectively measure, quantify, record and report DPP® test results. Certain of the products we have and/or are developing incorporate some of these readers, and we are developing other products that may be used with or will require use of a reader. Also, platforms can incorporate labeling reagents that cannot be visually read except by employing a reader, such as fluorescence, though no products are currently utilizing such reagents.
We are pursuing additional capabilities and technologies that will complement our current product portfolio and business strategy. This activity includes pursing development, license or acquisition of diagnostic technologies that complement our existing platforms, proprietary biomarkers that can result in new product applications of our existing platforms, and new platforms that would complement our commercial strategy. Target Markets
Rapid HIV Tests
A large percentage of individuals that are HIV positive worldwide are unaware of their status. Part of the reason for this is that even those that do get tested in public health settings will often not return or call back for their test results when samples have to be sent out to a laboratory which can take up to several days to process. The increased availability, greater efficacy and reduced costs for anti-retroviral treatments (ARVs) for HIV has increased the demand for testing, as the stigma associated with the disease is lessened, and the ability to resume normal activities is substantially improved, providing a positive message to those potentially infected. The impact that rapid HIV testing has had on prevention efforts has in turn increased the demand for testing, particularly by public health programs worldwide, which have also become more effective in reducing the number of annual new infections in many, but by no means all, high prevalence regions.
Despite less attention to HIV by the media as compared with prior years, there are still approximately 50,000 new diagnoses of HIV infection in the United States each year, according to the CDC. CDC estimates that approximately 1.1 million individuals in the U.S. are living with HIV, with an estimated 1 of 8 of these U.S. individuals, or almost 13%, unaware that they are infected. It is transmissions from these infected people that are reported to account for the majority of all new infections per year. Part of the reason for this is that even those individuals that do get tested in public health settings will often not return or call back for their test results if their blood samples have to be sent out to and tested in a laboratory and then reported back, a process which can take up to several days to complete. Making more people aware of their HIV status at the point-of-care reduces the number of HIV transmissions. Rapid HIV testing in the United States has now developed into an estimated 7.5 million test market at an average price of $10, or a total of $75 million. Public health programs, currently funded by grants distributed to states by the CDC, account for an estimated 45% of the market, with hospitals (40%) and doctor's offices (15%) comprising the other estimated market segments. Chembio's rapid HIV tests represent approximately a 20% share of this market. OraSure Technologies, Inc., which was the first FDA-approved rapid HIV test, maintains approximately 50% of this market. Trinity Biotech has an estimated 15% market share and Alere, Biolytical Laboratories, Medmira and Bio-Rad share the remaining 10%.
In 2006, the outlook for HIV testing was given a big boost with the release by the CDC of new recommendations for HIV testing. These new CDC recommendations were/are that an HIV test should be given as a routine test like any other for all patients between 13 and 64 years of age, regardless of risk, with an opt-out screening option and focused testing procedural (pre- and post-test counseling) guidelines. Though not mandatory, gradual adoption in whole or in part of the 2006 CDC recommendations by a number of states continues to have an increasing impact. Finally, in 2013, the United States Preventive Services Task Force ("USPSTF") fully embraced these CDC routine HIV testing recommendations. This USPSTF recommendation, which was given an A grade under their recommendation grading system based on the benefits of this practice and the nearly 600,000 AIDS-related deaths in the United States, requires insurance coverage under the Affordable Care Act (the "ACA") as a preventive screening test without any co-payment required. WeAssuming that new legislation does not modify this requirement, of which there is no assurance, we expect this requirement to result in an increase in HIV testing in the United States in the coming years, which we believe will include point-of-care HIV testing utilizing the Company'sour products. Although as stated above, currently most public health testing in the United States is funded by grants allocated to high prevalence areas by the CDC, we believe this will shift to an insurance-funded model under the ACA in the years to come, increasing the amount of testing done in doctor's offices and community health centers.
In the international market, we sell our products directly and through distributors to large screening programs overseen by ministries of health and NGOs, most but not all of which are funded by large bi-lateral and multi-lateral AIDS relief programs, the largest of which is the U.S. President's Emergency Plan for AIDS Relief (PEPFAR). Established by President George Bush as a 5-year $15 billion program in 2003, PEPFAR was reauthorized in 2008 and again in 2013. In 2012 PEPFAR directly supported HIV testing and counseling for more than 11 million pregnant women, and testing and counseling for more than 49 million people overall. The U.S. is also the first and largest donor to the Global Fund to Fight AIDS, Tuberculosis and Malaria. To date, the U.S. has provided more than $7 billion to the Fund.
In December 2013 President Obama signed into law the PEPFAR Stewardship and Oversight Act, which is the most recent reauthorization of PEPFAR. However, unlike the 2008 PEPFAR authorization, which authorized approximately $45 billion, the new law doesn't authorize a specific dollar amount for funding. Nevertheless, it is widely anticipated that PEPFAR will continue to enjoy strong funding; the FY14 budget had $6 billion for global HIV/AIDS assistance, including $4 billion for PEPFAR.
Chembio, with itsWith our four U.S.-manufactured rapid HIV tests, all of which are FDA-approved, iswe are recognized as a reputable and dependable supplier of high quality products that are available at reasonably competitive prices. As a result, certain of our products have been selected in the testing protocols in countries (national algorithms) that are large beneficiaries of PEPFAR and the Global Fund. As mentioned above, these programs can and do often result in large orders, but also can result in periods of relatively lower demand, based on the variations associated with this kind of demand. Also, even though the United States taxpayer is funding the largest share of global AIDS relief, U.S. companies do not receive any preference for these procurements, and therefore must compete with foreign suppliers that manufacture competitive products with lower costs, including those related to quality, regulatory, intellectual property, and costs of manufacturing.
Oral fluid testing is an established alternative to blood testing for diagnostic tests, including HIV tests. It is also often patient preferred, providing a more comfortable, less invasive test. In certain public health clinics, staffs choose not to handle blood specimens; thus, oral sample collection provides a viable alternative. The most well-established market for oral fluid HIV testing is the United States. Given the premium price required for an oral fluid test as compared with blood tests, the higher volume programs will not specify an oral fluid test. However, segments of these programs may want to have an oral fluid testing option, and certain programs that have greater resources may also choose to incorporate oral fluid testing into the testing protocol.
There is also now an over-the-counter market for HIV self-testing in the United States. OraSure Technologies Inc. received FDA approval for an over-the-counter (self-testing) version of its previously professional-market-approved (test performed on an individual by a health care professional) HIV test. The FDA approval was granted in July 2012, and OraSure has been investing heavily in developing this market. Initial results after over two years of marketing are well below expectations. The costs for such over-the-counter approval, including primarily the associated clinical trials, are estimated to be at least $5 million and they may take two to three years to complete, not to mention the cost of distribution. OraSure'sOraSure's initial results are not convincing of a large market, although this possibility remains. If it appears that there is an attractive market, we believe we are very well positioned to participate in this market.
Rapid HIV-Syphilis Test
There are significant risks relating to transmission of Syphilis from a pregnant mother to child, just as there are for transmission of HIV. Therefore we believe there is a significant opportunity to improve prevention efforts in pregnant mother to child transmission testing programs (PMTCT) that are currently not doing any or nearly enough testing for syphilis even though they are testing for HIV. In the United States, we believe there is also a significant need for this product in some of the highest HIV prevalence populations, such as among men that have sex with men (MSM), as data show high degrees of HIV and Syphilis co-infection in this segment of the population.
Marketing Strategy
Our marketing strategy is to: | · | Market our DPP® HIV 1/2 Assay, HIV 1/2 STAT-PAK® Assay, our SURE CHECK® HIV 1/2 Assay and future DPP® based new products in the US through our internal sales and marketing organization and selected channel partners (e.g., McKesson/PSS, Fisher Healthcare, Henry Schein, etc.). Chembio, followingFollowing the June 2014 termination of the STAT-PAK® agreement with Alere, does notand the May 31, 2016 termination of the SURE CHECK® agreement with Alere, we no longer have to share any portion of the net sales proceeds for STAT-PAK®these products with Alere. This decisionThese changes resulted in our incurring expenditures related to hiring sales representatives, establishing agreements and associated discounts with distributors, incurring advertising and marketing expenditures, warehousing, customer service and technical support. If Alere's new competitive product is indeed successful, our ability to retain a significant share of the market that has been established for our products may be enhanced by our having control of the marketing of our products, rather than relying on Alere to sell both our products while it is also selling its own competing product. We are leveraging the same sales force for U.S. Sales of our DPP® HIV 1/2 Assay. |
· | We will support, review and assess the marketing and distribution efforts of our rapid HIV barrel test in the U.S. |
| · | Outside the U.S., we will market our products primarily through commercial collaborators and distribution partners. |
| · | Leverage our DPP® intellectual property and product development and manufacturing experience to continue creating new collaborations where Chembiowe can be the exclusive development and manufacturing partner supporting leading marketing organizations. |
| · | Establish strong distribution relationships for our Chembio-branded products in the U.S and abroad, and establish a direct sales and marketing organization that is focused in the public health market segment, and that utilizes distributors for other market segments, primarily the acute care market which, together with public health, are the main market segments for rapid HIV tests in the United States. We believe that creation of a Chembio public health brand and marketing organization is fundamental to the creation of shareholder value over the long-term. |
We have increased our commercial activities and efforts in Africa, Europe and Asia for our HIV tests and product pipeline. We believe these efforts will enable us to be more closely engaged with opportunities to engage with customers and partners and to participate in the national testing algorithms that are established and revised from time to time by countries that are beneficiaries of PEPFAR, Global Fund and/or other bilateral or multilateral donor funding. In Europe, where there are a larger percentage of HIV positive people unaware of their status than in the United States, we believe that there is an emerging public health outreach opportunity, and there are relatively few strong competitors that are CE-marked. Most recently we have established new sales and marketing positions in the Company to support our efforts to increase brand awareness globally and to lead our direct sales effort in the U.S. market.
Competition
The diagnostics industry is a multi-billion dollar international industryThere are several established rapid HIV tests which are already in the marketplace that compete with our lateral flow HIV tests and is intensely competitive. Many of ourDPP® HIV 1/2 Assay. These include OraSure (sold by OraSure Technologies), Alere Determine® rapid test product (sold by Alere, Inc.), and INSTI (sold by Biolytical, Inc.). Our competitors aremay have significant advantages over us, including being substantially larger and havehaving greater financial, research, manufacturing and marketing resources. Industry competition in general is based on the following:
| · | Scientific and technological capability; |
| · | The ability to develop and market products and processes; |
| · | The ability to obtain FDA or other required regulatory approvals; |
| · | The ability to manufacture products that meet applicable FDA requirements, (i.e. FDA's Quality System Regulations) (see Governmental Regulation section); |
| · | The ability to manufacture products cost-effectively; |
| · | Access to adequate capital; |
| · | The ability to attract and retain qualified personnel; and |
| · | The availability of patent protection. |
We believe our scientific and technological capabilities and our proprietary know-how relating to our in-licensed lateral flow technology rapid tests and to our proprietary know-how related to our patented DPP® technology, particularly for the development and manufacture of tests for the detection of antibodies to infectious diseases such as HIV, are very strong.
Our ability to develop and market other products is in large measure dependent on our having additional resources and/or collaborative relationships. Some of our product development efforts have been funded on a project or milestone basis. We believe that our proprietary know-how in lateral flow technology and in our DPP® technology has been instrumental in our obtaining the collaborations we have and that we continue to pursue. We believe that the patent protection that we have with our DPP® technology enhances our ability to develop more profitable collaborative relationships and to license out the technology. However there are a number of competitive technologies used and/or seeking to be used in point-of-care settings. These technologies may be based on immunoassay principles such as the Company's products or other technologies, such as molecular-based technologies.
We launched our FDA-approved DPP® HIV 1/2 Assay, which test also can be used with either oral fluid or blood samples, in the U.S. market under a Chembio brand in the fourth quarter of 2014. OraSure Technologies manufactures the only other rapid, oral fluid HIV test that is FDA-approved, and OraSure has enjoyed this position for approximately 10 years. OraSure has lost a significant share of this market as certain customers have been indifferent to using blood or oral fluid samples, because the blood tests, including those made/marketed by Chembio and marketed by Alere, are priced lower and/or are as or more accurate than the performance of OraSure's product on blood samples. OraSure has primarily retained those customers for whom the oral fluid sample feature is a strong preference, and this is an estimated $35 million business for OraSure. Although we believe we can capture a meaningful portion of this OraSure market share, we also anticipate that OraSure will defend this business aggressively. In 2006 Alere acquired a division from Abbott Diagnostic located in Japan that manufactured and marketed a rapid HIV test product line called Determine®. The Determine® format was developed for the developing world and remote settings and, central to the needs of that market, the format is essentially a test strip that is integrated into a thin foil wrapper that, when opened, the underside of the wrapper serves as the test surface for applying the blood sample and performing the test. This design reduces costs and shipping weights and volumes and is an advantage for the developing world markets it has served. Some of the disadvantages of the platform are the amount of blood sample that is needed (50 microliters versus 2.5, 5 and 10 for our lateral flow barrel, lateral flow cassette, and DPP® products respectively), the open nature of the test surface, and the absence of a true control that differentiates biological from other kinds of samples.
The so-called "3rd generation" version of this product has been marketed for many years and is the leading rapid HIV test that is used in a large majority of the national algorithms of countries funded by PEPFAR and the Global Fund, as well as many other countries in the world. That product is not FDA-approved though it is CE-marked. The newest Determine® HIV version, which was developed and manufactured at Alere's subsidiary in Israel, Orgenics, is the so-called "4th Generation" version Determine® test. According to its claims, this product detects HIV antibodies and P24 HIV antigens. Since the P24 antigen is known to occur in HIV-positive individuals' blood samples before antibodies do, based on its performance claims, the 4th generation Determine® test is therefore able to detect HIV infection earlier than tests that solely rely on antibody detection. Chembio's tests, as well as all of the other currently FDA-approved rapid HIV tests, only detect antibodies. There are however laboratory tests that are FDA-approved that are "4th generation" tests, but they are of course neither rapid nor point-of-care.
The initial "4th generation" Alere Determine® rapid test product that was also CE-marked and that Alere launched internationally some years ago has not been successfully commercialized to the best of our knowledge and at least certain published studies were not favorable for this product. However the 4th generation product that is now FDA-approved was apparently modified as compared to the initial international version of it, and it may perform more satisfactorily. Alere received FDA approval of this modified product in August 2013 and CLIA-waiver for it in the fourth quarter of 2014. There is support by a number of key opinion leaders for the public health value of such 4th generation tests, and it represents a significant competitive threat to Chembio as well as to each of the other rapid HIV test manufacturers (OraSure and Trinity primarily).
During 2011 Biolytical, Inc. of Vancouver, Canada received FDA approval and in 2012 received CLIA waiver of a flow-through rapid HIV test called "INSTI". The technology used in the INSTI test, flow-through, is older than lateral flow, and it requires handling of multiple components (3 vials of solution) to perform the test in multiple steps. However, these steps can be accomplished in less than ten minutes, and the actual test results occur in only one minute after those steps are completed. Therefore sample-to-result time is shorter than any of the competitive products. There are settings where that reduced total test time, despite the multiple steps required, may be a distinct advantage, and we believe Biolytical has made some progress in penetrating certain public health markets.
Although we have no specific knowledge of any other competitors' products that are a competitive threat to our products, or that will render our products obsolete, if we fail to maintain and enhance our competitive position or fail to introduce new products and product features, our customers may decide to use the products developed by our competitors, which could result in a loss of revenues and cash flow.
Research and Development
During 2016, 2015 and 2014, we spent $8.4 million, $6.4 million and $4.8, million, respectively, on research and development (including regulatory activities). These expenses were in part underwritten by funding from R&D and milestones revenues of $3.7 million in 2016, $2.3 million in 2015 and $1.7 million in 2014. All of our new product development activities involve employment of our DPP® technology. These activities include completing development of certain products and making significant progress toward the development of additional products.
Employees
At December 31, 2015,2016, we employed approximately155approximately 131 people. We have entered into employment contracts with our Chief Executive Officer and President, John J. Sperzel, our Chief Operating Officer, Sharon Klugewicz, and our Chief Science and Technology Officer, Javan Esfandiari. Due to the specific knowledge and experience of these executives regarding the industry, technology and market, the loss of the services of any one of them would likely have a material adverse effect on the Company. The contract with Mr. Sperzel has a term of three years ending March 13, 2017. The contract with Ms. Klugewicz, has a term of two years ending May 2017. The contract with Mr. Esfandiari has a term of three years ending March 2016.2019. The Company and Mr. EsfandiariSperzel currently are discussing terms for renewal of his employment agreement. We have obtained a key man insurance policy for Mr. Esfandiari. The contract with Mr. Sperzel provides that Mr. Sperzel will serve as the Chief Executive Officer and President of the Company through March 2017.
Governmental Regulation
The manufacturing and marketing of the Company'sour existing and proposed diagnostic products are regulated by the United States Food and Drug Administration ("FDA"), United States Department of Agriculture ("USDA"), certain state and local agencies, and/or comparable regulatory bodies in other countries. These regulations govern almost all aspects of development, production and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing and record keeping. The Company's FDA and USDA regulated products require some form of action by each agency before they can be marketed in the United States, and, after approval or clearance, the Company must continue to comply with other FDA requirements applicable to marketed products, e.g. Quality Systems (for medical devices). Failure to comply with the FDA's requirements can lead to significant penalties, both before and after approval or clearance.
There are two review procedures by which medical devices can receive FDA clearance or approval. Some products may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, in which the manufacturer provides a pre-market notification that it intends to begin marketing the product, and shows that the product is substantially equivalent to another legally marketed product (i.e., that it has the same intended use and is as safe and effective as a legally marketed device and does not raise different questions of safety and effectiveness). In some cases, the submission must include data from human clinical studies. Marketing may commence when the FDA issues a clearance letter finding such substantial equivalence. FDA clearance of our DPP® Syphilis Screen & Confirm test will be by means of a 510(k) submission.
If the medical device does not qualify for the 510(k) procedure (either because it is not substantially equivalent to a legally marketed device or because it is required by statute and the FDA's implementing regulations have an approved application), the FDA must approve a Pre-Marketing Application ("PMA") before marketing can begin. PMA's must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness. A PMA application is typically a complex submission, including the results of non-clinical and clinical studies. Preparing a PMA application is a much more expensive, detailed and time-consuming process as compared with a 510(K) pre-market notification. The Company has approved PMAs for the two rapid HIV tests now marketed in the U.S.: both our HIV 1/2 STAT-PAK® and also our test that currently is marketed in the U.S. by Alere Medical as Clearview® Complete HIVSURE CHECK® 1/2 and Clearview® HIV 1/2 STAT PAK®.HIV.
FDA approval of our DPP® HIV screening assay for use with oral fluid or blood samples also was achieved by means of a PMA application. The Clinical Laboratory Improvement Act of 1988 ("CLIA") prohibits laboratories from performing in-vitro tests for the purpose of providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings unless there is in effect for such laboratories a certificate issued by the United States Department of Health and Human Services (via the FDA) applicable to the category of examination or procedure performed. Although a certificate is not required for the Company, it considers the applicability of the requirements of CLIA in the design and development of its products. The statutory definition of "laboratory" is very broad, and many of our customers are considered labs. A CLIA waiver will remove certain quality control and other requirements that must be met for certain customers to use the Company's products and this is critical to the marketability of a product into the point-of-care diagnostics market. The Company hasWe have received a CLIA waiver for each of the two lateral flow rapid HIV tests now marketed in the U.S. The CLIA waiver was granted by the FDA for HIV 1/2 STAT-PAK® on November 20, 2006 and for the Clearview® CompleteSURE CHECK® HIV 1/2 on October 22, 2007. In 2008 the FDA revised its CLIA waiver requirements so that an additional prospective trial need be conducted in order to demonstrate clinical utility by showing that the device is capable of identifying new infections when used by untrained users. Our DPP® HIV 1/2 test received CLIA waiver in October of 2014.
In addition, the FDA regulates the export of medical devices that have not been approved for marketing in the United States. The Federal Food, Drug and Cosmetic Act contains general requirements for any medical device that may not be sold in the United States and is intended for export. Specifically, a medical device intended for export is not deemed to be adulterated or misbranded if the product: (1) complies with the specifications of the foreign purchaser; (2) is not in conflict with the laws of the country to which it is intended for export; (3) is prominently labeled on the outside of the shipping package that it is intended for export; and (4) is not sold or offered for sale in the United States. However, the Federal Food, Drug and Cosmetic Act does permit the export of devices to any country in the world, if the device complies with the laws of the importing country and has valid marketing authorization in one of several "listed" countries under the theory that these listed countries have sophisticated mechanisms for the review of medical devices for safety and effectiveness.
The Company isWe are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval or evaluations by international public health agencies, such as the World Health Organization, in order to sell diagnostic products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for United States governmental approvals. On the other hand, the fact that our HIV diagnostic tests are of value in the AIDS epidemic may lead to some government process being expedited. The extent of potentially adverse governmental regulation affecting Chembious that might arise from future legislative or administrative action cannot be predicted.
Environmental Laws
To date, we have not encountered any costs relating to compliance with any environmental laws.
Intellectual Property
Intellectual Property Strategy
Our intellectual property strategy is to: (1) build our own intellectual property portfolio around our DPP® technology; (2) pursue licenses, trade secrets and know-how within the area of rapid point-of-care testing, and (3) develop and acquire proprietary positions to reagents and new hardware platforms for the development and manufacture of rapid diagnostic tests.
The Company hasWe have obtained patent coverage on theour DPP® technology, including four U.S. patents, and patents in China, Malaysia, Eurasia, Mexico, Singapore, Japan, Australia, Indonesia, Korea and the U.K. Additional patent applications on theour DPP® technology are pending in the U.S., as well as in many foreign countries such as Brazil, Canada, the European Union, India, Israel, and South Africa. Patents have also been filed on extensions to the DPP® product line concept, such as 4th generation assays. The four U.S. patents are as follows:
| U.S. Patent No. | Issued | Expires | Nature | Type | Description | | 7,189,522 | 3/13/2007 | 3/11/2025 | test device | utility | a test device for determining the presence of a ligand in a sample | | 7,682,801 | 3/23/2010 | 3/11/2025 | test device | utility | a test device and a method for determining the presence of a ligand in a sample | | 7,879,597 | 2/1/2011 | 3/11/2025 | test device | utility | a test device for determining multiple ligands in a sample | | 8,507,259 | 8/13/2013 | 3/11/2025 | test device | utility | a test device for determining the presence of a ligand in a sample |
The Company hasWe have also filed for patents and obtained some patents in the U.S. for other inventions, such as its multiple host species veterinary TB test, and patent applications for the other inventions are in various stages from being recently filed and not yet examined, to already examined and allowed but not yet issued. The CompanyWe selectively and strategically foreign files its patent applications based on a number of economic and strategic factors related to the invention.
Trademarks
The Company hasWe have filed and obtained trademarks for itsour products, including DPP®, SURE CHECK®, and STAT-PAK®, and also for the SampleTainer® used in certain DPP® products. TheOur DPP® trademark is also registered under the European convention (ECT). The CompanyWe recently filed a trademark for STAT-VIEW®, to market the barrel product in Europe.
Trade Secrets and Know-How
We believe that we have developed a substantial body of trade secrets and know-how relating to the development and manufacture of lateral flow and DPP®-based diagnostic tests, including but not limited to the sourcing and optimization of materials for such tests, and how to maximize sensitivity, speed-to-result, specificity, stability and reproducibility. The Company possessesWe possess proprietary know-how to develop tests for multiple conditions using colored latex. Our buffer formulations enable extremely long shelf lives of our rapid HIV and other tests and we believe that this provides us with an important competitive advantage.
Lateral Flow Technology and Reagent Licenses
As part of the agreements executed in 2006 with Alere for the marketing of our HIV tests, we were granted non-exclusive licenses to certain lateral flow patents for certain products manufactured and marketed by Chembious, including but not limited to our lateral flow HIV tests. This license allows us to produce, market and sell assays using lateral flow technologies specifically including our STAT-PAK®, SURE CHECK®, DIPSTICK®, and veterinary product lines. Under this license agreement, prior to February 3, 2015, we paid royalties to Alere ranging from 5% to 8½%, depending upon the country in which the products are sold. Even though the relevant patent has expired in most other jurisdictions, or were never issued in markets whereBetween 2007 and 2015 we have sold these products, our manufacture of the products in the United States has required that we pay royalties under this license, which has been a substantial expense. In 2015 our lateral flow royalty expense to Alere was $30,000, and since 2007 we have incurred a total of $2.87 million in lateral flow royalty expenses. As of February 3, 2015 this royalty expense was no longer payable as the applicable patent expired at that time.payable.
Although we believe our DPP® is outside of the scope of all lateral flow patents of which we are aware, we consult with patent counsel, and seek licenses and/or redesigns of products that we believe to be in theour best interests of the Company and our stockholders.interests. Because of the costs and other negative consequences of time-consuming patent litigation, we often attempt to obtain a license on reasonable terms. Nevertheless there is no assurance that the Alere lateral flow patents we have licensed will not be challenged or that other patents containing claims relevant to the Company'sour lateral flow or DPP® products will not be granted to third parties and that licenses to such patents, will be available on reasonable terms, if any. In the past Alere has aggressively enforced its lateral flow intellectual property, although some of the main patents have expired and we are not aware of any patent enforcement litigation that is ongoing with respect to the Alere lateral flow intellectual property.
Regardless, the DPP® technology provides us with our own intellectual property. We believe it provides us with a freedom to operate, and that it also enables tests to be developed with improved sensitivity as compared with comparable tests on lateral flow platforms. The Company hasWe have signed and anticipatesanticipate signing new development projects based upon the DPP® technology that will provide new manufacturing and marketing opportunities. We have filed other patent applications that we believe will strengthen the DPP® intellectual property and have also filed for patent protection for certain other point-of-care technologies or applications thereof.
The peptides used in our rapid HIV tests were patented by Adaltis Inc. and were licensed to us under a 10-year non-exclusive license agreement dated August 30, 2002. However, in connection with Adaltis' bankruptcy, during the third quarter of 2009 we bought out all of our remaining obligations under that agreement. We also have licensed the antigens used in other tests including our Syphilis, Tuberculosis, Leptospirosis, Leishmaniasis and Chagas tests, and we may enter other license agreements. In prior years we concluded license agreements related to intellectual property rights owned by the United States associated with HIV- 1,HIV-1, and during the first quarter of 2008 we entered into a sub-license agreement for HIV-2 with Bio-Rad Laboratories N.A., the exclusive licensee of the Pasteur Institute's HIV-2 intellectual property estate. Corporate HistoryInformation
On May 5, 2004,We are a Nevada corporation that was formed in December 1985. Since inception, we completed a merger with Trading Solutions, Inc. through which Chembio Diagnostic Systems Inc. became our wholly-owned subsidiary, and through which the management and business of Chembio Diagnostic Systems Inc. became our management and business. As part of this transaction, we changed our name to Chembio Diagnostics, Inc. In 2003, we had sold our prior business, and as a result, we had no specific business immediately prior to the merger.
Since the formation of Chembio Diagnostic Systems Inc. in 1985, it hashave been involved in developing, manufacturing, selling and distributing in-vitromedical diagnostic tests, including rapid tests beginning in 1995, forthat detect a number of diseases and other conditions in humans and animals.
On March 12, 2004, we implemented a 1-for-17 reverse split of our common stock. All references herein to shares of our common stock have been adjusted to reflect this reverse split.
On May 30, 2012, the Companywe effected a 1-for-8 reverse split of its common stock. This was done to allow the Company to move to the NASDAQ trading market from the OTCQB market, which occurred on June 7, 2012. As a result of the stock split, the outstanding 63,967,263 common shares were reduced to 7,995,918 outstanding common shares on May 30, 2012. The effect of this reverse stock split also has been retroactively reflected for all periods in these financial statements.
Stockholder Rights Agreement
On March 8, 2016, the Companywe entered into a Rights Agreement (the "Rights Agreement") between the Companyus and Action Stock Transfer Corp., as Rights Agent. Pursuant to the Rights Agreement, the Companywe declared a dividend distribution of one Preferred Share Purchase Right (a "Right") for each outstanding share of our common stock, par value $0.01 (the "Common Stock"), of the Company, in the manner described below. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2016, and the Rights were distributed to the Company'sour shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable. The Rights are not exercisable until a Distribution Date. Until a Right is exercised, the holder thereof, as such, has no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights. The Rights are to be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) has acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date") or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 20% or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date"). Glossary | AIDS | Acquired Immunodeficiency Syndrome. AIDS is caused by the Human Immunodeficiency Virus, HIV. | | ALGORITHM (parallel or serial) | For rapid HIV testing this refers both to method or protocol (in developing countries to date) for using rapid tests from different manufacturers in combination to screen and confirm patients at the point-of-care, and may also refer to the specific tests that have been selected by an agency or ministry of health to be used in this way. A parallel algorithm uses two screening tests from different manufacturers and a tie-breaker test only if there is a discrepancy between the screening tests results. A serial algorithm only uses a second confirmatory test if there is a positive result from the screening test, meaning that the number of confirmatory tests used is equal to the positivity rate in the testing venue. A tie-breaker test resolves discrepancies between the screen and the confirmatory test. | | ANTIBODY | A protein which is a natural part of the human immune system produced by specialized cells to neutralize antigens, including viruses and bacteria that invade the body. Each antibody producing cell manufactures a unique antibody that is directed against, binds to and eliminates one, and only one, specific type of antigen. | | ANTIGEN | Any substance which, upon entering the body, stimulates the immune system leading to the formation of antibodies. Among the more common antigens are bacteria, pollens, toxins, and viruses. | | ANVISA | The National Health Surveillance Agency of Brazil | | ARVs | Anti-retroviral medications developed to fight AIDS | | CDC | United States Centers for Disease Control and Prevention | | CLIA waiver | Clinical Laboratory Improvement Act designation that allows simple tests to be performed in point-of-care settings such as doctor's offices, walk-in clinics and emergency rooms. | | DIAGNOSTIC | Pertaining to the determination of the nature or cause of a disease or condition. Also refers to reagents or procedures used in diagnosis to measure proteins in a clinical sample. | | FIOCRUZ | The Oswaldo Cruz Foundation of Brazil | | FDA | United States Food and Drug Administration | | IgG | IgG or Immunoglobulin G are proteins found in human blood. This protein is called an "antibody" and is an important part of the body's defense against disease. When the body is attacked by harmful bacteria or viruses, antibodies help fight these invaders. | | IgM | IgM or Immunoglobulin M are proteins found in human blood. This protein is called an "antibody" and is an important part of the body's defense against disease. When the body is attacked by harmful bacteria or viruses, antibodies help fight these invaders. | | NGO | Non-Governmental Organization | | OTC | Over-the-Counter | | PEPFAR | The President's Emergency Plan for AIDS Relief | | PMA | Pre-Marketing Approval –FDA approval classification for a medical device that is not substantially equivalent to a legally marketed device or is otherwise required by statute to have an approved application. Rapid HIV tests must have an approved PMA application before marketing of such a product can begin. | | PROTOCOL | A procedure pursuant to which an immunodiagnostic test is performed on a particular specimen in order to obtain the desired reaction. | | REAGENT | A chemical added to a sample under investigation in order to cause a chemical or biological reaction which will enable measurement or identification of a target substance. | | RETROVIRAL | A type of virus which contains the enzyme Reverse Transcriptase and is capable of transforming infected cells to produce diseases in the host such as AIDS. | | SENSITIVITY | Refers to the ability of an assay to detect and measure small quantities of a substance of interest. The greater the sensitivity, the smaller the quantity of the substance of interest the assay can detect. Also refers to the likelihood of detecting the antigen when present. | | SPECIFICITY | The ability of an assay to distinguish between similar materials. The greater the specificity, the better an assay is at identifying a substance in the presence of substances of similar makeup. | | USDA | U.S Department of Agriculture | | WHO | World Health Organization |
You should carefully consider each of the following risk factors and all of the other information provided in this Form 10-K before purchasing our Common Stock. The risks described below are those we currently believe may materially affect us. An investment in our Company involves a high degree of risk, and should be considered only by persons who can afford the loss of their entire investment. Although we believe that these risks are the most important for you to consider, you should read this section in conjunction with our financial statements, the notes to those financial statements and our management's discussion and analysis of financial condition and results of operations included in our periodic reports and incorporated into this prospectus supplement by reference.
Risks related to our industry, business and strategy
Because we may not be able to obtain or maintain the necessary regulatory approvals for some of our products, we may not generate revenues in the amounts we expect, or in the amounts necessary to continue our business. Our existing products as well as our manufacturing facility must meet quality standards and are subject to inspection by a number of domestic regulatory and other governmental and non-governmental agencies.
All of our proposed and existing products are subject to regulation in the U.S. by the U.S. Food and Drug Administration, the U.S. Department of Agriculture and/or other domestic and international governmental, public health agencies, regulatory bodies or non-governmental organizations. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products. The process of obtaining required approvals or clearances varies according to the nature of, and uses for, a specific product. These processes can involve lengthy and detailed laboratory testing, human or animal clinical trials, sampling activities, and other costly, time-consuming procedures. The submission of an application to a regulatory authority does not guarantee that the authority will grant an approval or clearance for that product. Each authority may impose its own requirements and can delay or refuse to grant approval or clearance, even though a product has been approved in another country.
The time taken to obtain approval or clearance varies depending on the nature of the application and may result in the passage of a significant period of time from the date of submission of the application. Delays in the approval or clearance processes increase the risk that we will not succeed in introducing or selling the subject products, and we may determine to devote our resources to different products.
Changes in government regulations could increase our costs and could require us to undergo additional trials or procedures, or could make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all.
Changes in government regulations may adversely affect our financial condition and results of operations because we may have to incur additional expenses if we are required to change or implement new testing, manufacturing and control procedures. If we are required to devote resources to develop such new procedures, we may not have sufficient resources to devote to research and development, marketing, or other activities that are critical to our business.
We can manufacture and sell our products only if we comply with regulations and quality standards established by government agencies such as the FDA and the USDA as well as by non-governmental organizations such as the ISO and WHO. We have implemented a quality control system that is intended to comply with applicable regulations. Although FDA approval is not required for the export of our products, there are export regulations promulgated by the FDA that specifically relate to the export of our products that require compliance with FDA quality system regulation ("QSRs") and that also require meeting certain documentary requirements regarding the approval of the product in export markets. Although we believe that we meet the regulatory standards required for the export of our products, these regulations could change in a manner that could adversely impact our ability to export our products.
Our products may not be able to compete with new diagnostic products or existing products developed by well-established competitors, which would negatively affect our business.
The diagnostic industry is focused on the testing of biological specimens in a laboratory or at the point-of-care and is highly competitive and rapidly changing. Some of our principal competitors may have considerably greater financial, technical and marketing resources than we do. Several companies produce diagnostic tests that compete directly with our testing product line, including but not limited to, OraSure Technologies, Alere and Trinity Biotech. Furthermore these and/or other companies have or may have products incorporating molecular and/or other advanced technologies that over time could directly compete with our testing product line. As new products incorporating new technologies enter the market, our products may become obsolete or a competitor's products may be more effective or more effectively marketed and sold.
There are competing products that could significantly reduce our U.S. sales of rapid HIV tests.
In 2006 Alere, Inc. acquired a division from Abbott Diagnostic located in Japan that manufactured and marketed a rapid HIV test product line called Determine®. The Determine® format was developed for the developing world and remote settings and, central to the needs of that market. The format is essentially a test strip that is integrated into a thin foil wrapper. When opened, the underside of the wrapper serves as the test surface for applying the blood sample and performing the test. This design reduces costs and shipping weights and volumes and provides an advantage for the developing world markets it serves. Some of the disadvantages of the platform are the amount of blood sample that is needed (50 microliters versus 2.5, 5 and 10 for our lateral flow barrel, lateral flow cassette, and DPP® products respectively), the open nature of the test surface, and the absence of a true control that differentiates biological from other kinds of samples.
The so-called "3rd generation" version of this product has been marketed for many years and is the leading rapid HIV test that is used in a large majority of the national algorithms of countries funded by PEPFAR and the Global Fund, as well as many other countries in the world. That product is not FDA-approved though it is CE marked. The newest Determine® HIV version, which was developed and manufactured by Alere's subsidiary in Israel, Orgenics, is the so-called "4th Generation" version Determine® test. According to its claims, this product detects HIV antibodies and P24 HIV antigens. Because the P24 antigen is known to occur in HIV-positive individuals' blood samples before antibodies do, the 4th generation Determine® test is designed to detect HIV infection earlier than tests that solely rely on antibody detection. Chembio's tests, as well as all of the other currently FDA-approved rapid HIV tests, only detect antibodies. There are however laboratory tests that are FDA-approved that are "4th generation" tests, but they are of course neither rapid nor point-of-care.
The initial "4th generation" Alere Determine® rapid test product that was also CE marked and that Alere launched internationally some years ago has not been successfully commercialized to the best of our knowledge and at least certain published studies were not favorable for this product. However theThe 4th generation product that is now FDA-approved was apparently modified as compared to the initial international version, and it may perform more satisfactorily. Alere received FDA approval of this modified product in August 2013 and CLIA waiver for it in December 2014. Alere is also aggressively pursuing development of the market for this product. Moreover there is support by a number of key opinion leaders for the public health value of such 4th generation tests, and this product represents a significant competitive threat to Chembio as well as to each of the other rapid HIV test manufacturers (OraSure and Trinity primarily).
During 2011, Biolytical, Inc. of Vancouver, Canada received FDA approval and in 2012 received CLIA waiver of a flow-through rapid HIV test called "INSTI". The flow-through technology used in the INSTI test is older than lateral flow, and requires handling of multiple components (3 vials of solution) to perform the test in multiple steps. However, these steps can be accomplished in less than ten minutes, and the actual test results occur in only one minute after those steps are completed. Therefore sample-to-result time is shorter than any of the competitive products. The product also has good performance claims. There are settings where that reduced total test time, despite the multiple steps required, may be a distinct advantage, and we believe Biolytical has made some progress in penetrating certain public health markets.
Therefore, even though our lateral flow products currently enjoy a substantial market share in the U.S. rapid HIV test market, and we have an additional rapid HIV test, the DPP® HIV 1/2 Assay, there a number of risks and uncertainties concerning current and anticipated developments in this market. Although we have no specific knowledge of any other new product that is a significant competitive threat to our products, or that will render our products obsolete, if we fail to maintain and enhance our competitive position or fail to introduce new products and product features, our customers may decide to use products developed by our competitors, which could result in a loss of revenues and cash flow. More generally, the point-of-care diagnostics industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. As new technologies become introduced into the point-of-care diagnostic testing market, we may be required to commit considerable additional efforts, time and resources to enhance our current product portfolio or develop new products. We may not have the available time and resources to accomplish this, and many of our competitors have substantially greater financial and other resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers, which would materially harm our operating results.
Although we own our DPP® patent, lateral flow technology is still a competitive platform to DPP®, and lateral flow technology has a lower cost of manufacture than DPP® products. Although the DPP® platform has shown improved sensitivity as compared with conventional lateral flow platforms in a number of studies, several factors go into the development and performance attributes of products. Therefore the ability of our products to successfully compete will depend on several other factors, including but not limited to our having a patented rapid test platform technology that differentiates DPP® from lateral flow as well as from other diagnostic platform technologies. We believe that our DPP® is outside of the scope of currently issued patents in the field of lateral flow technology, thereby offering the possibility of greater freedom to operate. However there can be no assurance that our patents or our products incorporating the patent claims will not be challenged at some time in the future.
Our use of third-party suppliers, some of which may constitute our sole supply source, for certain important product components presents a risk that could have negative consequences for other business.
A number of our components and critical raw materials are provided by third-party suppliers, some of which may be sole-source suppliers, which impacts our ability to manufacture or sell productcertain products if our suppliers cannot or will not deliver those materials in a timely fashion, or at all, due to an interruption in their supply, quality or technical issues, or any other reason. If this occurs, we could incur substantial expense and time to be able to reestablish the appropriate quality, cost, regulatory and market-acceptance circumstances needed for commercial success. Even with the needed expense and time, we may not be able to reestablish any or all of these factors. The absence of any one or more of these factors could prevent us from being able to commercially produce and market the affected product or products.
New developments in health treatments or new non-diagnostic products may reduce or eliminate the demand for our products.
The development and commercialization of products outside of the diagnostics industry could adversely affect sales of our products. For example, the development of a safe and effective vaccine to HIV or treatments for other diseases or conditions that our products are designed to detect, could reduce or eventually eliminate the demand for our HIV or other diagnostic products and result in a loss of revenues.
We may not have sufficient resources to effectively introduce and market our products, which could materially harm our operating results.
Introducing and achieving market acceptance for our rapid HIV tests and other new products will require substantial marketing efforts and will require us and/or our contract partners, sales agents, and/or distributors to make significant expenditures of time and money. In some instances we will be significantly or totally reliant on the marketing efforts and expenditures of our contract partners, sales agents, and/or distributors. If they do not have or commit the expertise and resources to effectively market the products that we manufacture, our operating results will be materially harmed.
The success of our business depends on, in addition to the market success of our products, our ability to raise additional capital through the sale of debt or equity or through borrowing, and we may not be able to raise capital or borrow funds on attractive terms and/or in amounts necessary to continue our business, or at all.
We were profitable for five consecutive years through 2013. Nevertheless, prior to 2009 we sustained significant operating losses since 2004, and we incurred an operating loss for 2014, 2015 and 2015.2016. We estimate that our resources are sufficient to fund our needs through the end of 20162017 and beyond. Nevertheless weWe have already made, and may continue to make, significant financial commitments to invest in our sales and marketing organization, regulatory approvals, research and development including new technologies, and production capacity, including expanded facilities.
Our liquidity and cash requirements will depend on several factors. These factors include, among others, (1) the level of revenues; (2) the extent to which, if any, that revenue level improves operating cash flows; (3) our investments in research and development, facilities, marketing, regulatory approvals, and other investments we may determine to make; and (4) our investment in capital equipment and the extent to which it improves cash flow through operating efficiencies. There are no assurances that we will generate positive cash flow for 20162017 or, in the alternative, be successful in raising sufficient capital to fund our needs after 2016.2017.
Our U.S. market sales are difficult to predict in 20162017 given (i) our early June 2014 termination of the agreement with a third party for exclusive distribution of our cassette product in the U.S; and (ii) the impending May 31, 2016 termination of the agreement with a third party for exclusive distribution of our barrel product in the U.S. As a result of these terminations, we expect to continue to experience higher average revenue per unit, and a lower volume of U.S. sales, of the cassette and barrel products. Higher revenue per unit is anticipated because we previously sold these products to the exclusive U.S. distributor at a significantly lower price than the price at which the distributor resold these products to customers (including re-sellers and distributors) in the United States. However at this point with respect to the barrel product, this can occur only after any inventory that the exclusive U.S. distributor has accumulated is consumed, which may take several months. In addition, in marketing these products directly, we are incurring substantial costs associated with developing our sales and marketing organization and channel distribution partners.
We believe that underlying demand for HIV rapid testing in the United States remains strong, and that the restoration of some of the funding cutbacks from sequestration and the implementation of the Affordable Care Act and of the United States Preventive Services Task Force recommendations will have a positive impact on the development of the market. On the other hand, it is possible that changes to healthcare law in 2017 and thereafter could change this and/or have a negative impact on the market for our products. Further, our products are well established and relied upon by a large installed base of customers over many years of use in the U.S. global market, and we believe this is a strong advantage. We also believe that our DPP® HIV 1/2 Assay for which CLIA waiver was obtained in October 2014, for use with oral fluid or bloods samples will be able to serve new customers that were previously unavailable to us with our lateral flow blood tests. However, development of new customers with this product is costly and time-consuming.
We are attempting to increase international sales of our products, and we have invested in additional resources in connection with this effort; but as we have experienced, the nature of international business is such that it can be volatile from period to period, depending on ordering patterns of donor-funded programs.
Furthermore, a number of factors can slow or prevent international sales increases or cause international sales decreases, or substantially increase the cost of achieving sales assuming they are achieved. These factors include: | · | economic conditions and the absence of or reduction in available funding sources; |
| · | regulatory requirements and customs regulations; |
| · | cultural and political differences; |
| · | foreign exchange rates, currency fluctuations and tariffs; |
| · | dependence on and difficulties in managing international distributors or representatives; |
| · | the creditworthiness of foreign entities; |
| · | difficulties in foreign accounts receivable collection; |
| · | any inability we may have in maintaining or increasing revenues. |
If we are unable to maintain or increase our revenues from domestic and/or international customers, our operating results will be materially harmed. Although we have an ethics and anti-corruption policy in place, and have no knowledge or reason to know of any practices by our employees, agents or distributors that could be construed as in violation of such policies, our business includes sales of products to countries where there is or may be widespread corruption.
Chembio hasWe have a policy in place prohibiting itsour employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the United States Foreign Corrupt Practices Act (the "FCPA"). Nevertheless, because we work through independent sales agents and distributors (and do not have any employees or subsidiaries) outside the United States, we do not have control over the day-to-day activities of such independent agents and distributors. In addition, in the donor-funded markets in Africa where we sell our products, there is significant oversight from PEPFAR, the Global Fund, and advisory committees comprised of technical experts concerning the development and establishment of national testing protocols. This is a process that includes an overall assessment of a product which includes extensive product performance evaluations including five active collaborations and manufacturer's quality systems, as well as price and delivery. In Brazil, where we have had a total of six product collaborations with FIOCRUZ, the programs through which our products may be deployed are all funded by the Brazilian Ministry of Health. Although FIOCRUZ is affiliated with the Brazilian Ministry of Health, and is its sole customer, FIOCRUZ is not the exclusive supplier for the Ministry of Health. However, because each of our previous collaborations with FIOCRUZ incorporates a technology transfer aspect, we believe we have a competitive advantage versus other suppliers to the Brazilian Ministry of Health, assuming other aspects of our product offering through FIOCRUZ are otherwise competitive in comparison. We have no knowledge or reason to know of any activities by our employees, distributors or sales agents of any actions which could be in violation of the FCPA, although there can be no assurance of this.
We rely on trade secret laws and agreements with our key employees and other third parties to protect our proprietary rights, and we cannot be sure that these laws or agreements adequately protect our rights.
We believe that factors such as the technological and creative skills of our personnel, strategic relationships, new product developments, frequent product enhancements and name recognition are essential to our success. All of our management personnel are bound by non-disclosure agreements. If personnel leave our employment, in some cases we would be required to protect our intellectual property rights pursuant to common law theories which may be less protective than provisions of employment, non-competition or non-disclosure agreements.
We seek to protect our proprietary products under trade secret and copyright laws, enter into license agreements for various materials and methods employed in our products, and enter into strategic relationships for distribution of the products. These strategies afford only limited protection. We currently have some foreign patents issued, and we are seeking additional patent protection in several other foreign jurisdictions for our DPP® technology. We have licenses to reagents (antigens and peptides) used in several of our products and products under development. Despite our efforts to protect our proprietary assets, and respect the intellectual property rights of others, we participate in several markets where intellectual property rights protections are of little or no value. This can place our products and our company at a competitive disadvantage.
Despite the efforts we make to protect our confidential information, such as entering into confidentiality agreements in connection with new business opportunities, unauthorized parties may attempt to copy aspects of our products or to obtain information that we regard as proprietary. We may be required to expend substantial resources in asserting or protecting our intellectual property rights, or in defending suits related to intellectual property rights. Disputes regarding intellectual property rights could substantially delay product development or commercialization activities because some of our available funds would be diverted away from our business activities. Disputes regarding intellectual property rights might include state, federal or foreign court litigation as well as patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the U.S. Patent and Trademark Office.
To facilitate development and commercialization of a proprietary technology base, we may need to obtain additional licenses to patents or other proprietary rights from other parties. Obtaining and maintaining these licenses, which may not be available, may require the payment of up-front fees and royalties. In addition, if we are unable to obtain these types of licenses, our product development and commercialization efforts may be delayed or precluded.
Our continued growth depends on retaining our current key employees and attracting additional qualified personnel, and we may not be able to do so.
Our success will depend to a large extent upon the skills and experience of our executive officers, management and sales, marketing, operations and scientific staff. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among medical products businesses, geographic considerations, our ability to offer competitive compensation, relocation packages, benefits, and/or other reasons.
If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products to meet the demands of our strategic partners in a timely fashion, or to support internal research and development programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms.
We have entered into employment contracts with our Chief Executive Officer, John Sperzel, our Chief Operating Officer, Sharon Klugewicz, and our Chief Scientist & Technology Officer, Javan Esfandiari. Due to the specific knowledge and experience of these executives regarding the industry, technology and market, the loss of the services of any one of them could have a material adverse effect on the Company. The contract with Mr. Sperzel has a term of three years ending March 2017. The contract with Ms. Klugewicz has a term of two years ending May 2017. The contract with Mr. Esfandiari has a term of three years ending March 2016. The Company and Mr. Esfandiari currently are discussing terms for renewal of his employment agreement.2019. The Company has obtained a key man insurance policy on Mr. Esfandiari. The contract withCompany and Mr. Sperzel provides that Mr. Sperzel will serve as the Chief Executive Officer and as a Directorcurrently are discussing terms for renewal of the Company through March 13, 2017.his employment agreement.
We believe our success depends in part on the continued funding of and our ability to participate in large testing programs in the U.S. and worldwide. Funding of these and or similar programs may be reduced, discontinued and/or we may not be able to participate for other reasons.
We believe it to be in our best interests to meaningfully participate in large testing programs. Moreover many of these programs are funded by governments and other donors, and there can be no assurance that funding will not be reduced or completely discontinued. Participation in these programs also requires alignment and engagement with the many other participants in these programs, including the World Health Organization, U.S. Center for Disease Control,WHO, CDC, U.S. Agency for International Development, foreign governments and their agencies, non-governmental organizations, and HIV service organizations. If we are unsuccessful in our efforts to participate in these programs, our operating results could be materially harmed.
In December 2013 President Obama signed into law the PEPFAR Stewardship and Oversight Act, which is the most recent reauthorization of PEPFAR. However, unlike the 2008 PEPFAR authorization, which authorized approximately $45 billion in funding, the new law does not authorize a specific dollar amount for funding. Nevertheless it is widely anticipated that PEPFAR will continue to enjoy strong funding; the FY14 budget has $6 billion for global HIV/AIDS assistance, including $4 billion for PEPFAR. To the extent that we are unable to collect our outstanding accounts receivable, our operating results could be materially harmed.
There may be circumstances and timing that require us to accept payment terms, including delayed payment terms, from distributors or customers, which, if not satisfied, could cause financial losses.
We generally accept payment terms which require us to ship product before the contract price has been paid fully, and there also are circumstances pursuant to which we may accept further delayed payment terms pursuant to which we may continue to deliver product. To the extent that these circumstances result in significant accounts receivables and those accounts receivables are not paid on a timely basis, or are not paid at all, especially if concentrated in one or two customers, we could suffer financial losses.
Although we were profitable from 2009 through 2013, we incurred a net loss for 2014, 2015 and 20152016 and cannot be certain that we will be able to sustain profitability in the future.
From the inception of Chembio Diagnostic Systems, Inc. in 1985 through the period ended December 31, 2008, we incurred net losses. We were then profitable each year from 2009 through 2013. In 2014, 2015 and 2015,2016, we made substantial expenditures for sales and marketing, regulatory submissions, product development, production and warehouse capacity, and other purposes, and we incurred a net operating loss. Our ability to re-achieve profitability in the future will primarily depend on our ability to increase sales of our products based on having made the aforementioned expenditures to reduce production and other costs, and to successfully introduce new products and enhanced versions of our existing products into the marketplace. If we are unable to increase our revenues at a rate that is sufficient to achieve profitability, or adequately control and reduce our operating costs, our operating results would be materially harmed.
To the extent that we are unable to obtain sufficient product liability insurance or that we incur product liability exposure that is not covered by our product liability insurance, our operating results could be materially harmed.
We may be held liable if any of our products, or any product which is made with the use or incorporation of any of the technologies belonging to us, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or use. We have obtained product liability insurance even though we have never received a product liability claim, and have generally not seen product liability claims for screening tests that are accompanied by appropriate disclaimers. Nevertheless, in the event there is a claim, this insurance may not fully cover our potential liabilities. In addition, as we attempt to bring new products to market, we may need to increase our product liability coverage which could be a significant additional expense that we may not be able to afford. If we are unable to obtain sufficient insurance coverage at an acceptable cost to protect us, we may be forced to abandon efforts to commercialize our products or those of our strategic partners, which would reduce our revenues.
Risks related to our Common Stock
Our Common Stock continues to be illiquid, so investors may not be able to sell as much stock as they want at prevailing market prices.
The average daily trading volume of our Common Stock on the NASDAQ market was approximately 19,300 shares per day over the three months ended December 31, 2016 as compared with approximately 21,600 shares per day over the three months ended December 31, 2015 as compared with approximately 109,000 shares per day over the three months ended December 31, 2014.2015. The liquidity of our stock depends on several factors, including but not limited to the financial results of the Company and overall market conditions, so it is not possible to predict whether this level of liquidity will continue, be sustained, or decrease.
Decreased trading volume in our stock would make it more difficult for investors to sell their shares in the public market at any given time at prevailing prices. Our management and larger stockholders exercise significant control over the Company.
Our management and larger stockholders exercise significant control over the Company.
As of December 31, 2015,2016, our named executive officers, directors and 5% stockholders beneficially owned approximately 24.0%38.43% of our voting power, which includes twofour large investors that beneficially ownsown approximately 11.4%10.36%, 9.36%, 9.00% and 9.2%5.02%, respectively of the outstanding stock. For the foreseeable future, and assuming these ownership percentages continue to apply, to the extent that these parties vote similarly, they may be able to exercise significant control over many matters requiring approval by the board of directors or our stockholders. As a result, they may be able to: | · | control the composition of our board of directors; |
| · | control our management and policies; |
| · | determine the outcome of significant corporate transactions, including changes in control that may be beneficial to stockholders; and |
| · | act in each of their own interests, which may conflict with or differ from the interests of each other or the interests of the other stockholders. |
ITEM 1B. Unresolved Staff Comments.
Not Applicable
Our manufacturing, administrative offices and research facilities are located in Medford, New York. In addition we have warehousing space as well as some additional administrative offices located in Holbrook, New York. We lease approximately 39,660 square feet of industrial space in Medford for $27,988$28,688 per month. The space is utilized for research and development activities (approximately 5,440 square feet), offices (approximately 2,640 square feet) and production (approximately 31,580 square feet). The lease term expires on April 30, 2017. The lease provides for annual increases of two and one-half percent each year starting May 1, 2015. We lease approximately 21,450 square feet of industrial space in Holbrook for $15,097$15,550 per month. The space is utilized for offices (approximately 2,500 square feet) and warehousing (approximately 18,950 square feet). The lease term expires on April 30, 2018. The lease provides for annual increases of three percent each year starting March 1, 2015. The Company believes this space should be sufficient for its needs in the foreseeable future.
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest that is adverse to our interest.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
PART II ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our stock is quotedlisted on the NASDAQ Global Select Market of the NASDAQ Stock Market LLC under the symbol "CEMI." The table below sets forth the high and low bid prices per share of our common stock for each quarter of our two most recently completed fiscal years. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions. | Fiscal Year 2016 | | High | | Low | | | First Quarter | | | $ | 6.10 | | | $ | 4.03 | | | Second Quarter | | | $ | 9.40 | | | $ | 5.87 | | | Third Quarter | | | $ | 8.48 | | | $ | 5.08 | | | Fourth Quarter | | | $ | 7.45 | | | $ | 6.10 | | | | | | | | | | | Fiscal Year 2015 | High Bid | | Low Bid | | High | | Low | | | First Quarter | | | $ | 4.18 | | | | $ | 3.41 | | | $ | 4.20 | | | $ | 3.47 | | | Second Quarter | | | $ | 5.21 | | | | $ | 3.90 | | | $ | 5.25 | | | $ | 4.00 | | | Third Quarter | | | $ | 5.19 | | | | $ | 2.85 | | | $ | 5.20 | | | $ | 3.33 | | | Fourth Quarter | | | $ | 5.48 | | | | $ | 3.48 | | | $ | 5.53 | | | $ | 3.90 | | | | | | | | | | | | | | | | Fiscal Year 2014 | High Bid | | Low Bid | | | | First Quarter | | | $ | 3.88 | | | | $ | 2.81 | | | | Second Quarter | | | $ | 3.56 | | | | $ | 2.81 | | | | Third Quarter | | | $ | 3.85 | | | | $ | 3.02 | | | | Fourth Quarter | | | $ | 5.19 | | | | $ | 3.40 | | |
Holders As of March 1, 2016,3, 2017, there were approximately 1392,030 record owners of our common stock.stock (including nominee holders such as banks and brokerage firms who hold shares for beneficial owners). Dividends The Company has never paid cash dividends on its common stock and has no plans to do so in the foreseeable future. Any future declaration of dividends will be determined by our Board of Directors in its sole discretion and will depend on, among other things, our earnings, capital requirements, financial condition, prospects and any other factors the Board of Directors may deem relevant. Recent Sales of Unregistered Securities Not applicable.There were no sales of unregistered securities during the year ended December 31, 2016 that were not previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 10-K.
Issuer Purchases of Equity Securities We did not repurchase any of our equity securities during the fourth quarter of the fiscal year ended December 31, 2016.
| ITEM 6. | SELECTED FINANCIAL DATA |
Presented in this table areThe Following selected financial data forshould be read in connection with Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the past five years ended December 31, 2015.consolidated financial statements and notes that are included in this Annual Report on Form 10-K.
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
| SELECTED HISTORICAL FINANCIAL DATA
| As of and For the Years Ended
|
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES | | CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES | | SELECTED HISTORICAL FINANCIAL DATA | | SELECTED HISTORICAL FINANCIAL DATA | | As of and For the Years Ended | | As of and For the Years Ended | | | Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | | | | | December 31, 2014 | | | | | | December 31, 2013 | | | | | | December 31, 2012 | | | | | | December 31, 2011 | | | | | | December 31, 2016 | | | | | | December 31, 2015 | | | | | | December 31, 2014 | | | | | | December 31, 2013 | | | | | | December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | TOTAL REVENUES | | $ | 24,255,485 | | | | | | $ | 27,645,284 | | | | | | $ | 29,549,609 | | | | | | $ | 25,610,595 | | | | | | $ | 19,388,036 | | | | | | $ | 17,868,841 | | | | | | $ | 24,255,485 | | | | | | $ | 27,645,284 | | | | | | $ | 29,549,609 | | | | | | $ | 25,610,595 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | GROSS MARGIN(1) | | | 10,486,827 | | | | 43 | % | | | 10,814,023 | | | | 39 | % | | | 12,300,159 | | | | 42 | % | | | 10,789,991 | | | | 42 | % | | | 9,390,303 | | | | 48 | % | | | 8,451,336 | | | | 47 | % | | | 10,486,827 | | | | 43 | % | | | 10,814,023 | | | | 39 | % | | | 12,300,159 | | | | 42 | % | | | 10,789,991 | | | | 42 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | OPERATING COSTS: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Research and development expenses(1) | | | 6,377,839 | | | | 26 | % | | | 4,832,537 | | | | 17 | % | | | 5,834,249 | | | | 20 | % | | | 4,486,302 | | | | 18 | % | | | 4,878,119 | | | | 25 | % | | | 8,427,554 | | | | 47 | % | | | 6,377,839 | | | | 26 | % | | | 4,832,537 | | | | 17 | % | | | 5,834,249 | | | | 20 | % | | | 4,486,302 | | | | 18 | % | Selling, general and administrative expenses(1) | | | 7,663,035 | | | | 32 | % | | | 7,531,739 | | | | 27 | % | | | 5,461,083 | | | | 18 | % | | | 4,851,587 | | | | 19 | % | | | 3,424,297 | | | | 18 | % | | | 7,595,559 | | | | 43 | % | | | 7,663,035 | | | | 32 | % | | | 7,531,739 | | | | 27 | % | | | 5,461,083 | | | | 18 | % | | | 4,851,587 | | | | 19 | % | | | | | 14,405,874 | | | | | | | | 12,364,276 | | | | | | | | 11,295,332 | | | | | | | | 9,337,889 | | | | | | | | 8,302,416 | | | | | | | | 16,023,113 | | | | | | | | 14,040,874 | | | | | | | | 12,364,276 | | | | | | | | 11,295,332 | | | | | | | | 9,337,889 | | | | | | | INCOME (LOSS) FROM OPERATIONS | | | (3,554,047 | ) | | | | | | | (1,550,253 | ) | | | | | | | 1,004,827 | | | | | | | | 1,452,102 | | | | | | | | 1,087,887 | | | | | | | | (7,571,777 | ) | | | | | | | (3,554,047 | ) | | | | | | | (1,550,253 | ) | | | | | | | 1,004,827 | | | | | | | | 1,452,102 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | OTHER INCOME (EXPENSES): | | | (3,238 | ) | | | | | | | 132 | | | | | | | | 12,943 | | | | | | | | (1,584 | ) | | | | | | | (12,325 | ) | | | | | | | 25,548 | | | | | | | | (3,238 | ) | | | | | | | 132 | | | | | | | | 12,943 | | | | | | | | (1,584 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | INCOME (LOSS) BEFORE INCOME TAXES(1) | | | (3,557,285 | ) | | | (15 | %) | | | (1,550,121 | ) | | | (6 | %) | | | 1,017,770 | | | | 3 | % | | | 1,450,518 | | | | 6 | % | | | 1,075,562 | | | | 6 | % | | | (7,546,229 | ) | | | (42 | )% | | | (3,557,285 | ) | | | (15 | )% | | | (1,550,121 | ) | | | (6 | )% | | | 1,017,770 | | | | 3 | % | | | 1,450,518 | | | | 6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income tax provision (benefit) | | | (1,160,243 | ) | | | | | | | (412,918 | ) | | | | | | | 486,952 | | | | | | | | 509,237 | | | | | | | | (5,133,229 | ) | | | | | | | 5,800,818 | | | | | | | | (1,160,243 | ) | | | | | | | (412,918 | ) | | | | | | | 486,952 | | | | | | | | 509,237 | | | | | | | NET INCOME (LOSS) | | $ | (2,397,042 | ) | | | | | | $ | (1,137,203 | ) | | | | | | $ | 530,818 | | | | | | | $ | 941,281 | | | | | | | $ | 6,208,791 | | | | | | | $ | (13,347,047 | ) | | | | | | $ | (2,397,042 | ) | | | | | | $ | (1,137,203 | ) | | | | | | $ | 530,818 | | | | | | | $ | 941,281 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic income (loss) per share | | $ | (0.25 | ) | | | | | | $ | (0.12 | ) | | | | | | $ | 0.06 | | | | | | | $ | 0.12 | | | | | | | $ | 0.79 | | | | | | | $ | (1.26 | ) | | | | | | $ | (0.25 | ) | | | | | | $ | (0.12 | ) | | | | | | $ | 0.06 | | | | | | | $ | 0.12 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted income (loss) per share | | $ | (0.25 | ) | | | | | | $ | (0.12 | ) | | | | | | $ | 0.06 | | | | | | | $ | 0.11 | | | | | | | $ | 0.73 | | | | | | | $ | (1.26 | ) | | | | | | $ | (0.25 | ) | | | | | | $ | (0.12 | ) | | | | | | $ | 0.06 | | | | | | | $ | 0.11 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of shares outstanding, basic | | | 9,626,028 | | | | | | | | 9,530,320 | | | | | | | | 8,994,080 | | | | | | | | 7,986,030 | | | | | | | | 7,874,807 | | | | | | | | 10,622,331 | | | | | | | | 9,626,028 | | | | | | | | 9,530,320 | | | | | | | | 8,994,080 | | | | | | | | 7,986,030 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of shares outstanding, diluted | | | 9,626,028 | | | | | | | | 9,530,320 | | | | | | | | 9,519,968 | | | | | | | | 8,614,944 | | | | | | | | 8,556,284 | | | | | | | | 10,622,331 | | | | | | | | 9,626,028 | | | | | | | | 9,530,320 | | | | | | | | 9,519,968 | | | | | | | | 8,614,944 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Working capital | | $ | 9,479,968 | | | | | | | $ | 12,372,169 | | | | | | | $ | 4,221,011 | | | | | | | $ | 7,630,368 | | | | | | | $ | 6,133,956 | | | | | | | $ | 14,707,876 | | | | | | | $ | 9,479,968 | | | | | | | $ | 12,372,169 | | | | | | | $ | 14,221,011 | | | | | | | $ | 7,630,368 | | | | | | | Total assets | | | 20,816,344 | | | | | | | | 25,010,192 | | | | | | | | 24,486,592 | | | | | | | | 17,335,150 | | | | | | | | 15,485,744 | | | | | | | | 20,575,236 | | | | | | | | 20,816,344 | | | | | | | | 25,010,192 | | | | | | | | 24,486,592 | | | | | | | | 17,335,150 | | | | | | | Total liabilities | | | 3,154,838 | | | | | | | | 5,286,030 | | | | | | | | 4,309,490 | | | | | | | | 3,460,630 | | | | | | | | 2,991,110 | | | | | | | | 3,405,650 | | | | | | | | 3,154,838 | | | | | | | | 5,286,030 | | | | | | | | 4,309,490 | | | | | | | | 3,460,630 | | | | | | | Shareholders' equity | | | 17,661,506 | | | | | | | | 19,724,162 | | | | | | | | 20,177,102 | | | | | | | | 13,874,520 | | | | | | | | 12,494,634 | | | | | | | | 17,169,586 | | | | | | | | 17,661,506 | | | | | | | | 19,724,162 | | | | | | | | 20,177,102 | | | | | | | | 13,874,520 | | | | | |
(1) percentage shown reflects the percentage of total revenues
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview This discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements and related notes. Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we review our estimates and assumptions. Our estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined below in ''Critical Accounting Policies,'' and have not changed significantly. In addition, certain statements made in this report may constitute "forward-looking statements".
These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These factors include, among others, 1) our ability to obtain necessary regulatory approvals for our products; and 2) our ability to increase revenues and operating income, which is dependent upon our ability to develop and sell our products, general economic conditions, demand for our products, and other factors. You can identify forward-looking statements by terminology such as "may," "could", "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues" or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.
All of the Company's future products that are currently being developed are based on its patented Dual Path Platform (DPP®), which is a unique diagnostic point-of-care platform that has certain advantages over lateral flow technology. The Company has completed development of several products that employ the DPP® technology whichtechnology. These products are currently marketed under Chembio's label (DPP® HIV 1/2 Screening Assay and DPP® HIV 1/2 –Syphilis Assay), or which may be marketed pursuant to private label license or distribution agreements such as those with the Oswaldo Cruz Foundation ("FIOCRUZ"), and Bio-Rad.
Research and development ("R&D"), milestone, and grant and royalty revenues for the yearyears ended December 31, 2016, 2015 increased to $2,369,000 from $1,696,000 in the prior-year,and 2014 were $4.19 million, $2.37 million and $1.70 million, respectively, which was the result of additional grants awarded in 2016, 2015 overand 2014. R&D expenses in the year ofyears ended December 31, 2016, 2015 and 2014 were $8.43 million, $6.38 million compared withand $4.83 million, in the prior-year.respectively.
Research & Development Activities Sexually Transmitted Disease ·
| · | DPP® HIV-Syphilis Assay:Assay: The DPP® HIV-Syphilis Assay is a rapid, point-of-care (POC), multiplex test for the simultaneous detection of antibodies to HIV and to Treponema Pallidum (TP) bacteria (the causative agent of syphilis). This novel combination assay was developed to address the growing concern among public health officials regarding the rising co-infection rates of HIV and syphilis as well as mother-to-child transmission (MTCT) of HIV and syphilis. The product was successfully launched in Mexico during 2014, and received approval for commercial useby the Mexican regulatory agency (Cofepris) in 2014, received approval by the Brazilian regulatory agency, Agência Nacional de Vigilância Sanitária (ANVISA). The DPP® HIV-Syphilis Assay is the only test cleared for commercialization in Brazil for rapid, POC detection of both HIV 1/22015, and syphilis.received CE mark approval in 2017. We are developing a U.S. version of the DPP® HIV-Syphilis Assay, designed to meet the performance requirements for the "reverse" algorithm that is currently in clinical use for syphilis testing in the United States. We have completed our pre-clinical studies for this product with encouraging results, and areThe DPP® HIV-SYP Assay clinical trial is on schedule; initiated in the final stages of clinical site selection for our U.S. clinical studies. We plan to begin this clinical trial in the U.S. during first quarter of 2016 and, at the current enrollment rate, we expect thatto complete the trial in the first quarter of 2017. Following the completion of the clinical trial, we will be completed in six to nine months from initiation.file a Premarket Approval Application with the U.S. Food and Drug Administration. |
Fever & Tropical Disease | · | DPP® Malaria Assay:Assay: The DPP® Malaria Assay is a rapid, POC, multiplex test for the simultaneous detection of plasmodium falciparum and other plasmodium infections. In January 2015, we received a grant from Thethe Bill & Melinda Gates Foundation to expedite the development and feasibility testing of a POC DPP® Malaria Assay. The Company recently completed this project, which compared the new DPP® Malaria Assay to the world's leading currently-available POC malaria assay. Based on initial testing, the new DPP® Malaria Assay met the major objective of the feasibility project:assay with favorable results: a ten-fold improvement in sensitivity. Given these results,In April 2016, we received a second Malaria grant from the Bill & Melinda Gates Foundation to expedite the feasibility testing and development of the world's first oral fluid/saliva POC diagnostic test to simply and accurately identify individuals infected with all species of malaria. We recently completed the feasibility and plan to develop and commercializedeliver DPP® Malaria Assays to a familypartner of DPP® Malaria Assays.the Bill & Melinda Gates Foundation in March 2017, to commence field evaluation. |
| · | DPP® Zika Assay: The DPP® Zika Assay is a rapid POC stand-alone test for the simultaneous detection of IgM/IgG antibodies. In February 2016, we received a grant from The Paul G. Allen Family Foundation to initiate development of the DPP® Zika Assay. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Zika Assay. In August 2016, the Company received an award from the U.S. Government (HHS/ASPR/BARDA), granting the Company up to $13.2 million ($5.9 million to develop DPP® Zika Assay and obtain U.S. regulatory approval). The Company filed the following regulatory submissions: U.S. Food and Drug Administration Emergency Use Authorization (EUA), World Health Organization EUA, Brazil's regulatory agency ANVISA, Mexico's regulatory agency Cofepris, and CE mark. The Company obtained CE mark in July 2016, and then began selling in the Caribbean region via its distribution partner, Isla Lab, LLC. In September 2016, the Company received a contract award from CDC to initiate a Zika surveillance program in India, Peru, Guatemala and Haiti, and we began selling the DPP® Zika IgM/IgG Assay to CDC for field testing purposes during the first quarter of 2017. The Company received ANVISA approval (Brazil) for the DPP® Zika IgM/IgG Assay in November 2016 and is working with our Brazilian partner, Bio-Manguinhos, to obtain ANVISA approval for the DPP® Micro Reader. |
| · | DPP® Dengue Fever Assay: The DPP® Dengue Fever Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM and NS1 antigens. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system related to the DPP® Dengue Fever Assay. We completed verification and validation studies, and production of pilot lots, to support preclinical studies. Also during 2016, we initiated registration to begin initial commercialization in Southeast Asia, and we believe initial DPP® Dengue Assay sales will occur in Southeast Asia during Q1 2017. |
| · | DPP® Chikungunya Assay: The DPP® Chikungunya Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM antibodies. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Chikungunya Assay. |
| · | DPP® Zika/Dengue/Chikungunya Assay: The DPP® Zika/Dengue/Chikungunya Assay is a rapid, POC, multiplex test for the simultaneous detection of IgM/IgG antibodies. In February 2016, we received a grant from The Paul G. Allen Family Foundation to initiate development of the DPP® Zika/Dengue/Chikungunya Assay. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Zika/Dengue/Chikungunya Assay. In August 2016, the Company received an award from the U.S. Government (HHS/ASPR/BARDA), granting the Company up to $13.2 million (including an option of $7.3 million to develop DPP® Zika/Dengue/Chikungunya Assay and obtain U.S. regulatory approval). In September 2016, the Company received a contract award from CDC, to initiate a Zika, Dengue, and Chikungunya surveillance program in India, Peru, Guatemala and Haiti and we began selling the DPP® Zika/Dengue/Chikungunya IgM/IgG Assay to CDC for field test purposes during the first quarter of 2017. |
| · | DPP® Fever Panel Assay:Assay: The DPP® Fever Panel Assay is a rapid, POC, multiplex test for the simultaneous detection of Malaria, Dengue, Chikungunya, Zika, Ebola, Lassa, and Marburg. In October 2015, we received a $2.1 million grant from the Paul G. Allen Ebola Program, to develop the DPP® Fever Panel Assay and a $0.55 million follow-on grant to add a test for the detection of Zika virus. We plancompleted the development of the DPP® Fever Panel Assay in 2016, including the addition of Zika, and we supplied 10,000 tests to be ready for field testingFIND, who will initiate evaluation in the fourth quarter of 2016.Peru and Nigeria. |
| · | DPP® Ebola Assay and DPP® Malaria-Ebola Assay:Assay: The DPP® Ebola Assay is a rapid POC test for the detection of Ebola, and the DPP® Malaria-Ebola Assay is a rapid, POC, multiplex test for the simultaneous detection of Malaria and Ebola. In October 2014, we announced plans to develop, validate, and commercialize POC DPP® Assays for Ebola and Febrile Illness. We completed the development of the DPP® Ebola Assay and submitted it for Emergency Use Authorization (EUA) with the Food & Drug Administration (FDA) and World Health Organization (WHO)., and we are actively engaged with these regulatory agencies. During the third and fourth quarters of 2015, we sold DPP® Ebola and DPP® Malaria-Ebola Assays to the Centers for Disease Control & Prevention (CDC) for field studies in West Africa, which is ongoing. |
·
| DPP® Dengue Fever Assay: The DPP® Dengue Fever Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM and NS1 antigens. We are currently conducting verification and validation studies, and we anticipate the production of pilot lots, to support preclinical studies. We anticipate starting pre-clinical studies in the second quarter of 2016. This program is fully funded by a partner. However, under the terms of our agreement, Chembio's partner is not being disclosed. |
·
| DPP® Zika Assays: The DPP® Zika Assay is a rapid POC stand-alone test for the simultaneous detection of IgG/IgM antibodies and the DPP® Dengue/Chikungunya/Zika Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM antibodies. |
·
| In February 2016, we received a $550,000 grant from the Paul G. Allen Family Foundation to develop the DPP® Zika Assays, which we plan to be ready for field testing in 2016. |
Technology Collaboration ·
| · | DPP® Cancer Assay:Assay: The DPP® Cancer Assay is a rapid, POC, multiplex test for the early detection and monitoring of a specific type of cancer. In October 2014, we entered into collaboration with an international diagnostics company to develop a POC diagnostic test for a specific type of cancer. This program is fully funded by athis partner. However, under the terms of the agreement, neither Chembio's partner nor the specific type of cancer is being disclosed. The cancer project represents an application of the DPP® technology outside of the infectious disease field, and the scope of the agreement involves product development of a quantitative, reader-based cancer assay for two cancer markers, utilizing Chembio's DPP® technology and its DPP® Micro Reader. During the third quarter of 2015, we completed successful feasibility, and our partner agreed to fund continued development of the DPP® Cancer Assay.Assay, which development and verification is ongoing. |
·
| · | DPP® Traumatic Brain Injury Assay:Assay: The DPP® Traumatic Brain Injury Assay is a rapid POC test for the detection of traumatic brain injury (TBI) and sports-related concussion. In January 2015, we entered into an agreement with the Concussion Science Group (CSG) Division of Perseus Science Group LLC, to combine CSG's patented biomarker with our proprietary DPP® platform and DPP® Micro Reader, to develop a semi-quantitative or quantitative POC test, to diagnose TBI. In May 2015, an Informational Meeting was conducted at the FDA to present the technology and intended use, as well to initiate dialogue regarding the regulatory pathway for this product. The DPP® Traumatic Brain Injury Assay is in the feasibility and pre-clinical stage. We are currently working with several hospitals to finalizeUnder institutional review board (IRB) agreements and develop the plan forwith multiple hospitals, we are conducting initialpre-clinical studies of the prototype DPP® Traumatic Brain Injury Assay using patient samples. |
·
| · | DPP® FLU Immunostatus Assay:Bovine Tuberculosis: The DPP® FLU ImmunostatusDPP® BovidTB Assay is a rapid POC multiplex influenza immunity test.test for the detection of bovine tuberculosis (TB). In November 2014, we entered intoSeptember 2016, the Company was awarded a follow-on, milestone-based development agreement with a contracting organization acting on behalf$600,000 grant from the United States Department of Agriculture (USDA) to develop the DPP® BovidTB Assay. The grant will be managed by the Small Business Innovation Research Program (SBIR) of the National Institute of Food and Agriculture (NIFA), a federal agency within the USDA and the assay will be developed in collaboration with National Animal Disease Center (NADC) and Infectious Disease Research Institute (IDRI). Under the two-year grant, Chembio will use its patented DPP® technology to undertake to develop a simple, rapid, accurate and cost-effective test for bovine TB in cattle. The DPP® BovidTB Assay will be designed to provide results within 20 minutes, thereby significantly improving on the time-consuming, tedious and inadequate diagnostic methods currently in use. |
Regulatory Activities | · | DPP® HIV-Syphilis Assay: We have developed a U.S. government,version of the DPP® HIV-Syphilis Assay, designed to meet the performance requirements for a multiplex POC influenza immunity test utilizing our patentedthe "reverse" algorithm that is currently in clinical use for syphilis testing in the United States. The clinical trial to support the FDA application for approval of the DPP® technology. We successfullyHIV-Syphilis Assay was initiated during first quarter of 2016 and is expected to be completed the product development of a 7-band multiplex DPP® Flu Immunostatus Assay with a digital reader duringin the first quarter of 2015 and subsequently applied for additional funding in response to2017. Following the completion of the clinical trial, we will file a new request for proposal (RFP) fromPremarket Approval Application with the U.S. Government,Food and Drug Administration. In January 2017, we received CE mark approval for which we expect a response in the second quarter of 2016.DPP® HIV-Syphilis Assay. |
Regulatory Activities
| · | DPP® Zika IgM/IgG System: In July of 2016 Chembio obtained a CE Mark for the DPP® Zika IgM/IgG Assay. The DPP® Zika IgM/IgG System, which includes an assay utilizing the patented DPP® technology as well as a digital reader (DPP® Micro Reader), are now cleared for commercialization in European countries as well as the majority of the Caribbean nations, not including U.S. territories. In November of 2016, we received approval from ANVISA, Brazil's regulatory Agency and we are working with our Brazilian partner, Bio-Manguinhos, to obtain ANVISA approval for the DPP® Micro Reader. We have also filed regulatory submissions to U.S. Food and Drug Administration (Emergency Use Authorization), the World Health Organization (Emergency Use Assessment and Listing), and Cofepris (Mexico), and we are actively engaged with these organizations. |
DPP® HIV 1/2 Assay: In May 2015 we received approval for a CE Mark for the DPP® HIV 1/2 Assay for Oral Fluid, Serum, Plasma, Fingerstick Whole Blood and Venous Whole Blood. The Chembio DPP® HIV 1/2 Assay for rapid, POC detection of HIV is now cleared for commercialization and sale within the 28 member states of the European Union.
DPP® HIV-Syphilis: The DPP® HIV-Syphilis Assay is a rapid, POC, multiplex test for the simultaneous detection of antibodies to HIV and to Treponema Pallidum (TP) bacteria (the causative agent of syphilis). This novel combination assay was developed to address the growing concern among public health officials regarding the rising co-infection rates of HIV and syphilis as well as mother-to-child transmission (MTCT) of HIV and syphilis. The product was successfully launched in Mexico during 2014, and received approval for commercial use by the Brazilian regulatory agency, Agência Nacional de Vigilância Sanitária (ANVISA). The DPP® HIV-Syphilis Assay is the only test cleared for commercialization in Brazil for rapid, POC detection of both HIV 1/2 and syphilis. In December 2015, the application by way of technical file was submitted to the Notified Body for CE Mark consideration to commercialize within the European Union.
We have developed a U.S. version of the DPP® HIV-Syphilis Assay, designed to meet the performance requirements for the "reverse" algorithm that is currently in clinical use for syphilis testing in the United States. We have completed our pre-clinical studies for this product with encouraging results, and have identified clinical sites for our U.S. clinical studies. We plan to begin this clinical trial in the U.S. during first quarter of 2016, and expect that the trial will be completed in six to nine months from initiation.
There can be no assurance that any of the aforementioned Research & Development and/or Regulatory products or activities will result in any product approvals or commercialization, nor that any of the existing research and development activities, or any new potential development programs or collaborations will materialize or that they will meet regulatory or any other technical requirements and specifications, and/or that if continued, will result in completed products, or that such products, if they are successfully completed, can or will be successfully commercialized.
Recent Events
On February 19, 2016,January 9, 2017, the Company announced it had beencompleted the acquisition of RVR Diagnostics Sdn Bhd, a Malaysia corporation ("RVR"), pursuant to the previously reported Amended And Restated Stock Purchase Agreement, dated as of December 7, 2016 (the "Stock Purchase Agreement"), by and among Chembio, RVR, Avijit Roy and Magentiren Vajuram. See footnote 16 to Chembio's Consolidated Financial Statements included in this Form 10-K for more information.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2016 AS COMPARED WITH THE YEAR ENDED DECEMBER 31, 2015 Income:
For the year ended December 31, 2016, Loss before income taxes was $7,546,000 compared to Loss before income taxes of $3,557,000 for the year ended December 31, 2015. Net Loss for the year ended December 31, 2016 consists not only of the $7,546,000 Loss before income tax described above, but also of the $5,801,000 non-cash income tax provision described below under "Income tax provision (benefit)". Net Loss for the year ended December 31, 2015 consists not only of the $3,557,000 Loss before income tax described above, but also of the $1,160,000 non-cash income tax benefit described below under "Income tax provision (benefit)". The change in Loss before income taxes is primarily attributable to decreased revenue and gross margin, and increased operating expenses. Gross margin decreased in the year ended December 31, 2016 as compared with the year ended December 31, 2015, by $2,035,000, or (19.4)%. The increased operating expenses, the most significant of which were an increase materials and supplies for R&D of $1,512,000, increased clinical trial expenses of $412,000, and an increase in wages and related expenses of $633,000, partially offset by decreased commission expenses of $611,000, accounted for most of the change in Loss before income taxes.
Revenues:
| Selected Product Categories: | | For the years ended | | | | | | | | | | | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | | | | | | | | | | | | | | | | | Lateral Flow HIV Tests and Components | | $ | 7,943,224 | | | $ | 9,957,882 | | | $ | (2,014,658 | ) | | | -20.23 | % | DPP® Tests and Components | | | 5,400,893 | | | | 11,265,876 | | | | (5,864,983 | ) | | | -52.06 | % | | Other | | | 335,990 | | | | 662,930 | | | | (326,940 | ) | | | -49.32 | % | | Net Product Sales | | | 13,680,107 | | | | 21,886,688 | | | | (8,206,581 | ) | | | -37.50 | % | | License and royalty revenue | | | 449,685 | | | | 52,753 | | | | 396,932 | | | | 752.43 | % | | R&D, milestone and grant revenue | | | 3,739,049 | | | | 2,316,044 | | | | 1,423,005 | | | | 61.44 | % | | Total Revenues | | $ | 17,868,841 | | | $ | 24,255,485 | | | $ | (6,386,644 | ) | | | -26.33 | % |
Revenues for our lateral flow HIV tests and related components during the year ended December 31, 2016 decreased by approximately $2,015,000 from the same period in 2015. This was primarily attributable to decreased sales to Africa of approximately $1,436,000, decreased sales to Europe of $40,000, decreased sales to the U.S. of $1,580,000, partially offset by increased sales to Mexico of $123,000. Revenues for our DPP® products during the year ended December 31, 2016 decreased by approximately $5,865,000 over the same period in 2015, primarily for decreases in sales in Brazil to FIOCRUZ of $5,340,000. The increase in R&D, and in milestone and grant revenue, was primarily due to revenues from certain development projects that were awarded during the period. R&D revenues include funds, recognized on an "as expenses are incurred" basis or on a $550,000 grantproportonial performance basis, from philanthropistvarious grants, see footnote 14 of our financial statements. Gross Margin:
| Gross Margin related to Net Product Sales: | | For the years ended | | | | | | | | | | | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | | | | | | | | | | | | | | | | | Gross Margin per Statement of Operations | | $ | 8,451,336 | | | $ | 10,486,827 | | | $ | (2,035,491 | ) | | | -19.41 | % | | Less: R&D, milestone, grant, license and royalties | | | 4,188,734 | | | | 2,368,797 | | | | 1,819,937 | | | | 76.83 | % | | Gross Margin from Net Product Sales | | | 4,262,602 | | | | 8,118,030 | | | $ | (3,855,428 | ) | | | -47.49 | % | | Product Gross Margin % | | $ | 31.16 | % | | $ | 37.09 | % | | | | | | | | |
The overall gross margin dollar decrease of 2,035,000 consisted of a $3,855,000 decrease in gross margin from net product sales and entrepreneur Paul G. Allena $1,820,000 increase in non-product revenues. The decrease in net product sales gross margin of $3,855,000 is primarily attributable to immediately initiatethe change in product sales compared to 2015. The net product sales gross margin decrease is comprised of two components, one is the decrease in product sales of $8,207,000, which at the 37.1% margin contributed $3,044,000 to the decrease, and the other is the decreased change in margin percentage of 5.9% which contributed the balance of $812,000. The 5.9% decrease in the percentage, from 37.1% in 2015 to 31.2% in 2016, was primarily due to increased overhead as a percentage of products produced, due to the lower volume of sales.
Research and Development:
This category includes costs incurred for clinical and regulatory affairs and for product research and development.
| Selected expense lines: | | For the years ended | | | | | | | | | | | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | | Clinical and Regulatory Affairs: | | | | | | | | | | | | | | Wages and related costs | | $ | 569,664 | | | $ | 490,802 | | | $ | 78,862 | | | | 16.07 | % | | Consulting | | | 40,974 | | | | 44,135 | | | | (3,161 | ) | | | -7.16 | % | | Stock-based compensation | | | - | | | | - | | | | - | | | | 100.00 | % | | Clinical trials | | | 778,921 | | | | 366,469 | | | | 412,452 | | | | 112.55 | % | | Other | | | 54,851 | | | | 80,960 | | | | (26,109 | ) | | | -32.25 | % | | Total Regulatory | | | 1,444,410 | | | | 982,366 | | | | 462,044 | | | | 47.03 | % | | | | | | | | | | | | | | | | | | | R&D Other than Regulatory: | | | | | | | | | | | | | | | | | | Wages and related costs | | | 2,951,456 | | | | 2,896,226 | | | | 55,230 | | | | 1.91 | % | | Consulting | | | 143,321 | | | | 128,117 | | | | 15,204 | | | | 11.87 | % | | Stock-based compensation | | | 89,246 | | | | 62,713 | | | | 26,533 | | | | 42.31 | % | | Materials and supplies | | | 3,290,868 | | | | 1,779,046 | | | | 1,511,822 | | | | 84.98 | % | | Other | | | 508,253 | | | | 529,371 | | | | (21,118 | ) | | | -3.99 | % | | Total other than Regulatory | | | 6,983,144 | | | | 5,395,473 | | | | 1,587,671 | | | | 29.43 | % | | | | | | | | | | | | | | | | | | | | Total Research and Development | | $ | 8,427,554 | | | $ | 6,377,839 | | | $ | 2,049,715 | | | | 32.14 | % |
Expenses for Clinical and Regulatory Affairs for the year ended December 31, 2016 increased by $462,000 as compared to the same period in 2015. This was due to an increase of $412,000 in clinical trial expenses and increased wages and related costs of $79,000.
R&D expenses other than Clinical & Regulatory Affairs increased by $1,588,000 in the year ended December 31, 2016, as compared with the same period in 2015. The increases were primarily related to an increase in wages and related costs, and in material and supplies, to support our sponsored research and internal development programs.
Selling, General and Administrative Expense:
| Selected expense lines: | | For the years ended | | | | | | | | | | | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | | | | | | | | | | | | | | | | | Wages and related costs | | $ | 3,559,482 | | | $ | 3,060,407 | | | $ | 499,075 | | | | 16.31 | % | | Consulting | | | 128,992 | | | | 311,488 | | | | (182,496 | ) | | | -58.59 | % | | Commissions | | | 680,545 | | | | 1,291,453 | | | | (610,908 | ) | | | -47.30 | % | | Stock-based compensation | | | 214,913 | | | | 271,674 | | | | (56,761 | ) | | | -20.89 | % | | Marketing materials | | | 375,739 | | | | 223,445 | | | | 152,294 | | | | 68.16 | % | | Investor relations/investment bankers | | | 298,675 | | | | 204,198 | | | | 94,477 | | | | 46.27 | % | | Legal, accounting and compliance | | | 1,086,212 | | | | 879,887 | | | | 206,325 | | | | 23.45 | % | | Travel, entertainment and trade shows | | | 446,541 | | | | 448,599 | | | | (2,058 | ) | | | -0.46 | % | | Bad debt allowance (recovery) | | | - | | | | - | | | | - | | | | 100.00 | % | | Other | | | 804,460 | | | | 971,884 | | | | (167,424 | ) | | | -17.23 | % | | Total S, G &A | | $ | 7,595,559 | | | $ | 7,663,035 | | | $ | (67,476 | ) | | | -0.88 | % |
Selling, general and administrative expenses for the year ended December 31, 2016, decreased by $67,000 as compared with the same period in 2015, a 0.9% decrease. This decrease resulted primarily from decreases in consulting, commissions (due to decreased sales to Brazil), and stock-based compensation, which were partially offset by increases in wages and related costs and travel expenses which for 2016 included the continued development of simple, cost-effective POC diagnostic testsa sales and marketing team over 2015, marketing materials, professional fees and in investor relations/investment bankers.
Other Income and Expense:
| | | For the years ended | | | | | | | | | | | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | | | | | | | | | | | | | | | | | Other income (expense) | | $ | - | | | $ | (4,814 | ) | | $ | 4,814 | | | | -100.00 | % | | Interest income | | | 25,548 | | | | 2,412 | | | | 23,136 | | | | 959.20 | % | | Interest expense | | | - | | | | (836 | ) | | | 836 | | | | -100.00 | % | | Total Other Income and (Expense) | | $ | 25,548 | | | $ | (3,238 | ) | | $ | 28,786 | | | | 889.01 | % |
Other income (expense) for the year ended December 31, 2016 increased approximately $29,000, primarily due to identify Zika virus and related febrile illnesses. The grant is managed by Mr. Allen's company, Vulcan Inc., andinterest income, compared to the funds come fromsame period in 2015.
Income tax provision (benefit):
For the Paul G. Allen Family Foundation. On March 7,year ended December 31, 2016 the Company announced plansrecognized a $5,801,000 non-cash income tax provision and decreased its deferred tax assets by $5,801,000 as the Company took a full valuation allowance against its carryforward losses in the second quarter. For the year ended December 31, 2015, the Company recognized a $1,160,000 non-cash income tax benefit and increased its deferred tax assets by $1,160,000. The effective tax rate used to collaborate with Bio-Manguinhos/Fiocruzrecognize the benefit in 2015 was 32.0% to undertake to develop, register and commercialize POC DPP® Zika Assaysrecord the amount charged. In the 2015 year, non-deductible expenses for Brazil.tax purposes accounted for most of the difference from the standard 34% U.S. tax rate. The Company has developedstill maintains a prototype DPP® Zika Assayfull valuation allowance on research and prototype DPP® Zika/Dengue/Chikungunya Assay, and we hope to receive additional funding, along with the grant mentioned above, to accelerate the development and testing of our DPP® Zika Assays. The Company anticipates receiving significant orders for DPP® Zika Assays in 2016.tax credits
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2015 AS COMPARED WITH THE YEAR ENDED DECEMBER 31, 2014 Income:
For the year ended December 31, 2015, Loss before income taxes was $(3,557,000)$3,557,000 compared to Loss before income taxes of $(1,550,000)$1,550,000 for the year ended December 31, 2014. Net Loss for the year ended December 31, 2015 period was $(2,397,000) as compared to aconsists not only of the $3,557,000 Loss before income tax described above, but also of the $1,160,000 non-cash income tax benefit described below under "Income tax provision (benefit)". Net Loss for the year ended December 31, 2014 consists not only of $(1,137,000) for 2014.the $1,550,000 Loss before income tax described above, but also of the $413,000 non-cash income tax benefit described below under "Income tax provision (benefit)". The change in Net Loss before income taxes is primarily attributable to decreased revenue and gross margin, and increased operating expenses. Gross margin decreased in the year ended December 31, 2015 as compared with the year ended December 31, 2014, by $327,000, or 3.0%. The increased operating expenses, the most significant of which were an increase in wages and related expenses of $779,000, an increase in materials and supplies for R&D of $758,000, and increased clinical trial expenses of $161,000, , partially offset by decreased commission expenses of $141,000, accounted for most of the change in Net Loss.Loss before income taxes.
Revenues:
| Selected Product Categories: | | For the years ended | | | | | | | | | | | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | | | | | | | | | | | | | | | | | Lateral Flow HIV Tests and Components | | $ | 9,957,882 | | | $ | 9,518,242 | | | $ | 439,640 | | | | 4.62 | % | DPP® Tests and Components | | | 11,265,876 | | | | 15,655,680 | | | | (4,389,804 | ) | | | -28.04 | % | | Other | | | 662,930 | | | | 775,847 | | | | (112,917 | ) | | | -14.55 | % | | Net Product Sales | | | 21,886,688 | | | | 25,949,769 | | | | (4,063,081 | ) | | | -15.66 | % | | License and royalty revenue | | | 52,753 | | | | 23,257 | | | | 29,496 | | | | 126.83 | % | | R&D, milestone and grant revenue | | | 2,316,044 | | | | 1,672,258 | | | | 643,786 | | | | 38.50 | % | | Total Revenues | | $ | 24,255,485 | | | $ | 27,645,284 | | | $ | (3,389,799 | ) | | | -12.26 | % | | | | | | | | | | | | | | | | | | |
Revenues for our lateral flow HIV tests and related components during the year ended December 31, 2015 increased by approximately $440,000 from the same period in 2014. This was primarily attributable to increased sales to Africa, of approximately $1,576,000 and increased sales to Europe of $973,000, partially offset by decreased sales to the U.S. of $1,604,000, and decreased sales to Mexico of $458,000. Revenues for our DPP® products during the year ended December 31, 2015 decreased by approximately $4,390,000 over the same period in 2014, primarily for decreases in sales in Mexico of $3,455,000 and decreases in sales in Brazil to FIOCRUZ of $2,112,000, partially offset by increased sales in the U.S. of $1,011,000. The increase in R&D, and in milestone and grant revenue, was primarily due to revenues from certain development projects that were awarded during the period. R&D revenues include funds, recognized on an "as expenses are incurred" basis or on a milestone basis, from various grants, see footnote 14 of our financial statements. Gross Margin:
| Gross Margin related to Net Product Sales: | | For the years ended | | | | | | | | | | | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | | | | | | | | | | | | | | | | | Gross Margin per Statement of Operations | | $ | 10,486,827 | | | $ | 10,814,023 | | | $ | (327,196 | ) | | | -3.03 | % | | Less: R&D, milestone, grant, license and royalties | | | 2,368,797 | | | | 1,695,515 | | | | 673,282 | | | | 39.71 | % | | Gross Margin from Net Product Sales | | $ | 8,118,030 | | | $ | 9,118,508 | | | $ | (1,000,478 | ) | | | -10.97 | % | | Product Gross Margin % | | | 37.09 | % | | | 35.14 | % | | | | | | | | | | | | | | | | | | | | | | | | | | |
The overall gross margin dollar decrease of $327,000 included a $1,000,000 decrease in gross margin from net product sales and a $673,000 increase in non-product revenues. The decrease in net product sales gross margin of $1,000,000 is primarily attributable to the change in product sales compared to 2014. The net product sales gross margin decrease is comprised of two components, one is the decrease in product sales of $4,063,000, which at the 35.1% margin contributed $1,428,000 to the decrease, and the other is the increased change in margin percentage of 2.0% which contributed the balance of $427,000. The 2.0% increase in the percentage, from 35.1% in 2014 to 37.1% in 2015, was primarily due to increased efficiencies from our operations excellence program.
Research and Development: This category includes costs incurred for clinical and regulatory affairs and for product research and development.
| Selected expense lines: | | For the years ended | | | | | | | | | | | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | | Clinical and Regulatory Affairs: | | | | | | | | | | | | | | Wages and related costs | | $ | 490,802 | | | $ | 448,852 | | | $ | 41,950 | | | | 9.35 | % | | Consulting | | | 44,135 | | | | 29,741 | | | | 14,394 | | | | 48.40 | % | | Stock-based compensation | | | - | | | | 3,231 | | | | (3,231 | ) | | | -100.00 | % | | Clinical trials | | | 366,469 | | | | 205,589 | | | | 160,880 | | | | 78.25 | % | | Other | | | 80,960 | | | | 93,780 | | | | (12,820 | ) | | | -13.67 | % | | Total Regulatory | | | 982,366 | | | | 781,193 | | | | 201,173 | | | | 25.75 | % | | | | | | | | | | | | | | | | | | | R&D Other than Regulatory: | | | | | | | | | | | | | | | | | | Wages and related costs | | | 2,896,226 | | | | 2,456,514 | | | | 439,712 | | | | 17.90 | % | | Consulting | | | 128,117 | | | | 123,965 | | | | 4,152 | | | | 3.35 | % | | Stock-based compensation | | | 62,713 | | | | 41,306 | | | | 21,407 | | | | 51.83 | % | | Materials and supplies | | | 1,779,046 | | | | 1,021,516 | | | | 757,530 | | | | 74.16 | % | | Other | | | 529,371 | | | | 408,043 | | | | 121,328 | | | | 29.73 | % | | Total other than Regulatory | | | 5,395,473 | | | | 4,051,344 | | | | 1,344,129 | | | | 33.18 | % | | | | | | | | | | | | | | | | | | | | Total Research and Development | | $ | 6,377,839 | | | $ | 4,832,537 | | | $ | 1,545,302 | | | | 31.98 | % | | | | | | | | | | | | | | | | | | |
Expenses for Clinical and Regulatory Affairs for the year ended December 31, 2015 increased by $201,000 as compared to the same period in 2014. This was primarily due to an increase of $161,000 in clinical trial expenses and increased wages and related costs of $42,000.
R&D expenses other than Clinical & Regulatory Affairs increased by $1,344,000 in the year ended December 31, 2015, as compared with the same period in 2014. The increases were primarily related to an increase in wages and related costs, and in material and supplies, to support our sponsored research and internal development programs. Selling, General and Administrative Expense:
| Selected expense lines: | | For the years ended | | | | | | | | | | | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | | | | | | | | | | | | | | | | | Wages and related costs | | $ | 3,060,407 | | | $ | 2,763,370 | | | $ | 297,037 | | | | 10.75 | % | | Consulting | | | 311,488 | | | | 456,658 | | | | (145,170 | ) | | | -31.79 | % | | Commissions | | | 1,291,453 | | | | 1,432,567 | | | | (141,114 | ) | | | -9.85 | % | | Stock-based compensation | | | 271,674 | | | | 399,334 | | | | (127,660 | ) | | | -31.97 | % | | Marketing materials | | | 223,445 | | | | 345,426 | | | | (121,981 | ) | | | -35.31 | % | | Investor relations/investment bankers | | | 204,198 | | | | 168,410 | | | | 35,788 | | | | 21.25 | % | | Legal, accounting and compliance | | | 879,887 | | | | 662,522 | | | | 217,365 | | | | 32.81 | % | | Travel, entertainment and trade shows | | | 448,599 | | | | 320,280 | | | | 128,319 | | | | 40.06 | % | | Bad debt allowance (recovery) | | | - | | | | 28,000 | | | | (28,000 | ) | | | -100.00 | % | | Other | | | 971,884 | | | | 955,172 | | | | 16,712 | | | | 1.75 | % | | Total S, G &A | | $ | 7,663,035 | | | $ | 7,531,739 | | | $ | 131,296 | | | | 1.74 | % | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses for the year ended December 31, 2015, increased by $131,000 as compared with the same period in 2014, a 1.7% increase. This increase resulted primarily from increases in wages and related costs and travel expenses, which for 2015 included the continued development of a sales and marketing team over 2014, professional fees and in investor relations/investment bankers, which were partially offset by decreases in consulting, commissions (due to decreased sales to Brazil), stock-based compensation, and marketing materials.
Other Income and Expense:
| | | For the years ended | | | | | | | | | For the years ended | | | | | | | | | | | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | | | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other (expense) | | $ | (4,814 | ) | | $ | (5,707 | ) | | $ | 893 | | | | 15.65 | % | | $ | (4,814 | ) | | $ | (5,707 | ) | | $ | 893 | | | | 15.65 | % | | Interest income | | | 2,412 | | | | 5,839 | | | | (3,427 | ) | | | -58.69 | % | | $ | 2,412 | | | $ | 5,839 | | | $ | (3,427 | ) | | | -58.69 | % | | Interest expense | | | (836 | ) | | | - | | | | (836 | ) | | | 100.00 | % | | | (836 | ) | | | - | | | | (836 | ) | | | 100.00 | % | | | | | - | | | | - | | | | - | | | | | | | | Total Other Income and (Expense) | | $ | (3,238 | ) | | $ | 132 | | | $ | (3,370 | ) | | | -2,553.03 | % | | $ | (3,238 | ) | | $ | 132 | | | $ | (3,370 | ) | | | -2,553.03 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other (expense) for the year ended December 31, 2015 decreased approximately $3,400, primarily due to decreased interest income, compared to the same period in 2014. Income tax provision (benefit): For the year ended December 31, 2015 the Company recognized a $(1,160,000) non-cash income tax benefit and increased its deferred tax assets by $(1,160,000). For the year ended December 31, 2014, the Company recognized a $(413,000) non-cash income tax benefit and increased its deferred tax assets by $(403,000)$(413,000). The effective tax rate used to recognize the benefit in 2015 was 32.0% compared to a 26.6% rate used in 2014 to record the amount charged. In both years non-deductible expenses for tax purposes accounted for most of the difference from the standard 34% U.S. tax rate. The Company maintains a full valuation allowance on research and development tax creditscredits.
MATERIAL CHANGES IN FINANCIAL CONDITION
| Selected Changes in Financial Condition | | As of | | | | | | | | | As of | | | | | | | | | | | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | | | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | | | Cash and cash equivalents | | $ | 5,376,931 | | | $ | 4,614,538 | | | $ | 762,393 | | | | 16.52 | % | | $ | 10,554,464 | | | $ | 5,376,931 | | | $ | 5,177,533 | | | | 96.29 | % | | Accounts receivable, net of allowance for doubtful accounts of $52,000 and $52,000 at December 31, 2015 and 2014, respectively | | | 2,422,971 | | | | 8,338,889 | | | | (5,915,918 | ) | | | -70.94 | % | | | Accounts receivable, net of allowance for doubtful accounts of $52,000 and $52,000 at December 31, 2016 and 2015, respectively | | | | 3,383,729 | | | | 2,422,971 | | | | 960,758 | | | | 39.65 | % | | Prepaid expenses and other current assets | | | 1,256,879 | | | | 1,066,473 | | | | 190,406 | | | | 17.85 | % | | | 840,145 | | | | 1,256,879 | | | | (416,734 | ) | | | -33.16 | % | | Fixed assets, net of accumulated depreciation | | | 2,374,308 | | | | 2,797,929 | | | | (423,621 | ) | | | -15.14 | % | | | 1,709,321 | | | | 2,374,308 | | | | (664,987 | ) | | | -28.01 | % | | License agreements, net of current portion | | | 100,000 | | | | 256,875 | | | | (156,875 | ) | | | -61.07 | % | | | Deferred tax asset, net of valuation allowance | | | 5,467,143 | | | | 4,031,302 | | | | 1,435,841 | | | | 35.62 | % | | | - | | | | 5,467,143 | | | | (5,467,143 | ) | | | -100.00 | % | | Deposits and other assets | | | | 720,489 | | | | 209,169 | | | | 511,320 | | | | 244.45 | % | | Accounts payable and accrued liabilities | | | 2,801,432 | | | | 4,946,030 | | | | (2,144,598 | ) | | | -43.36 | % | | | 3,013,133 | | | | 2,801,432 | | | | 211,701 | | | | 7.56 | % | | | | | | | | | | | | | | | | | | | | | Deferred revenue | | | | 392,517 | | | | 353,406 | | | | 39,111 | | | | 11.07 | % | | Additional paid-in capital | | | | 60,721,783 | | | | 47,890,642 | | | | 12,831,141 | | | | 26.79 | % |
Cash increased by $762,000$5,178,000 from December 31,2014,31, 2015, primarily due to net cash provided by financing activities for the year of 2016. The Company raised, net of expenses, approximately $12,500,000 which was partially offset by cash used in operating activities for the year of 2015.2016. In addition there were decreasesincreases in accounts receivable, net of allowance, of $5,916,000, fixed assets of $424,000 after depreciation, license agreements of $157,000,$961,000, deposits, accounts payable and accrued liabilities of $2,145,000,$212,000 and increasesother assets of $511,000, deferred revenue of $39,000, and decreases in fixed assets of $665,000 after depreciation, prepaid expenses of $417,000, non-current deferred tax asset of $1,436,000$5,467,000, and an increase in prepaid expensesadditional paid-in-capital of $190,000. $12,831,000.
The decrease in accounts receivable wasincrease from December 31, 2015, is primarily attributabledue to the lower amount of credit sales at the end ofan increase in December 2016 versus December 2015 versus December 2014.sales of approximately $1.50 million, partially offset by lower sales in prior months. The decrease in fixed assets is primarily due to depreciation. The increase in prepaid and other current assets is due todepreciation for the current portion of additional licenses.year ending December 2016 versus December 2015. Deferred tax asset decrease is related to recording of a full valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
| | | For the years ended | | | | | | | | | For the years ended | | | | | | | | | | | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | | | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash provided by (used in) operating activities | | $ | 1,792,978 | | | $ | (3,820,299 | ) | | $ | 5,613,277 | | | | 146.93 | % | | $ | (6,704,734 | ) | | $ | 1,792,978 | | | $ | (8,497,712 | ) | | | -473.94 | % | | Net cash used in investing activities | | | (1,030,585 | ) | | | (1,452,601 | ) | | | 422,016 | | | | 29.05 | % | | | (668,706 | ) | | | (1,030,585 | ) | | | 361,879 | | | | 35.11 | % | | Net cash provided by financing activities | | | - | | | | 237,163 | | | | (237,163 | ) | | | -100.00 | % | | | 12,550,973 | | | | - | | | | 12,550,973 | | | | 100.00 | % | | INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | $ | 762,393 | | | $ | (5,035,737 | ) | | $ | 5,798,130 | | | | 115.14 | % | | $ | 5,177,533 | | | $ | 762,393 | | | $ | 4,415,140 | | | | 579.12 | % | | | | | | | | | | | | | | | | | | | |
The Company's cash increased as of December 31, 20152016 by $762,000$5,178,000 from December 31, 2014,2015, primarily due to net cash provided by operating activities and partially offset by cash used in investing activities for year of 2015.2016.
The cash provided byused in operations in 20152016 was $1,793,000,$6,705,000, primarily due to a decreasethe net loss net of non-cash items of $6,103,000 and with an increase in accounts receivable of $5,916,000, a decrease in inventories of $60,000 and an increase in deferred revenue of $13,000, partially offset by an$961,000, increase in prepaid and other current assets of $191,000,$136,000, and a decrease in accounts payable and other accrued liabilities of $2,145,000$212,000, partially offset by a decrease in inventories of $243,000, decrease in deposits and a net loss netother assets of non-cash items$1,000, and an increase in deferred revenue of $1,861,000.$39,000. Net loss net of non-cash items includes net loss of $2,397,000, $1,171,000$13,347,000 partially offset by $5,801,000 in income tax benefit, partially offset by $1,373,000provision, $1,139,000 in depreciation and amortization, and $334,000$304,000 in share-based compensation. The use of cash from investing activities is primarily the purchase of fixed assets and acquisition of licenses.
Fixed Asset Commitments
As of December 31, 2015,2016, the Company had paid deposits on various pieces of equipment aggregating $30,918$31,900 which is reflected in Other AssetsDeposits on manufacturing equipment on the balance sheet. TheAs of December 31, 2016, the Company is furtherwas not committed to additional equipment-purchase obligation of $31,000 as various milestones are achieved by the various vendors.obligations.
RECENT DEVELOPMENTS AND CHEMBIO'S PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
During 2015,2016, Chembio took three important strategic steps which management believes will position the Company for growth. First, the Company continued to expand ourits product portfolio, leveraging its patented DPP®DPP® technology to new markets. Whileplatform. Second, the Company continuesexpanded its global sales and marketing infrastructure, strengthening its U.S. sales leadership and building its first international sales team. Third, the Company expanded its operational capabilities, acquiring a Malaysia-based operation.
Expanding Chembio's Product Portfolio
For nearly fifteen years, Chembio was primarily focused on POC HIV testing and succeeded in commercializing multiple FDA-approved and CLIA-Waived POC HIV tests. In 2014, the Company made the strategic decision to strengthenexpand its product portfolio and focus on three initiatives: 1) strengthening its core sexually transmitted disease business, we are also2) building robust product pipelines in two new areas:a highly-differentiated fever and tropical disease business, and 3) establishing technology collaborations. Ascollaborations to further leverage its patented DPP® technology platform.
1. Strengthening the Company's core sexually transmitted disease products continuebusiness began with the decision to make important contributions to our business, we believe our new fever disease portfolioterminate its U.S. distribution agreements for HIV 1/2 Stat-Pak® Assay in 2014 and technology collaborations will paveSURE CHECK HIV® 1/2 Assay in 2016, which provided the way for future growth. Sexually Transmitted Diseases
In the U.S. during 2015, Chembio recorded an increase in lateral flow salesCompany with worldwide commercial control of approximately $440,000its legacy POC HIV tests, which are FDA-approved, CLIA-waived, WHO Prequalified and an increase ofCE marked. The Company leveraged its DPP® sales of more than $1.0 million (primarily astechnology platform to develop a result of sales toDPP® HIV 1/2 Assay, which became FDA-Approved and CLIA-Waived in October 2014 for use with blood and oral fluid, the CDC for DPP® Malaria-Ebola and DPP® Ebola Assays), as compared to the respective U.S. sales in 2014. We are optimistic about the increasing demand for our productssecond such entrant in the U.S. We will also have full controlmarket. Finally, following the introduction of SURE CHECK® HIV Assay, effective June 1, 2016, to add to our U.S. commercial efforts.
In Latin America, we experienced a decline in sales in 2015 due primarily to a $3.5 million decrease in sales ofits DPP® HIV-Syphilis Assay in Mexico, related to excess inventory from 2014, and a $2.1 million decrease in sales of DPP® HIV Assay in Brazil. We expect that our recently announced DPP® Zika Assay program will expand our sales in this region, and given our initial indications for 2016, we believe Latin America, will continue to bethe Company has prioritized the development of a strong market for Chembio.
In Europe, Chembio's partners, AAZ and BioSure, launched sales of Chembio's SURE CHECK® HIV 1/2 self-testing kits in the U.K. and France, respectively. The launch of these private-label, self-testing kits in Europe was a great success, and we received kit orders that totaled approximately $1.0 million in 2015. HIV continues to pose a significant threat in Europe, and European health agencies aggressively promote the importance of testing for HIV. We believe our SURE CHECK® HIV 1/2 product is particularly well-suited for the emerging European self-testing segment, given its ability to provide simple, fast and reliable detection of antibodies to HIV 1 and HIV 2.
Another important advancement in our sexually transmitted disease business during 2015 is the progress made with our DPP® HIV-Syphilis Assay for the U.S. market to address the rise in HIV and Syphilis co-infection.
2. Building a highly-differentiated fever and tropical disease business began as a response to the 2014-2015 Ebola outbreak in West Africa, which led to the Company's decision to enter the fever and tropical disease market. ItToday, the Company is developing eight POC fever and tropical disease tests, specifically the following: DPP® Malaria Assay, DPP® Zika Assay, DPP® Dengue Fever Assay, DPP® Chikungunya Assay, DPP® Zika/Dengue/Chikungunya Assay, DPP® Fever Assay (Malaria, Zika, Dengue, Chikungunya, Ebola, Lassa, Marburg), DPP® Ebola Assay, and DPP® Ebola-Malaria Assay. The Company's fever and tropical disease products are being developed through collaborations and/or funding's from the Bill & Melinda Gates Foundation, the Paul G. Allen Family Foundation, the Centers for Disease Control and Prevention (CDC), the U.S. Department of Health and Human Services (HHS), the Office of the Assistant Secretary for Preparedness and Response, and the Biomedical Advanced Research and Development Authority (BARDA).
3. Establishing technology collaborations to further leverage the Company's patented DPP® technology platform has allowed the Company to advance the development of novel POC tests in areas with unmet medical needs, such as traumatic brain injury (concussion), a specific form or cancer, and bovine tuberculosis in cattle. The collaborations and external funding can be attributed to the unique characteristics of the Company's DPP® technology platform as compared to traditional lateral flow technology, such as enhanced sensitivity and specificity, the ability to multiplex, and the ability to provide a semi-quantitative result when combined with Chembio's DPP® Micro Reader.
Expanding Chembio's Sales & Marketing Infrastructure
Prior to 2014, Chembio's HIV products were sold through a single, exclusive distribution partner in the U.S. market, the majority of the Company's international sales were limited to a few countries, and the Company had no internal commercialization infrastructure. Between 2014 and 2016, Chembio took important steps to gain control of its HIV products in the U.S. market, ending the longstanding relationship with its previous distribution partner and building its own U.S. sales and marketing team to sell its DPP® HIV, STAT-PAK® HIV, and SURE CHECK® HIV products in the U.S. market. In addition, the Company has partnered with professional distributors such as Fisher, McKesson/PSS, Henry Schein and Medline to establish a geographic coverage model in the U.S. market.
To lead this growing infrastructure, Chembio recently appointed two senior executives to direct the expansion of the Company's global commercial operations. Robert Passas, Ph.D., joined the Company in October 2016 as President, EMEA and APAC regions, and is responsible for commercial operations in Europe, the Middle East, Africa, and Asia. Prior to joining the Company, Dr. Passas held positions of increasing responsibility at Abbott, Quidel, The Binding Site, and Trinity Biotech. In his most recent position, he was responsible for worldwide marketing and international sales at Trinity Biotech. Sharon Klugewicz, who most recently served as Chembio's Chief Operating Officer, was promoted to President, Americas region in October 2016, with responsibility for commercial operations in the United States, Latin America, and Canada. Ms. Klugewicz is responsible for sales, marketing, customer support, clinical and regulatory affairs, and quality systems in the Americas, and will be tasked with leading the U.S. commercial team and expanding commercial operations throughout Latin America, the U.S. and Canada. Prior to joining the Company in 2012, she spent 20 years at Pall Corporation where she held positions of increasing responsibility, including Senior Vice President, Scientific and Laboratory Services. In addition, Chembio has recently hired three international sales executives to oversee commercial expansion in specific regions. Javier Gutman was named Regional Director, Latin America; Kenneth Burns was named Regional Director, Africa; and Mohan Anasalam was named Regional Director, Asia Pacific. Each of these sales executives brings considerable experience to Chembio, and each will focus on increasing product sales, strengthening and expanding the Company's distribution channels, and providing local support to customers and commercial partners in their respective areas of Latin America, Africa and Asia Pacific. Today, led by experienced executives with extensive experience in global diagnostic sales, Chembio is building a world-class commercialization organization with focus on the U.S., Europe, Africa, Asia Pacific and Latin America. Expanding Chembio's Operational Capabilities In November 2016, Chembio announced plans to acquire Malaysia-based RVR Diagnostics ("RVR"), a strategic decision to expand the Company's operational capabilities, increasing manufacturing capacity and establishing a physical presence in Southeast Asia.
Previously, in 2014, Chembio entered into two agreements with RVR, a privately-held company in Malaysia. The agreements were intended to build a Chembio presence in Asia and establish RVR as a licensee, distributor and contract manufacturer. Through these agreements, RVR acquired rights to license, manufacture and distribute certain Chembio products in Southeast Asia. Between 2014 and 2016, RVR achieved a number of important milestones under the agreements, including the following:
| • | completed a manufacturing facility capable of producing DPP® Assays and obtained ISO 13485 certification; |
| • | provided funding to accelerate the development of Chembio's DPP® Dengue Assay; |
| • | received regulatory approval to market and sell products in certain Southeast Asia countries; |
| • | obtained RVR Dengue tender award in Malaysia, which resulted in 2016 revenue in excess of US$1 million. |
In light of the considerable progress made by RVR, and to further support Chembio's global product and commercialization strategies, Chembio acquired RVR in January 2017. As a subsidiary of Chembio, RVR provides an important corporate prioritybase of operations, providing additional revenue, a strategically located and cost-effective manufacturing facility, and a path to regulatory access in Southeast Asia that management believes will be an important growth driver. Overview of Chembio's Business Sexually Transmitted Disease: Chembio's sexually transmitted disease product sales decreased during 2016, primarily due to the Company's loss of ongoing DPP® HIV and DPP® Syphilis product sales as a result of a previously disclosed tender offer in Brazil having been awarded to a competitor at an extremely low price point as well as lower sales of HIV products in Africa. Despite the loss of the HIV and Syphilis tender in Brazil, Chembio continues to supply other novel DPP® products to Bio-Manguinhos/Fiocruz, and the Ministry of Health in Brazil. These products include DPP® HIV Confirmatory Assay and DPP® Leishmania Assay. Given Chembio's product portfolio in sexually transmitted disease, coupled with the expansion of our global commercial resources, the Company believes the Unites States, Latin America, Africa, and Asia Pacific will be important current and future markets for its sexually transmitted disease products. In the U.S., sales of the Company's POC HIV Assays showed positive trends. During 2016, U.S. sales of the HIV 1/2 STAT-PAK® Assay increased 34.7% as compared to 2015. We are also seeing very encouraging U.S. sales of the SURE CHECK® HIV 1/2 Assay. During the fourth quarter of 2016, U.S. sales of the SURE CHECK® HIV 1/2 Assay increased by approximately $516,000 or 230.5% as compared to the third quarter of 2016. Our U.S. HIV sales are bolstered by a receipt of a two-year HIV tender for the state of Florida, which the Company was awarded during the fourth quarter of 2016 and of a two-year HIV tender for another state, which the Company was awarded subsequent to the end of 2016. This growth provides evidence that we are effectively rebuilding the U.S. HIV STAT-PAK® and SURE CHECK® HIV business, after we took back the U.S. distribution rights to these products in June 2014 and June 2016 respectively. Looking toward 2017 sales of Chembio's sexually transmitted disease products, the Company recently received CE Mark for the DPP® HIV-Syphilis Assay, clearing the product to be marketed and sold within the member states of the European Union and the Caribbean region, except for Puerto Rico and the U.S. Virgin Islands. The Company continued to advance the clinical trial for its DPP® HIV-Syphilis Assay for the U.S. market during 2016, which is expected to be completed as planned, in the first quarter of 2017. As we've stated previously, we are striving to be the first-to-market in the U.S. with an HIV-Syphilis combination test. While Fever Disease: During 2016, Chembio significantly advanced the Company is already successfully marketing a DPP® HIV-Syphilis combo assay in Latin America, regulatory standards require additional enhancements for the U.S. market and completiondevelopment of a clinical trial. We will initiate this clinical trial in the first quarter of 2016. We anticipate that the trial will be completed in six to nine months and cost between $1.0 and $1.5 million. We are also in the process of submitting the technical dossier for CE Mark which will allow us to commercialize theits fever disease products, including: DPP® HIV-Syphilis Assay in Europe. Fever Disease
In response to the Ebola outbreak in West Africa, our fever disease business was initiated in Q4 2014, and expanded rapidly through 2015. Today we are collaborating with several of the world's leading health organizations with the goal of containing the spread of fever diseases around the globe through accurate and early diagnosis. In the last year, our fever disease product portfolio has grown to include the following highly differentiated products:
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| The DPP® Fever Panel Assay which is funded by the Paul G. Allen Ebola Program, is a point-of-care (POC) test for the simultaneous detection of Malaria, Dengue Fever, Chikungunya, Zika, Ebola, Lassa and Marburg;
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| The DPP® Malaria-Ebola and DPP® Ebola Assays which were developed through a research collaboration agreement with the Centers for Disease Control and Prevention (CDC), are currently being field tested in West Africa;
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· | The DPP® Dengue Fever Assays which have been funded by an undisclosed entity, are currently being field tested in Asia;
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| The DPP® Malaria Assay, which has been funded by The Bill and Melinda Gates Foundation, is 10-times more sensitive than the current world-leading POC malaria test; and,
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· | The recently-announced DPP® Zika Assay, which has received initial funding from the Paul G. Allen Family Foundation.
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· | The recently-announced plans to collaborate with Bio-Manguinhos/Fiocruz to undertake development of POC Zika tests for the Ministry of Health in Brazil. |
As we are excited by each of these programs, the DPP® Fever Panel Assay and the DPP® Zika Assay in particular highlight the power, versatility and broad applicability of our DPP® technology, and we believe both of these products to be truly groundbreaking. Our DPP® Fever PanelDengue Assay, will be the first POC diagnostic test capable of testing for multiple fever diseases simultaneously. We believe this product will significantly improve the diagnosis and care for people in regions where there is regular exposure to fever diseases and their causes. The sensitivity, specificity and multiplexing capability of the DPP® technology uniquely suits it for the fever disease market. Many of these diseases are present in the same regions with nearly identical symptoms. These factors make it difficult to make an accurate diagnosis and often delay appropriate treatment. Today, many available POC diagnostics are limited by their lack of the sensitivity and specificity required to identify asymptomatic patients. Further, there are currently no POC diagnostics capable of testing for multiple diseases simultaneously. For these reasons, Chembio is prioritizing development of our DPP® Fever Panel Assay.
Our new DPP® Zika Assay development also showcases the exceptional versatility and broad applicability of our DPP® technology. In February, the World Health Organization (WHO) declared the Zika virus a 'public health emergency of international concern,' and today the virus has spread to more than twenty countries. In response to the outbreak, we began exploring the feasibility of a POC DPP® Zika Assay, DPP® Chikungunya Assay, DPP® Zika/Dengue/Chikungunya Assay, DPP® Fever Panel Assay, DPP® Ebola Assay, and DPP® Malaria/Ebola Assay. We are fortunate thatAlso during 2016, the Company pursued and received numerous grants which fund much of the fever disease development initiatives, including funding from the Paul G. Allen Family Foundation, recognizing the urgencyBill & Melinda Gates Foundation, and the U.S. Government (HHS/ASPR/BARDA and CDC). In addition, during the first quarter of 2016, the Company also entered into a collaboration with Bio-Manguinhos/Fiocruz for the development of POC Zika diagnostic tests for Brazil.
Of particular note is the Company's work to develop a much-needed alternative to currently available molecular tests for the Zika virus that have limited utility as they are accurate only during a narrow window of time, approximately one week, between initial Zika virus exposure and the patient's development of detectable antibodies to the virus, a process known as seroconversion. Following seroconversion, antibody tests are recommended to accurately identify Zika virus infections. The DPP® Zika IgM/IgG Assay is an antibody test that will provide timely results, during the patient consultation. The DPP® Zika System, which includes the DPP® Zika IgM/IgG Assay and DPP® Micro Reader, detects both IgM and IgG antibodies, uses a 10uL fingerstick blood sample, and provides semi-quantitative results in 15 minutes. Though Chembio's Zika program was only initiated in February 2016, by September 2016, the Company was awarded a contract by the CDC for the purchase of POC surveillance diagnostic assays for Zika, Dengue and Chikungunya. Under the terms of the matter, moved swiftlycontract, during the first quarter of 2017 Chembio will supply its DPP® Zika IgM/IgG Assay, DPP® Zika/Chikungunya/Dengue IgM/IgG Combination Assay, and DPP® Micro Reader to providethe CDC, for a surveillance testing pilot program in India, Peru, Guatemala and Haiti.
Concurrent with this important development work, Chembio withis moving expeditiously to complete regulatory filings that will ultimately determine the availability of our products to the regions in need. In July 2016, a grantCE Mark was obtained that allowed the Company to support the initiation of the project. We are pleased to report that in a few short weeks, we have developed a prototype assay and are in discussions with a number of agencies, all of which are interested in supporting the rapid development of this critical product. While this program is in the early stages, we hope that success withbegin commercializing the DPP® Zika IgM/IgG System, which includes an assay utilizing the patented DPP® technology, as well as a digital reader, the DPP® Micro Reader, in 17 European countries, including the United Kingdom, Germany, and France, as well as a majority of the Caribbean nations. During the fourth quarter of 2016, Chembio initiated sales of the DPP® Zika system via its exclusive Caribbean distribution partner, Isla Labs.
In November 2016, the Company received approval for commercial use of its DPP® Zika IgM/IgG Assay likeby the Brazilian health regulatory agency, Agência Nacional de Vigilância Sanitária (ANVISA), and during the first quarter 2017, the Company was notified of the successful evaluation of the DPP® Zika system by INCQS, Brazil's National Institute for Quality Control in Health. Brazil has been hardest hit by the Zika virus, where it is estimated that 1.5 million people have been infected with Zika virus and approximately 2,000 babies have been born with microcephaly, a devastating birth defect linked to the Zika virus. For this reason the Company is particularly pleased to receive approval from Brazil's health regulatory agency, and we look forward to initiating sales of our DPP® EbolaZika IgM/IgG Assay, will further demonstrate Chembio's ability to rapidly and effectively deploy ourfollowing ANVISA approval of the DPP® technology to addressMicro Reader. There is no assurance of the world's most serious health threatstiming of this approval or that it will occur at all.
Beyond these approvals, the Company made multiple other regulatory filings during 2016 for the DPP® Zika IgM/IgG Assay, including an Emergency Use Authorization (EUA) submission with POC treatmentthe U.S. Food and Drug Administration (FDA), an Emergency Use Assessment and Listing (EUAL) with the World Health Organization (WHO), and a submission with Cofepris in a practical and efficient manner. TheMexico. Supplementing these filings, the Company anticipates receiving significant orders for DPP® Zika Assaysis engaged fully with these agencies in 2016.the hope of facilitating the earliest possible approvals.
Technology CollaborationsCollaborations: Chembio'sChembio currently has the following ongoing technology collaborations represent another important business area for the Company. In the fourth quarter of 2014, we signed collaborative agreements for both the development of thecollaborations: DPP® Cancer Assay for a specific form of cancer, and also for the DPP® Flu Immunostatus Assay. In 2015, we added two more important new collaborations for the development of the DPP® Traumatic Brain Injury Assay, and the DPP® Micro Reader.
BovidTB Assay. We are pleased with theto report that we made progress made with each of these programs in 2015. 2016. The DPP® Cancer Assay, which is funded by an undisclosed entity, targets a specific form of cancer. During 2015, weWe have successfully completed the feasibility phase of the program and moved into the product development stage, which is also funded by anthe undisclosed entity. The results to-date with this program have been highly encouraging. With success, we are hopeful that we'll be able to find additional applications for our DPP® technology in the broader oncology market. We also made important advances with our DPP® Traumatic Brain Injury Assay program during the year.2016. This project, which is funded by Perseus Science Group, LLC, is in the feasibility phase. We are currently working with several hospitals to finalizerecently finalized institutional review board (IRB) agreements with several hospitals and develop the plan forbegan conducting initial studies of the DPP® Traumatic Brain Injury Assay using patient samples. We are awaiting response on the most recent multi-year grant proposal for completion of the DPP® Flu Immunostatus Assay, a multiplex assay to monitor 9 different seasonal and pandemic flu viruses.
An addtional new technology collaboration was signed in the fourth quarter of 2015 with opTricon, a leading developer of mobile analysis devices for rapid diagnostic tests. Through our exclusive agreement, Chembio will launch the DPP® Micro Reader to complement a number of our proprietary assays for sexually transmitted diseases, certain fever diseases, and a specific form of cancer. We are particularly excited about offering this technology in combination with our assays. Using a state-of-the-art camera system, the DPP® Micro Reader is designed to provide definitive diagnostic results for low analyte concentrations, which may otherwise result in faint or ambiguous test results. In addition, the DPP® Micro Reader will provide customers with various options to capture, record, transmit and store test results. Because the DPP® Micro Reader is simple, fast, palm-sized, battery-operated and cost-effective compared to traditional POC assay readers, it is unique in its attractiveness and utility, and we believe it will be well-received by the market. We are working to develop a suite ofThe DPP® Assay-Reader kits, and we look forward to commercialization of these innovative and versatile diagnostic systems.
2015 was an exciting and transformative time for Chembio. During the year, we significantly expanded the horizonBovidTB Assay is a rapid POC test for the utilitydetection of our DPP® technology. This has led usbovine tuberculosis (TB). In September 2016, the Company was awarded a $600,000 grant from the United States Department of Agriculture (USDA) to new and exciting applications beyond HIV to fever disease, brain injury, cancer and more. And in a short amount of time, we gained the attention of, and funding from, world-leading health organizations such as The Bill and Melinda Gates Foundation, the Paul G. Allen Family Foundation, the Centers for Disease Control and Prevention and Perseus Science who have aligned with Chembio and selecteddevelop the DPP® BovidTB Assay. Under the two-year grant, Chembio will use its patented DPP®technology in an effort to address somedevelop a simple, rapid, accurate and cost-effective test for bovine TB in cattle. The DPP® BovidTB Assay will be designed to provide results within 20 minutes, thereby significantly improving on the time-consuming, tedious and inadequate diagnostic methods currently in use.
Conclusion During 2016, the Company made significant advances to expand its product portfolio, its sales and marketing infrastructure, and its operational capabilities. The product strategy includes three strategic initiatives: strengthening the Company's core sexually transmitted disease, building a highly-differentiated fever and tropical disease, and establishing technology collaborations to further leverage the Company's patented DPP® technology platform. Though the Company only initiated its fever disease program in late 2014, sales of two fever disease products were initiated in 2015 (DPP® Ebola, DPP® Malaria-Ebola) and expanded in late 2016 (DPP® Zika Assay). The efficiency with which these products were developed, and regulatory clearances were obtained, speaks to the versatility of the world's most serious diagnostic obstacles. Company's patented DPP® technology platform, the Company's scientific expertise, and its commitment to fever disease. It further highlights Chembio's ability to succeed with a range of new product opportunities. The eventscommercial strategy shifted from a product supply model, in which the Company relied on others to market and opportunitiessell its products, to taking critical steps to build a global sales and marketing organization. Prior to 2014, the Company had no sales infrastructure. Today, Chembio has experienced sales leadership guiding the Company's global commercialization plan, with focus on the U.S., Europe, the Middle East, Africa, Asia, and Latin America. The new sales and marketing leadership joined Chembio starting in Q4 of 2015 have considerably changed Chembio by significantly2016 with 2017 goals of increasing product sales, strengthening and expanding the potential applicationCompany's distribution channels, and marketsproviding local support to customers and commercial partners around the world. With several fever and HIV products receiving regulatory approvals in late 2016, there is great optimism for 2017 sales. And the operational strategy was significantly expanded beyond Medford, NY to incorporate Malaysia-based RVR Diagnostics. The acquisition, of RVR provides Chembio with an important base of operations, providing additional revenue, a strategically located and cost-effective manufacturing facility, and a path to regulatory access in Southeast Asia that management believes will be an important growth driver.
2016 was an important year for Chembio, but it was merely a starting point for this new global organization. Contractual Obligations and Commercial Commitments The following sets forth our DPP® technology. For many diseases, infections or conditions that requires exceptional sensitivity, specificity and/orapproximate aggregate obligations as of December 31, 2016 for future payments under contracts and other contingent commitments, for the ability to multiplex, we believe our DPP® technology may becomeyear 2017 and beyond: | | | Payments due by period | | | Contractual Obligations | | Total | | | Less than one year | | | 1 - 3 years | | | 3-5 years | | | More than 5 years | | Operating leases1 | | $ | 370,085 | | | $ | 306,018 | | | $ | 64,067 | | | $ | - | | | $ | - | | Employment contracts2 | | | 907,000 | | | | 516,200 | | | | 390,800 | | | | - | | | | - | | Purchase obligations3 | | | 694,725 | | | | 694,725 | | | | - | | | | - | | | | - | | Minimum commitments under contracts4 | | | 532,627 | | | | 333,627 | | | | 92,000 | | | | 77,000 | | | | 30,000 | | | | | | | | | | | | | | | | | | | | | | | | | Total contractual obligations | | $ | 2,504,437 | | | $ | 1,850,570 | | | $ | 546,867 | | | $ | 77,000 | | | $ | 30,000 | | | | | | | | | | | | | | | | | | | | | | | |
1 | Represents payments required under our operating leases. See Note 13 of the Notes to the consolidated financial statements included herein. | | | 2 | Represents salary payments payable under the terms of employment agreements executed by us with certain executives. See Note 13 of the Notes to the consolidated financial statements included herein. | | | | 3 | Represents payments required by non-cancellable purchase orders related to inventory, capital expenditures and other goods or services. | | | | 4 | Represents payments required pursuant to certain licensing agreements executed by the Company. These agreements are cancellable within a specified number of days after communication by the Company of its intent to terminate. | | |
Off-Balance Sheet Arrangements. We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the development platformSecurities Exchange Act of choice. Looking ahead to 2016, we will continue to advance each of our development programs, and look for new opportunities and applications.1934, as amended.
Critical Accounting Policies and Estimates
The preparation of the 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 amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.
We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management's judgments and estimates. These significant accounting policies relate to revenue recognition, research and development costs, valuation of inventory, valuation of long-lived assets and income taxes. These policies, and the related procedures, are described in detail below.
Revenue Recognition –
We recognize revenue for product sales in accordance with ASC 605,605. Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.
For certain contracts, we recognize revenue from R&D, milestone and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned.
For certain collaborative research projects, we recognize revenue by defining milestones at the inception of the agreement and applying the milestone method of revenue recognition for relevant contracts.
Stock-Based Compensation –
We recognize the fair value of equity-based awards as compensation expense in our statement of operations. The fair value of our stock option awards was estimated using a Black-Scholes option valuation model. This valuation model's computations incorporate highly subjective assumptions, such as the expected stock price volatility and the estimated life of each award. The fair value of the options, after considering the effect of expected forfeitures, is then amortized, generally on a straight-line basis, over the related vesting period of the option. The fair value of our restricted shares is based on the market value of the shares at the date of grant and is recognized on a straight-line basis over the related vesting period of the award.
Research & Development Costs –
Research and development activities consist primarily of new product development, continuing engineering for existing products, and regulatory and clinical trial costs. Costs related to research and development efforts on existing or potential products are expensed as incurred.
Valuation of Inventories –
Inventories are stated at the lower of cost or market, using the first-in, first-out method (FIFO) to determine cost. Our policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a reserve for any inventory considered slow moving or obsolete. For example, each additional 1% of obsolete inventory would reduce such inventory by approximately $36,000.$35,000.
Allowance for doubtful accounts –
Our policy is to review our accounts receivable on a periodic basis, no less than monthly. On a quarterly basis an analysis is made of the adequacy of our allowance for doubtful accounts and adjustments are made accordingly. The current allowance is approximately 2% of accounts receivable. For example each additional 1% of accounts receivable that becomes uncollectible would reduce such balance of accounts receivable by approximately $24,000.$32,000.
Income Taxes –
Income taxes are accounted for under ASC 740 authoritative guidance ("Guidance") which requires the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
The Guidance also requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including a company's current and past performance, the market environment in which the company operates, length of carryback and carryforward periods and existing contracts that will result in future profits. The Company believes that it will not be able to utilize its net operating loss carryforwards and has recordedmaintains a deferred tax asset.full valuation allowance. The Company still maintains a full valuation allowance on research and development tax credits.
The Guidance also prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the consolidated financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America ("U.S. GAAP"), with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any viable alternative would not produce a materially different result. See our audited financial statements and notes thereto which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States of America.
Recent Accounting Pronouncements – 26
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2018. The Company has conducted a preliminary analysis of its sales contracts which are based on the shipment of goods to the customer, and currently this new accounting standard will not have a material impact on its consolidated financial statement for our sales contracts. The Company has conducted a preliminary analysis of its current R&D contracts which are currently based on "as expenses are incurred" basis, and currently this new accounting standard will not have a material impact on its consolidated financial statement for our current R&D contracts.
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under the new guidance. This guidance will be effective for Chembio beginning in 2018, with early adoption permitted. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, which amends the ASC and creates Topic 842, Leases. Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous US GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. We are in the initial stages of evaluating the effect of the standard on our financial statements and will continue to evaluate. While not yet in a position to assess the full impact of the application of the new standard, the Company expects that the impact of recording the lease liabilities and the corresponding right-to-use assets will have a significant impact on its total assets and liabilities with a minimal impact on equity.
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will change certain aspects of accounting for share-based payments to employees. ASU 2016-09 is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2016. The Company is currently in the initial stages of evaluating the impact of the provisions of ASU 2016-09. We are still evaluating this standard and currently the Company does not believe this new accounting standard will have a material impact on its consolidated financial statement.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. We do not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, we have no material derivative risk to report under this Item.
As of December 31, 2016, we did not have any foreign currency exchange contracts or purchase currency options to hedge local currency cash flows. Sales for the year ended December 31, 2016 are in U.S. Dollars (USD).
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Consolidated Financial Statements and schedules that constitute Item 8 are attached at the end of this Annual Report on Form 10-K. An index to these Financial Statements and schedules is also included on page F-1 of this Annual Report on Form 10-K.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not Applicable.
| ITEM 9A. | CONTROLS AND PROCEDURES |
(a) Disclosure Controls and Procedures. Under the supervision and with the participation of our senior management, consisting of our chief executive officer and our chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this report (the "Evaluation Date"). Based on that evaluation, the Company's management, including our chief executive officer and chief financial officer, concluded that as of the Evaluation Date our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our Exchange Act reports is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Our internal control over financial reporting is a process, under the supervision of our chief executive officer and chief financial officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. These internal controls over financial reporting processes include policies and procedures that: | a. | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| b. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| c. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management's Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), we conducted an evaluation of the effectiveness of our internal control over financial reporting our management usedas of December 31, 2016, based on the framework and criteria set forthin the 2013 Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework 2013.. Based on thismanagement's evaluation our Chief Executive Officer and our Chief Financial Officerthose criteria, the CEO and CFO concluded that ourits system of internal control over financial reporting was effective as of December 31, 2015.2016. This annual report does not include an attestation report of ourThe Company's independent registered public accounting firm regardinghas issued an attestation report on the Company's internal control over financial reporting.
Dated: March 7, 2017 /s/ John J. Sperzel John J. Sperzel III Chief Executive Officer
Dated: March 7, 2017 /s/ Richard J. Larkin Richard J. Larkin Chief Financial Officer
Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders of Chembio Diagnostics, Inc. Medford, New York We have audited the internal control over financial reporting of Chembio Diagnostics, Inc. and subsidiaries (the "Company") as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's reportReport on Internal Control over Financial Reporting ("Management's Report"). Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to attestation bythe risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our registered public accounting firm pursuant toopinion, Chembio Diagnostics, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based COSO criteria. We also have audited, in accordance with the rulesstandards of the SecuritiesPublic Company Accounting Oversight Board (United States), the consolidated balance sheets of Chembio Diagnostics, Inc. and Exchange Commission that permitsubsidiary as of December 31, 2016 and 2015, and the Company to provide only management'srelated consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016 and our report in this annual report.dated March 7, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP Melville, New York March 7, 2017
(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the Company's last fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
Not applicable.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive OfficersThe information required in response to this Item 10 is incorporated herein by reference to our Definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
John J. Sperzel (52), President, Chief Executive Officer and Director. Mr. Sperzel was appointed Chief Executive Officer and President of Chembio Diagnostics, Inc. and a member of our Board in March 2014. Prior to joining the Company, Mr. Sperzel, was the President and CEO of International Technidyne Corporation (ITC) from September 2011 to December 2013. Mr. Sperzel served as President at Axis-Shield from September 2004 to September 2011. He also has held senior leadership positions at Bayer Diagnostics (Siemens Dx), Instrumentation Laboratory, and Boehringer Mannheim Diagnostics (Roche Dx). Mr. Sperzel graduated from Plymouth State College in New Hampshire, with a B.S. in Business Administration/Management. He currently serves on the board of directors of Diadexus, Inc., a company which the common stock is registered under the Securities Exchange Act of 1934, and as an advisor to the board of the Diagnostic Marketing Association, and was the president of the board of that Association in 2007. Mr. Sperzel's knowledge of, and experience in, the Company's specific business and its industry sector, together with the continuing current knowledge that he is accumulating about the Company in his position as CEO of the Company, made him an excellent candidate for serving on the Board.
Richard J. Larkin (59), Chief Financial Officer. Mr. Larkin was appointed as Chief Financial Officer of Chembio Diagnostics, Inc. upon consummation of the merger in 2004. Mr. Larkin oversees our financial activities and information systems. Mr. Larkin has been the Chief Financial Officer of Chembio Diagnostic Systems Inc. since September 2003. Prior to joining Chembio Diagnostic Systems Inc., Mr. Larkin served as CFO at Visual Technology Group ("VTG") from May 2000 to September 2003, and also led VTG's consultancy program that provided hands-on expertise in all aspects of financial service, including the initial assessment of client financial reporting requirements within an Enterprise Resource Planning (Manufacturing) environment through training and implementation. Prior to joining VTG, he served as CFO at Protex International Corporation from May 1987 to January 2000. Mr. Larkin holds a BBA in Accounting from Dowling College and is a member of the American Institute of Certified Public Accountants.
Javan Esfandiari (49), Chief Science and Technology Officer. Mr. Esfandiari joined Chembio Diagnostic Systems, Inc, in 2000. Mr. Esfandiari co-founded, and became a co-owner of Sinovus Biotech AB where he served as Director of Research and Development concerning lateral flow technology until Chembio Diagnostic Systems Inc. acquired Sinovus Biotech AB in 2000. From 1993 to 1997, Mr. Esfandiari was Director of Research and Development with On-Site Biotech/National Veterinary Institute, Uppsala, Sweden, which was working in collaboration with Sinovus Biotech AB on development of veterinary lateral flow technology. Mr. Esfandiari received his B.Sc. in Clinical Chemistry and his M. Sc. in Molecular Biology from Lund University, Sweden. He has published articles in various veterinary journals and has co-authored articles on tuberculosis serology with Dr. Lyashchenko.
Sharon Klugewicz (48), Chief Operating Officer. Prior to joining the Company in September 2012, Ms. Klugewicz, served as Senior Vice President, Scientific & Laboratory Services at Pall Corporation (NYSE:PLL), a world leader in filtration, separation and purification technologies. Prior to that, Ms. Klugewicz held a number of positions at Pall Corporation over her 20-year tenure there, including in the Pall Life Sciences Division, in Marketing Product Management, and Field Technical Services, which included a position as Senior Vice President, Global Quality Operations. Ms. Klugewicz holds an M.S. in Biochemistry from Adelphi University and a B.S. in Neurobiology from Stony Brook University.
Dr. Gary Meller M.D. (65), Director. Dr. Meller was elected to our Board of Directors on March 15, 2005, and currently serves on the Board's Audit, and Nominating And Corporate Governance Committees, including as Chairman of the Audit Committee. Dr. Meller has been the president of CommSense Inc., a healthcare business development company, since 2001. CommSense Inc. works with clients in Europe, Asia, North America, and the Middle East on medical information technology, medical records, pharmaceutical product development and financing, health services operations and strategy, and new product and new market development. From 1999 until 2001 Dr. Meller was the executive vice president, North America, of NextEd Ltd., a leading internet educational services company in the Asia Pacific region. Dr. Meller also was a limited partner and a member of the Advisory Board of Crestview Capital Master LLC, which was our largest shareholder. Dr. Meller is a graduate of the University of New Mexico School of Medicine and has an MBA from the Harvard Business School. Dr. Meller's experience in the medical field both domestic and foreign (especially his experience with CommSense Inc.) as well as his financing experience make him an excellent candidate for serving on the board.
Kathy Davis (59), Director and Chair of the Board. Ms. Davis was elected to the Board in May 2007, and was elected in March 2014 to serve as Chair of the Board. She currently serves on the Board's Audit, Compensation, and Nominating And Corporate Governance Committees, including as Chair of the Nominating And Corporate Governance Committee. In 2014, Ms. Davis also served on the Board's CEO Search Committee, and in 2013 she served on the Board's Special Committee for handling certain strategic opportunities. Since January 2007, Ms. Davis has been the owner of Davis Design Group LLC, a company that provides analytical and visual tools for public policy design. As of January 1 2016 Ms. Davis serves as Systems Advisor to the Mayor of Indianapolis. Previously, from February 2005 to December 2006, she served as the Chief Executive Officer of Global Access Point, a start-up company with products for data transport, data processing, and data storage network and hub facilities. From October 2003 to January 2005, Ms. Davis was Lieutenant Governor of the State of Indiana, and from January 2000 to October 2003 was Controller of the City of Indianapolis. From 1989 to 2003, Ms. Davis held leadership positions with agencies and programs in the State of Indiana including State Budget Director, Secretary of Family & Social Services Administration, and Deputy Commissioner of Transportation. From 1982 to 1989 Ms. Davis held increasingly senior positions with Cummins Engine, where she managed purchasing, manufacturing, engineering, and assembly of certain engine product lines. Ms. Davis also led the startup of and initial investments by a $50 million Indiana state technology fund, serves on the not-for-profit boards of Noble of Indiana, Lumina Foundation for Education, Indianapolis Foundation, Central Indiana Community Foundation, Western Governor's University Indiana, and Indiana University School of Public and Environmental Affairs. She holds a Bachelor of Science in Mechanical Engineering from the Massachusetts Institute of Technology and an MBA from Harvard Business School. Ms. Davis has varied experience in business, political and financial areas that made her an excellent candidate for serving on the Board.
Dr. Barbara DeBuono M.D., M.P.H., (60), Director. Dr. DeBuono, who was elected to the Company's Board of Directors in June 2011, currently serves on the Board's Compensation and Nominating And Corporate Governance Committees, including as Chair of the Compensation Committee. Ms. DeBuono is a renowned expert in public health innovation, health policy, education and research. She currently serves as a consultant to both public and private entities involved in healthcare, healthcare policy and healthcare products. From May 2011 to January 31,2012., Dr. DeBuono served as President and CEO of ORBIS International, which is dedicated to saving sight and eliminating avoidable blindness worldwide with headquarters in New York City. Previously, from 2009-2011, Dr. DeBuono was Chief Medical Officer, Partner and Global Director of Health and Social Marketing at Porter Novelli, and from 2000-2008 she was Executive Director, Public Health and Government at Pfizer Inc. Dr. DeBuono has served as Commissioner of Health for the state of New York and as Director of Health in Rhode Island and she was honored by the CDC Foundation in 2005 as one of five Public Health Heroes nationwide. She serves as adjunct professor at The George Washington University School of Public Health, and is a co-founder of The MAIA Foundation, a charity dedicated to women's health in sub-Saharan Africa. A Fellow of the American College of Physicians, Dr. DeBuono received her B.A. from the University of Rochester, her M.D. from the University of Rochester School of Medicine, and a Masters in Public Health (M.P.H.) from Harvard University School of Public Health. Dr. DeBuono's experience in and knowledge of, both domestic and international, public health services, public health innovations, and the medical field make her an excellent candidate for serving on the board.
Dr. Peter Kissinger, Ph.D. (71), Director. Dr. Kissinger, who was elected to the Company's Board of Directors in June 2011, currently serves on the Company's Audit, and Compensation Committees. Dr. Kissinger is a scientist, entrepreneur and academic, with a multi-faceted career in biotechnology and biomedical technologies. He is the founder of Bioanalytical Systems, Inc. (NASDAQ: BASI), which he led from 1974-2007, and is Professor of Chemistry at Purdue University, West Lafayette, Indiana. Dr. Kissinger's academic research has involved the study of modern liquid chromatography techniques, and in vivo methodology for drug metabolism and the neurosciences. Dr. Kissinger has published more than 240 scientific papers and is a Fellow of the American Association of Pharmaceutical Scientists and the American Association for the Advancement of Science. In 2005, he became the Chairman of Prosolia, which markets mass spectrometry innovations for life science, industrial and homeland security applications. In 2007, he and Candice Kissinger founded Phlebotics, Inc., a medical device company focused on diagnostic information for intensive care medicine. He is a columnist for the trade publication Drug Discovery News. Dr. Kissinger received a B.S. in Chemistry from Union College, Schenectady, N.Y. and a Ph.D. in Analytical Chemistry from the University of North Carolina in Chapel Hill. Dr. Kissinger has knowledge of and experience in biotechnology and biomedical technologies as well as publicly-traded companies, all of which make him an excellent candidate for serving on the board.
Section 16(a) Beneficial Ownership Reporting Compliances
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's directors, executive officers and beneficial owners of more than 10% of the Company's common stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. The Company believes that during the year ended December 31, 2015, each person who was an officer, director and beneficial owner of more than 10% of the Company's common stock complied with all Section 16(a) filing requirements.
Code of Ethics
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, controller, and persons performing similar functions. A copy of the Company's code of ethics is available on the Company's website at www.chembio.com.
Identification of Audit Committee; Audit Committee Financial Expert
The Company's board of directors has established an audit committee. Katherine L. Davis, Dr. Pete Kissinger and Dr. Gary Meller each serves on the audit committee, with Dr. Meller serving as chairman. The Company's board of directors has determined that, based on his past experience, Dr. Meller is an audit committee financial expert and is independent.
| ITEM 11. | EXECUTIVE COMPENSATION |
The following table summarizes all compensation recordedinformation required in response to this Item 11 is incorporated herein by reference to our Definitive Proxy Statement to be filed with the Company in eachSEC pursuant to Regulation 14A of the last two completed fiscal years for our principal executive officer and our two most highly compensated executive officers otherExchange Act not later than our principal executive officer whose annual compensation exceeded $100,000. | Name / | | | Salary1 | | Bonus2 | | Stock | | Option Awards3 | | All Other Compensation5 | | Total | | | Principal | | | ($) | | ($) | | Awards | | ($) | | ($) | | ($) | | | Position | Year | | | | | | ($) | | | | | | | | John J. Sperzel4 | 2015 | | $ | 375,000 | | $ | 70,000 | | $ | - | | $ | - | | $ | - | | $ | 445,000 | | | CEO | 2014 | | $ | 298,558 | | $ | - | | $ | - | | $ | 669,625 | | $ | - | | $ | 968,183 | | | | | | | | | | | | | | | | | | | | | | | | | Javan Esfandiari | 2015 | | $ | 304,130 | | $ | 60,000 | | $ | - | | $ | - | | $ | 10,520 | | $ | 374,650 | | | CSTO | 2014 | | $ | 315,000 | | $ | 90,000 | | $ | - | | $ | - | | $ | 9,825 | | $ | 414,825 | | | | | | | | | | | | | | | | | | | | | | | | | Sharon Klugewicz | 2015 | | $ | 259,000 | | $ | 40,000 | | $ | - | | $ | - | | $ | 5,180 | | $ | 304,180 | | | COO | 2014 | | $ | 259,616 | | $ | 75,000 | | $ | - | | $ | - | | $ | 4,182 | | $ | 338,798 | | | | | | | | | | | | | | | | | | | | | | | |
1 Salary is total base salary. John Sperzel's 2014 salary reflects his base pay from commencement of his employment on March 13, 2014 until120 days after the end of 2014.
2 Bonuses earned in 2015 and 2014 were partially based on reaching certain objectives, which included revenue dollar levels and operating profit levels. Additional amounts earned were discretionary.
3 The estimated fair value of any option or common stock granted was determined in accordance with ASC 718, "Stock-Based Payment".
4 Mr. Sperzel also serves as a director on the Company's board of directors. Mr. Sperzel does not receive any compensation for this director role.
5 Other compensation includes an employer match to 401(K) contributions and car allowances where applicable.
Employment Agreements
Mr. Sperzel. Effective March 13, 2014 (the "Effective Date"), the Company entered into an Employment Agreement with John J. Sperzel III to serve as the Company's CEO for a term of three years. Mr. Sperzel's annual base salary is $375,000, with the possibility of a discretionary, performance-based annual cash bonus of up to 40% of his base salary. The Employment Agreement also provides for a grant of 250,000 options to purchase shares of the Company's common stock, 43,132 of which will be incentive stock options under the Company's 2008 Stock Incentive Plan (the "Plan"), and 206,868 of which will be non-qualified stock options. The options will become exercisable at the rate of 50,000 shares per year for each of the first through the fifth anniversary of the Effective Date. In the event Mr. Sperzel's employment is terminated by reason of disability or for "cause," as defined in the Employment Agreement, all compensation, including his base salary, his right to receive a performance bonus, and the vesting of any unvested options, will cease as of his termination date, and Mr. Sperzel will receive no severance benefits. If the Company terminates Mr. Sperzel's employment without cause or Mr. Sperzel terminates his employment for a reasonable basis, as defined in the Employment Agreement (which includes involuntary termination within a six-month period upon a "Change of Control"), then the Company will pay Mr. Sperzel his base salary for a period of six months as severance and all of his unvested stock options immediately shall become vested. The Employment Agreement also contains provisions prohibiting Mr. Sperzel from (i) soliciting the Company's employees for a period of 24 months following his termination, (ii) soliciting the Company's customers, agents, or other sources of distribution of the Company's business for a period of twelve months following his termination, and (iii) except where termination is involuntary upon a "Change in Control," engaging or participating in any business that directly competes with the business activities of the Company in any market in which the Company is in business or plans to do business during the period in which he is entitled to severance, or for a period of six months if he is not entitled to severance payments under the Employment Agreement. The foregoing description of the Employment Agreement is qualified in its entirety by reference to the full text of the Employment Agreement.
Mr. Esfandiari. The Company entered into an employment agreement effective March 5, 2013 (the "Employment Agreement"), with Mr. Esfandiari to continue as the Company's Chief Scientific and Technology Officer for an additional term of three years through March 5, 2016. The Company and Mr. Esfandiari currently are discussing terms for renewal of his employment agreement. Mr. Esfandiaris's salary under the Employment Agreement is $304,500 for the year ended March 5, 2016, and he is eligible for a performance-based bonus of up to 50% of his base salary for each year, which is in the same proportions as described below under "Executive Bonus Plan". The Company also granted Mr. Esfandiari, pursuant to the Company's 2008 Stock Incentive Plan, incentive stock options to purchase 30,000 shares of the Company's common stock. The price per share of these options is equal to the fair market value of the Company's common stock as of the close of the market on March 5, 2013, which is the trading date on which the Agreement was entered into. Of these stock options, options to purchase 10,000 shares vest on each of the first three anniversaries of the effective date of the Employment Agreement. Mr. Esfandiari is eligible to participate in any profit sharing, stock option, retirement plan, medical and/or hospitalization plan, and/or other benefit plans except for disability and life insurance that the Company may from time to time place in effect for the Company's executives during the term of Mr. Esfandiari's employment agreement. If Mr. Esfandiari's employment agreement is terminated by the Company without cause, or if Mr. Esfandiari terminates his employment agreement for a reasonable basis, as defined in the Employment Agreement, including within 12 months of a change in control, the Company is required to pay as severance Mr. Esfandiari's salary for twelve months.
Ms. Klugewicz. The Company entered into an employment agreement dated May 22, 2015 with Ms. Klugewicz (the "Employment Agreement"), effective May 22, 2015 (the "Effective Date"). The Agreement provides that she will serve as the Company's COO for a term of two years. Ms. Klugewicz will receive an annual salary of $265,000, with the option of a discretionary, performance-based annual cash bonus of up to 37.5% of her base salary. In the event Ms. Klugewicz's employment is terminated by reason of disability or for "cause", as defined in the Employment Agreement, all compensation including her base salary, her right to receive a performance bonus, and the vesting of any unvested options, will cease as of her termination date, and Ms. Klugewicz will receive no severance benefits. If the Company terminates Ms. Klugewicz's employment without cause or Ms. Klugewicz terminates her employment for a reasonable basis, as defined in the Employment Agreement (which definition includes involuntary termination within a six-month period upon a "Change of Control"), then the Company will pay Ms. Klugewicz her base salary for a period of six months as severance, and all her unvested stock options shall immediately become vested. The Employment Agreement also contains provisions prohibiting Ms. Klugewicz from (i) soliciting the Company's employees for a period of twenty-four months following her termination, (ii) soliciting the Company's customers, agents, or other sources of distribution of the Company's business for a period of twelve months following her termination, and (iii) for a period of twelve months following termination of this Agreement, except where termination is involuntary upon a "Change in Control," engaging or participating in any business that directly competes with the business activities of the Company in any market in which the Company is in business or plans to do business. The foregoing description of the Employment Agreement is qualified in its entirety by reference to the full text of the Employment Agreement.
None of the other officers of the Company has an employment contract with the Company.
Executive Bonus Plan
The Company has established a bonus plan for its executives who do not have a contract. For the fiscal year ended December 31, 2015, there were four executives eligible forcovered by this bonus plan. Each executive can earn up to 25% of that executive's salary in the form of a cash bonus. The Compensation Committee determined that 80% of the executive's bonus will be quantitative factors, basedAnnual Report on the budget, and the other 20%, which will be based on other factors, will be discretionary. For 2015, the quantitative 80% portion of the plan called for attaining certain revenue goals, and for attaining certain operating profit goals.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2015
| | Option Awards | Stock Awards | | | Name | | Number of Securities Underlying Unexercised Options Exercisable (#) | | Number of Securities Underlying Unexercised Options Unexercisable
(#) | | Option Exercise Price
($) | | Option Expiration Date | Option Vesting Date | Number of Shares of Stock That Have Not Vested
(#) | Market Value of Shares of Stock That Have Not Vested
($) | | Foot-
note | | John J. Sperzel | | 25,000 | | | | 3.4163 | | 3/21/2021 | 3/13/2015 | | | | 5 | | | 25,000 | | | | 3.4163 | | 3/21/2021 | 3/13/2015 | | | | 2 | | | | | 18,132 | | 3.4163 | | 3/21/2021 | 3/13/2016 | | | | 5 | | | | | 31,868 | | 3.4163 | | 3/21/2021 | 3/13/2016 | | | | 2 | | | | | 50,000 | | 3.4163 | | 3/21/2021 | 3/13/2017 | | | | 2 | | | | | 50,000 | | 3.4163 | | 3/21/2021 | 3/13/2018 | | | | 2 | | | | | 50,000 | | 3.4163 | | 3/21/2021 | 3/13/2019 | | | | 2 | | | | | | | | | | | | | | | | Javan Esfandiari | | 10,000 | | | | 5.44 | | 3/5/2018 | 3/5/2014 | | | | 1 | | | 10,000 | | | | 5.44 | | 3/5/2018 | 3/5/2015 | | | | 1 | | | | | 10,000 | | 5.44 | | 3/5/2018 | 3/5/2016 | | | | 1 | | | 4,765 | | | | 5.56 | | 2/26/2018 | 2/26/2013 | | | | 4 | | | 7,969 | | | | 4.00 | | 2/16/2017 | 2/16/2012 | | | | 3 | | | 12,500 | | | | 2.16 | | 3/4/2015 | 3/5/2013 | | | | 1 | | | 12,500 | | | | 2.16 | | 3/4/2015 | 3/5/2012 | | | | 1 | | | 12,500 | | | | 2.16 | | 3/4/2015 | 3/5/2010 | | | | 1 | | | | | | | | | | | | | | | | Sharon Klugewicz | | 2,500 | | | | 4.50 | | 5/22/2018 | 5/22/2014 | | | | 1 | | | 2,500 | | | | 4.50 | | 5/22/2018 | 5/22/2015 | | | | 1 | | | 630 | | | | 5.56 | | 2/26/2018 | 2/26/2013 | | | | 4 | | | 12,000 | | | | 4.45 | | 9/4/2017 | 9/4/2013 | | | | 5 | | | 12,000 | | | | 4.45 | | 9/4/2017 | 9/4/2014 | | | | 5 | | | 12,000 | | | | 4.45 | | 9/4/2017 | 9/4/2015 | | | | 5 |
1 Options issued in connection with an employment contract and under the 2008 Stock Incentive Plan. | 2 Options issued in connection with the start of employment with the Company and not under a Plan. | 3 On February 16, 2012, the Company determined to grant on February 16, 2012, to certain employees of the Company, options to purchase an aggregate of 203,125 shares of the Company's common stock. The exercise price for these options was the last traded market price for the Company's common stock on February 16, 2012, which was $4.00 per share. The options become exercisable on the effective date of the grant. Each option granted will expire and terminate, if not exercised sooner, upon the earlier to occur of (a) 30 days after termination of the employee's employment with the Company or (b) the fifth anniversary of the effective date of grant.
| 4 On February 26, 2013, the Company determined to grant on February 26, 2013 to certain employees of the Company, options to purchase an aggregate of 16,360 shares of the Company's common stock. The exercise price for these options was the last traded market price for the Company's common stock on February 26, 2013, which was $5.56 per share. The options become exercisable on the effective date of the grant. Each option granted will expire and terminate, if not exercised sooner, upon the earlier to occur of (a) 30 days after termination of the employee's employment with the Company or (b) the fifth anniversary of the effective date of grant.
| 5 Options issued in connection with the start of employment with the Company and under the 2008 Stock Incentive Plan. |
Director Compensation
Effective January 1, 2015, all non-employee directors are paid $25,000 annual fee in semi-annual payments. In addition, once every five years, on the date of the annual meeting of shareholders at which a director is elected or re-elected (every 5 years), that director receives stock options to acquire, subject to vesting as described below, 46,875 shares of the Company's common stock, with an exercise price equal to the market price on the date of the grant. Stock options to acquire 9,375 shares become exercisable on the date of grant, and options to acquire an additional 9,375 shares become exercisable on the date of each of the four succeeding annual meetings of shareholders if and to the extent that the non-employee director is reelected as a director at each such annual meeting. [These options grants also are described in note 1 below.] Beginning in April 2014, the non-employee board chair was paid a monthly fee of $6,500, and as of January 1, 2015, this monthly fee was adjusted to $4,167. The audit committee chair is paid an annual fee of $2,500, paid semi-annually. In addition, the non-employee directors are paid $1,000 for each board of directors' meeting attended, and paid $500 for each telephonic board of directors meeting. The non-employee directors who are members of a committee of the board of directors are paid $500 for each committee meeting attended, or $750 for each committee meeting attended if that non-employee director is the committee chair. Directors also may be paid for serving on ad hoc committees of the Board.
DIRECTOR COMPENSATION
| Name | | Fees Earned or Paid in Cash
($) 1 | | | Option Awards
($) 2 | | | Total
($) | | | Katherine L. Davis | | $ | 82,500 | | | $ | - | | | $ | 82,500 | | | | | | | | | | | | | | | | | Barbara DeBuono | | | 30,250 | | | | - | | | | 30,250 | | | | | | | | | | | | | | | | | Pete Kissinger | | | 48,500 | | | | - | | | | 48,500 | | | | | | | | | | | | | | | | | Gary Meller | | | 58,500 | | | | - | | | | 58,500 | |
1 Fees earned or paid in cash represents a yearly fee and fees for meeting expenses: (a) Ms. Davis received a $25,000 annual fee as a member of the board of directors, a $4,167 monthly fee as chair aggregating $50,000 and $7,500 in meeting fees earned during 2015; (b) Dr. DeBuono received a $25,000 annual fee as a member of the board of directors and 5,250 in meeting fees; (c) Dr. Kissinger received a $25,000 annual fee as a member of the board of directors, $18,000 in fees as a member of a Special Committee and $5,500 in meeting fees; (d) Dr. Meller received a $25,000 annual fee as a member of the board of directors, $2,500 in fees as chairperson of the Audit Committee, $24,000 in fees as a member of a Special Committee and $7,000 in meeting fees.
2 Each non-employee member of the board of directors is granted, once every five years, options to purchase 46,875 shares of the company's common stock with an exercise price equal to the market price on the date of the grant as part of annual non-employee board compensation. One-fifth of these options are exercisable on the date of grant, one-fifth become exercisable on the first anniversary of the date of grant, and additional one-fifths become exercisable on the second through fourth anniversaries of the date of grant. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model.
Compensation Committee Interlocks and Insider Participation
No executive officer of the Company served as a member of the Board of any other public company during the year ended December 31, 2015, except for Mr. Sperzel who serves on the Board of Directors of Diadexus, Inc. No member of the Compensation Committee served as an executive officer of any other public company during the year ended December 31, 2015. No interlocking relationship exists between the members of our Compensation Committee and the Board or compensation committee of any other company. As of March 1, 2015, the members of the Compensation Committee were Dr. Barbara DeBuono (Chairman), Katherine Davis, and Dr. Peter Kissinger, each of whom is deemed by the Board of Directors to be independent.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth certain information regarding the beneficial ownership ofrequired in response to this Item 12 is incorporated herein by reference to our common stock by each person or entity known by usDefinitive Proxy Statement to be filed with the beneficial owner of more than 5%SEC pursuant to Regulation 14A of the outstanding shares of common stock, each of our directors, each of our "named executive officers", and all of our directors and executive officers as a group as of March 1, 2016. Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | | Percent of Class | John J. Sperzel (1) 3661 Horseblock Road Medford, NY 11763 | 100,000 | | 1.03% | | | | | | Esfandiari, Javan (2) 3661 Horseblock Road Medford, NY 11763 | 134,844 | | 1.39% | | | | | | Larkin, Richard (3) 3661 Horseblock Road Medford, NY 11763 | 66,514 | | .69% | | | | | | Ippolito, Tom (4) 3661 Horseblock Road Medford, NY 11763 | 38,916 | | .40% | | | | | | Steele, Michael (5) 3661 Horseblock Road Medford, NY 11763 | 36,785 | | .38% | | | | | | Lambotte, Paul (6) 3661 Horseblock Road Medford, NY 11763 | 51,630 | | .53% | | | | | | Klugewicz, Sharon (7) 3661 Horseblock Road Medford, NY 11763 | 12,000 | | .12% | | | | | | Meller, Gary (8) 3661 Horseblock Road Medford, NY 11763 | 123,750 | | 1.28% | | | | | | Davis, Katherine L. (9) 3661 Horseblock Road Medford, NY 11763 | 77,046 | | .80% | | | | | | DeBuono, Barbara (10) 3661 Horseblock Road Medford, NY 11763 | 46,188 | | .48% | | | | | | Kissinger, Peter (11) 3661 Horseblock Road Medford, NY 11763 | 50,629 | | .52% | | | | | | GROUP (12) | 738,302 | | 7.36% | | | | | | Wellington Management Company, LLP 280 Congress Street Boston, MA 02210 | 1,092,780 | | 11.35% | | | | | | Norman H. Pessin 366 Madison Ave, 14th Floor New York, NY 10017 | 884,087 | | 9.18% |
Beneficial ownership is determined in accordance with the Rule 13d-3(a) of the Securities Exchange Act of 1934, as amended, and generally includes voting or investment power with respect to securities. Except as subject to community property laws, where applicable, the person named above has sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by that person.
The beneficial ownership percent in the table is calculated with respect to the number of shares (9,628,248) of the Company's common stock outstanding as of March 1, 2016. With respect to each stockholder, the denominator is the sum of the number of common shares outstanding and the number, if any, of outstanding options included in that stockholder's beneficial ownership. Each stockholder's beneficial ownership is calculated as the number of shares of common stock owned plus the number of shares of common stock into which any preferred stock, warrants, options or other convertible securities owned by that stockholder can be converted within 60 days.
The term "named executive officer" refers to our principal executive officer, our two most highly compensated executive officers othernot later than the principal executive officer who were serving as executive officers at120 days after the end of 2015, and two additional individuals for whom disclosure would have been provided but for the fact that the individuals were not serving as executive officers of the Company at the end of 2015.
| (1) | Includes 100,000 shares issuable upon exercise of options exercisable within 60 days. Does not include 150,000 shares issuable upon exercise of options that are not exercisable within the next 60 days. |
| (2) | Includes 42,734 shares issuable upon exercise of options exercisable within 60 days. |
| (3) | Includes 23,217 shares issuable upon exercise of options exercisable within 60 days. |
| (4) | Includes 20,399 shares issuable upon exercise of options exercisable within 60 days. |
| (5) | Includes 36,785 shares issuable upon exercise of options exercisable within 60 days. |
| (6) | Includes 41,630 shares issuable upon exercise of options exercisable within 60 days. |
| (7) | Includes 12,000 shares issuable upon exercise of options exercisable within 60 days. Does not include 24,000 shares issuable upon exercise of options that are not exercisable within the next 60 days. |
| (8) | Includes 18,750 shares issuable upon exercise of options exercisable within 60 days. Does not include 28,125 shares issuable upon exercise of options that are not exercisable within the next 60 days. |
| (9) | Includes 18,750 shares issuable upon exercise of options exercisable within 60 days. Does not include 28,125 shares issuable upon exercise of options that are not exercisable within the next 60 days. |
| (10) | Includes 48,829 shares issuable upon exercise of options exercisable within 60 days. |
| (11) | Includes 45,188 shares issuable upon exercise of options exercisable within 60 days. |
| (12) | Includes footnotes (1)-(10). |
fiscal year covered by this Annual Report on Form 10-K.
Equity Compensation Plan Information
| | | Combined Equity Compensation Plans - Information as of December 31, 2015 | | | Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a) | | | | | (a) | | (b) | | (c) | | Equity compensation plans approved by security holders1 | | 649,478 | | | $ | 3.75 | | 753,455 | | | Equity compensation plans not approved by security holders | | - | | | | - | | - | | | Total | | 649,478 | | | $ | 3.75 | | 753,455 | |
1 The "Number of Securities to be Issued Upon Exercise of Outstanding Warrants and Rights" represents 312,860 from the 2008 Stock Incentive Plan, 129,750 under the 2014 Stock Incentive Plan and 206,868 issued outside of the Plans. The 2008 Stock Incentive Plan was increased by 125,000 units at the Annual Stockholder meeting held September 23, 2011. The "Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans" represents 83,205 from the 2008 Stock Incentive Plan and 670,250 under the 2014 Stock Incentive Plan.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The executive officersinformation required in response to this Item 13 is incorporated herein by reference to our Definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Company are as follows: John J. Sperzel, president, chief executive officer and memberExchange Act not later than 120 days after the end of the board of directors of the Company, Sharon Klugewicz, chief operating officer, Richard J. Larkin, chief financial officer of the Company, and Javan Esfandiari, chief science and technology officer of the Company. The Company entered into an employment agreement effective March 5, 2013, with Mr. Esfandiari to continue as the Company's Chief Scientific and Technology Officer for an additional term of three years through March 5, 2016. The Company also entered into an employment agreement effective May 22, 2015, with Ms. Klugewicz to serve as Chief Operating Officer for a term of two years. On March 13, 2014, Mr. Siebert, the former Chief Executive Officer, retired from the Company and entered into a six-month Consulting Agreement with the Company. On March 13, 2014, the Company entered into an employment agreement (the "Employment Agreement") with John J. Sperzel III to serve as its Chief Executive Officer beginningfiscal year covered by this Annual Report on March 13, 2014 for a term of three years. See Item 11 for additional information.
Director Independence
Our common stock trades on the NASDAQ. Accordingly, we are subject to the corporate the governance standards of NASDAQ, which require, among other things, that the majority of the board of directors be independent. We define an "independent" director in accordance with the NASDAQ Global Market's requirements for independent directors. Under this definition, we have determined that each of Katherine Davis, Barbara DeBuono, Peter Kissinger, and Gary Meller currently qualify as independent directors. We do not list this "independent" definition on our internet website.Form 10-K.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit Fees
For the years ended December 31, 2015 and 2014 the Company engaged BDO USA, LLP as its independent accounting firmThe information required in response to perform an audit of the Company's annual financial statements included on Form 10-K, including reviews of the quarterly financial statements and assistance with and review of documentsthis Item 14 is incorporated herein by reference to our Definitive Proxy Statement to be filed with the SEC for $161,000 and $128,000 respectively in fees.
Audit-Related Fees
For the years ended December 31, 2015 and 2014, the Company's independent accounting firm, BDO USA, LLP, did not provide the Company with any assurance and related services reasonably relatedpursuant to the performanceRegulation 14A of the audit or reviewExchange Act not later than 120 days after the end of the Company's financial statements that are not reported above under "Audit Fees."fiscal year covered by this Annual Report on Form 10-K.
Tax Fees
For the years ended December 31, 2015 and 2014, the Company's independent accounting firm, BDO USA, LLP, billed the Company $23,600 and $18,350, respectively for professional services for tax compliance, tax advice and tax planning.
All Other Fees
For the year ended December 31, 2015, the Company's independent accounting firm, BDO USA, LLP, billed the Company $69,600 for services in connection with other matters. For the year ended December 31, 2014, the Company's independent accounting firm, BDO USA, LLP, did not provide the Company with any services for other matters.
Audit Committee Pre-Approval Policies
The Audit Committee approves in advance all audit and non-audit services performed by the independent accounting firm. There are no other specific policies or procedures relating to the pre-approval of services performed by the independent accounting firm.
ITEM 15. EXHIBITS INDEX | Number | | Description | | 3.1 | | | | 3.2 | | AmendedBylaws and Restated Bylaws.Bylaw Amendments. (2) | | 3.3 | | | | 4.1 | | | | 4.2 | | | | 4.3 | | | | 4.4 | | | | 4.5 | | | | 4.6 | | Form of Warrant (to be filed by amendment) | 4.7 | | Rights Agreement, dated March 8, 2016 (14) | 4.8 | | Form of Warrant (to be filed by amendment) | | 10.1* | | | | 10.2* | | | | 10.3* | | | 10.310.4 | | HIV | 10.410.5 | | | 10.510.6 | | | 10.610.7 | | | | 10.8 | | Secured Revolving Demand Note, dated as of April 30, 2013, by and among the Registrant, Chembio Diagnostics Systems, Inc. and HSBC Bank, NA (11) | 10.9 | | Loan and Security Agreement, dated as of April 30, 2013, by and among the Registrant, Chembio Diagnostics Systems, Inc. and HSBC Bank, NA (11) | 10.10 | | | | 14.1 | | | | 21 | | List of Subsidiaries | | 23.1 | | Consent of BDO USA, LLP, Independent Registered Public Accountants. | | 31.1 | | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 31.2 | | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | 101.INS | | XBRL Instance Document | | 101.SCH | | XBRL Taxonomy Extension Schema Document | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | 101.DEF | | XBRL Taxonomy Definition Linkbase Document | | 101.LAB | | XBRL Taxonomy Label Linkbase Document | | 101.PRE | | XBRL Taxonomy Presentation Linkbase Document | | | | | | 1 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on July 29, 2010. | | 2 | | | | 3 | | Incorporated by reference to the Registrant's definitive proxy statement on Schedule 14A filed with the Commission on August 3, 2012. | | 4 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 8, 2014. | | 5 | | Incorporated by reference to the Registrant's definitive proxy statement on Schedule 14A filed with the Commission on April 29, 2014. | | 6 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 7, 2014. | | 7 | | Incorporated by reference to the Registrant's registration statement on Form 8-A filed with the Commission on March 11, 2010.April 7, 2016. | | 8 | | Incorporated by reference to the Registrant's AnnualCurrent Report on Form 10-K8-K filed with the Commission on March 7, 2013.14, 2016. | | 9 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on June 17, 2015. | | 10 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on October 5, 2006. | | 11 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 8, 2013. | 12 | | Incorporated by reference to the Registrant's Annual Report on Form 10-K filed with the Commission on March 5, 2015. | 1312 | | Incorporated by reference to the Registrant's Annual Report on Form 10-KSB filed with the Commission on March 30, 2006. | | 13 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on April 7, 2016. | | | | | | (*) | | An asterisk (*) beside an exhibit number indicates the exhibit contains a management contract, compensatory plan or arrangement which is required to be identified in this report. |
ITEM 16. Form 10-K Summary
None.
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | CHEMBIO DIAGNOSTICS, INC. | | | | | | Date: March 8, 20167, 2017 | By | /s/ John J. Sperzel | | | | | John J. Sperzel III | | | | | President, Chief Executive Officer and | | | | | Member of the Board | |
In accordance with the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | Signatures | | Title | | Date | | | | | | | | | | | | | | | | | | | /s/ John J. Sperzel | | Chief Executive Officer, President and | | March 8, 20167, 2017 | | John J. Sperzel III | | Member Of The Board | | | | | | (Principal Executive Officer) | | | | | | | | | | | | | | | | | | | | | /s/ Richard J. Larkin | | Chief Financial Officer (Principal Financial & | | March 8, 20167, 2017 | | Richard J. Larkin | | Accounting Officer) | | | | | | | | | | | | | | | | | | | | | /s/ Gary Meller | | Director | | March 8, 20167, 2017 | | Gary Meller | | | | | | | | | | | | | | | | | | | | | | | /s/ Katherine L. Davis | | Director & Chair of the Board | | March 8, 20167, 2017 | | Katherine L. Davis | | | | | | | | | | | | | | | | | | | | | | | /s/ Peter T. Kissinger | | Director | | March 8, 20167, 2017 | | Peter T. Kissinger | | | | | | | | | | | | | | | | | | | | | | | /s/ Barbara DeBuono | | Director | | March 8, 2016 | Barbara DeBuono�� | | | | |
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY Index to Consolidated Financial Statements —INDEX— | | Page(s) | | Report of Independent Registered Public Accounting Firm | F-1 | | | | | Consolidated Financial Statements: | | | | | Balance Sheets as of December 31, 20152016 and 20142015 | F-2 | | | | | Statements of Operations for each of the years ended December 31, 2016, 2015 and 2014 | F-3 | | | | | Statements of Changes in Stockholders' Equity for each of the years ended December 31, 2016, 2015 and 2014 | F-4 | | | | | Statements of Cash Flows for each of the years ended December 31, 2016, 2015 and 2014 | F-5 | | | | | Notes to Consolidated Financial Statements | F-6 - F-19 | | | | Schedule II - Valuation and Qualifying Accounts | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of Chembio Diagnostics, Inc. Medford, New York
We have audited the accompanying consolidated balance sheets of Chembio Diagnostics, Inc. and Subsidiary (the "Company") as of December 31, 20152016 and 20142015 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years then ended.in the period ended December 31, 2016. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chembio Diagnostics, Inc. and Subsidiary as of December 31, 20152016 and 2014,2015, and the consolidated results of their operations and their cash flows for each of the three years thenin the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
BDO USA, LLPAlso, in our opinion the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Chembio Diagnostics, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 7, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Melville, New York March 8, 20167, 2017
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF
- ASSETS -
| | | December 31, 2015 | | | December 31, 2014 | | | December 31, 2016 | | | December 31, 2015 | | | CURRENT ASSETS: | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 5,376,931 | | | $ | 4,614,538 | | | $ | 10,554,464 | | | $ | 5,376,931 | | | Accounts receivable, net of allowance for doubtful accounts of $52,000 and $52,000 at December 31, 2015 and 2014, respectively | | | 2,422,971 | | | | 8,338,889 | | | | Accounts receivable, net of allowance for doubtful accounts of $52,000 and $52,000 at December 31, 2016 and 2015, respectively | | | | 3,383,729 | | | | 2,422,971 | | | Inventories | | | 3,578,025 | | | | 3,638,299 | | | | 3,335,188 | | | | 3,578,025 | | | Prepaid expenses and other current assets | | | 1,256,879 | | | | 1,066,473 | | | | 840,145 | | | | 1,256,879 | | | TOTAL CURRENT ASSETS | | | 12,634,806 | | | | 17,658,199 | | | | 18,113,526 | | | | 12,634,806 | | | | | | | | | | | | | | | | | | | | FIXED ASSETS, net of accumulated depreciation | | | 2,374,308 | | | | 2,797,929 | | | | 1,709,321 | | | | 2,374,308 | | | | | | | | | | | | | | | | | | | | | OTHER ASSETS: | | | | | | | | | | | | | | | | | | Deferred tax asset, net of valuation allowance | | | 5,467,143 | | | | 4,031,302 | | | | - | | | | 5,467,143 | | | License agreements, net of current portion | | | 100,000 | | | | 256,875 | | | | - | | | | 100,000 | | | Deposits on manufacturing equipment | | | 30,918 | | | | 20,017 | | | | 31,900 | | | | 30,918 | | | Deposits and other assets | | | 209,169 | | | | 245,870 | | | | 720,489 | | | | 209,169 | | | | | | | | | | | | | | | | | | | | | TOTAL ASSETS | | $ | 20,816,344 | | | $ | 25,010,192 | | | $ | 20,575,236 | | | $ | 20,816,344 | | | | | | | | | | | | | | | | | | | | | - LIABILITIES AND STOCKHOLDERS' EQUITY - | - LIABILITIES AND STOCKHOLDERS' EQUITY - | | - LIABILITIES AND STOCKHOLDERS' EQUITY - | | | CURRENT LIABILITIES: | | | | | | | | | | | | | | | | | | Accounts payable and accrued liabilities | | $ | 2,801,432 | | | $ | 4,946,030 | | | $ | 3,013,133 | | | $ | 2,801,432 | | | Deferred revenue | | | 353,406 | | | | 340,000 | | | | 392,517 | | | | 353,406 | | | TOTAL CURRENT LIABILITIES | | | 3,154,838 | | | | 5,286,030 | | | | 3,405,650 | | | | 3,154,838 | | | | | | | | | | | | | | | | | | | | | TOTAL LIABILITIES | | | 3,154,838 | | | | 5,286,030 | | | | 3,405,650 | | | | 3,154,838 | | | | | | | | | | | | | | | | | | | | | COMMITMENTS AND CONTINGENCIES (Note 13) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | STOCKHOLDERS' EQUITY: | | | | | | | | | | | | | | | | | | Preferred stock – 10,000,000 shares authorized, none outstanding | | | - | | | | - | | | | - | | | | - | | | Common stock - $.01 par value; 100,000,000 shares authorized, 9,628,248 and 9,611,139 shares issued and outstanding for 2015 and 2014, respectively | | | 96,282 | | | | 96,112 | | | | Common stock - $.01 par value; 100,000,000 shares authorized, 12,026,847 and 9,628,248 shares issued and outstanding for 2016 and 2015, respectively | | | | 120,268 | | | | 96,282 | | | Additional paid-in capital | | | 47,890,642 | | | | 47,556,426 | | | | 60,721,783 | | | | 47,890,642 | | | Accumulated deficit | | | (30,325,418 | ) | | | (27,928,376 | ) | | | (43,672,465 | ) | | | (30,325,418 | ) | | TOTAL STOCKHOLDERS' EQUITY | | | 17,661,506 | | | | 19,724,162 | | | | 17,169,586 | | | | 17,661,506 | | | | | | | | | | | | | | | | | | | | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 20,816,344 | | | $ | $ 25,010,192 | | | $ | 20,575,236 | | | $ | $ 20,816,344 | |
See accompanying notes to condensed consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
| | | For the years ended | | | For the years ended | | | | | December 31, 2015 | | | December 31, 2014 | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2014 | | | REVENUES: | | | | | | | | | | | | | | | | | Net product sales | | $ | 21,886,688 | | | $ | 25,949,769 | | | $ | 13,680,107 | | | $ | 21,886,688 | | | $ | 25,949,769 | | | License and royalty revenue | | | 52,753 | | | | 23,257 | | | | 449,685 | | | | 52,753 | | | | 23,257 | | | R&D, milestone and grant revenue | | | 2,316,044 | | | | 1,672,258 | | | | 3,739,049 | | | | 2,316,044 | | | | 1,672,258 | | | TOTAL REVENUES | | | 24,255,485 | | | | 27,645,284 | | | | 17,868,841 | | | | 24,255,485 | | | | 27,645,284 | | | | | | | | | | | | | | | | | | | | | | | | | Cost of product sales | | | 13,768,658 | | | | 16,831,261 | | | | 9,417,505 | | | | 13,768,658 | | | | 16,831,261 | | | | | | | | | | | | | | | | | | | | | | | | | GROSS MARGIN | | | 10,486,827 | | | | 10,814,023 | | | | 8,451,336 | | | | 10,486,827 | | | | 10,814,023 | | | | | | | | | | | | | | | | | | | | | | | | | OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | | | Research and development expenses | | | 6,377,839 | | | | 4,832,537 | | | | 8,427,554 | | | | 6,377,839 | | | | 4,832,537 | | | Selling, general and administrative expenses | | | 7,663,035 | | | | 7,531,739 | | | | 7,595,559 | | | | 7,663,035 | | | | 7,531,739 | | | | | | 14,040,874 | | | | 12,364,276 | | | | 16,023,113 | | | | 14,040,874 | | | | 12,364,276 | | | LOSS FROM OPERATIONS | | | (3,554,047 | ) | | | (1,550,253 | ) | | | (7,571,777 | ) | | | (3,554,047 | ) | | | (1,550,253 | ) | | | | | | | | | | | | | | | | | | | | | | | | OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | | | | Other expense | | | (4,814 | ) | | | (5,707 | ) | | | - | | | | (4,814 | ) | | | (5,707 | ) | | Interest income | | | 2,412 | | | | 5,839 | | | | 25,548 | | | | 2,412 | | | | 5,839 | | | Interest expense | | | (836 | ) | | | - | | | | - | | | | (836 | ) | | | - | | | | | | (3,238 | ) | | | 132 | | | | 25,548 | | | | (3,238 | ) | | | 132 | | | | | | | | | | | | | | | | | | | | | | | | | LOSS BEFORE INCOME TAXES (BENEFIT) | | | (3,557,285 | ) | | | (1,550,121 | ) | | | (7,546,229 | ) | | | (3,557,285 | ) | | | (1,550,121 | ) | | | | | | | | | | | | | | | | | | | | | | | | Income tax provision (benefit) | | | (1,160,243 | ) | | | (412,918 | ) | | | 5,800,818 | | | | (1,160,243 | ) | | | (412,918 | ) | | | | | | | | | | | | | | | | | | | | | | | | NET LOSS | | $ | (2,397,042 | ) | | $ | (1,137,203 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) | | $ | (1,137,203 | ) | | | | | | | | | | | | | | | | | | | | | | | | Basic loss per share | | $ | (0.25 | ) | | $ | (0.12 | ) | | $ | $ (1.26 | ) | | $ | (0.25 | ) | | $ | (0.12 | ) | | | | | | | | | | | | | | | | | | | | | | | | Diluted loss per share | | $ | (0.25 | ) | | $ | (0.12 | ) | | $ | $ (1.26 | ) | | $ | (0.25 | ) | | $ | (0.12 | ) | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of shares outstanding, basic | | | 9,626,028 | | | | 9,530,320 | | | | 10,622,331 | | | | 9,626,028 | | | | 9,530,320 | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of shares outstanding, diluted | | | 9,626,028 | | | | 9,530,320 | | | | 10,622,331 | | | | 9,626,028 | | | | 9,530,320 | |
See accompanying notes to condensed consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
| | | Common Stock | | | Additional Paid in Capital | | | Accumulated Deficit | | | Total | | | Common Stock | | | Additional Paid- in Capital | | | Accumulated Deficit | | | Total | | | | | Shares | | | Amount | | | Amount | | | Amount | | | Amount | | | Shares | | | Amount | | | Amount | | | Amount | | | Amount | | | Balance at December 31, 2013 | | | 9,324,783 | | | $ | 93,248 | | | $ | 46,875,027 | | | $ | (26,791,173 | ) | | $ | 20,177,102 | | | | 9,324,783 | | | $ | 93,248 | | | $ | 46,875,027 | | | $ | (26,791,173 | ) | | $ | 20,177,102 | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock: | | | | | | | | | | | | | | | | | | | | | | New Stock from Offering | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercised | | | 286,356 | | | | 2,864 | | | | 234,299 | | | | - | | | | 237,163 | | | | 286,356 | | | | 2,864 | | | | 234,299 | | | | - | | | | 237,163 | | | Stock option compensation | | | - | | | | - | | | | 447,100 | | | | - | | | | 447,100 | | | | - | | | | - | | | | 447,100 | | | | - | | | | 447,100 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | (1,137,203 | ) | | | (1,137,203 | ) | | | | | | | | | | | | | | | (1,137,203 | ) | | | (1,137,203 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2014 | | | 9,611,139 | | | $ | 96,112 | | | $ | 47,556,426 | | | $ | (27,928,376 | ) | | $ | 19,724,162 | | | | 9,611,139 | | | $ | 96,112 | | | $ | 47,556,426 | | | $ | (27,928,376 | ) | | $ | 19,724,162 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercised | | | 17,109 | | | | 170 | | | | (170 | ) | | | - | | | | - | | | | 17,109 | | | | 170 | | | | (170 | ) | | | - | | | | - | | | Stock option compensation | | | - | | | | - | | | | 334,386 | | | | - | | | | 334,386 | | | | - | | | | - | | | | 334,386 | | | | - | | | | 334,386 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | (2,397,042 | ) | | | (2,397,042 | ) | | | - | | | | - | | | | - | | | | (2,397,042 | ) | | | (2,397,042 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2015 | | | 9,628,248 | | | $ | 96,282 | | | $ | 47,890,642 | | | $ | (30,325,418 | ) | | $ | 17,661,506 | | | | 9,628,248 | | | $ | 96,282 | | | $ | 47,890,642 | | | $ | (30,325,418 | ) | | $ | 17,661,506 | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock: | | | | | | | | | | | | | | | | | | | | | | | New stock from offering | | | | 2,300,000 | | | | 23,000 | | | | 12,470,398 | | | | - | | | | 12,493,398 | | | | | | | | | | | | | | | | | | | | | | | | | | Options: | | | | | | | | | | | | | | | | | | | | | | | Exercised | | | | 98,599 | | | | 986 | | | | 56,589 | | | | - | | | | 57,575 | | | Stock option compensation | | | | - | | | | - | | | | 304,154 | | | | - | | | | 304,154 | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | | - | | | | - | | | | - | | | | (13,347,047 | ) | | | (13,347,047 | ) | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2016 | | | | 12,026,847 | | | $ | 120,268 | | | $ | 60,721,783 | | | $ | (43,672,465 | ) | | $ | 17,169,586 | |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED | | | December 31, 2015 | | | December 31, 2014 | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2014 | | | | | | | | | | | | | | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | Cash received from customers and grants | | $ | 30,174,083 | | | $ | 23,898,516 | | | $ | 16,947,194 | | | $ | 30,174,083 | | | $ | 23,898,516 | | | Cash paid to suppliers and employees | | | (28,382,681 | ) | | | (27,724,654 | ) | | | (23,677,476 | ) | | | (28,382,681 | ) | | | (27,724,654 | ) | | Interest received | | | 2,412 | | | | 5,839 | | | | 25,548 | | | | 2,412 | | | | 5,839 | | | Interest paid | | | (836 | ) | | | - | | | | - | | | | (836 | ) | | | - | | | Net cash provided by (used in) operating activities | | | 1,792,978 | | | | (3,820,299 | ) | | | (6,704,734 | ) | | | 1,792,978 | | | | (3,820,299 | ) | | | | | | | | | | | | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | Acquisition of license | | | (550,000 | ) | | | - | | | | - | | | | (550,000 | ) | | | - | | | Deposit for investment in RVR | | | | (550,000 | ) | | | - | | | | - | | | Acquisition of and deposits on fixed assets | | | (480,585 | ) | | | (1,452,601 | ) | | | (118,706 | ) | | | (480,585 | ) | | | (1,452,601 | ) | | Net cash used in investing activities | | | (1,030,585 | ) | | | (1,452,601 | ) | | | (668,706 | ) | | | (1,030,585 | ) | | | (1,452,601 | ) | | | | | | | | | | | | | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | Proceeds from option and warrant exercises | | | - | | | | 237,163 | | | | 57,575 | | | | - | | | | 237,163 | | | Proceeds from credit line | | | 700,000 | | | | - | | | | - | | | | 700,000 | | | | - | | | Repayment of credit line | | | (700,000 | ) | | | - | | | | - | | | | (700,000 | ) | | | - | | | Payment of capital lease obligation | | | - | | | | - | | | | Proceeds from sale of common stock, net | | | | 12,493,398 | | | | - | | | | - | | | Net cash provided by financing activities | | | - | | | | 237,163 | | | | 12,550,973 | | | | - | | | | 237,163 | | | | | | | | | | | | | | | | | | | | | | | | | (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | 762,393 | | | | (5,035,737 | ) | | | 5,177,533 | | | | 762,393 | | | | (5,035,737 | ) | | Cash and cash equivalents - beginning of the period | | | 4,614,538 | | | | 9,650,275 | | | | 5,376,931 | | | | 4,614,538 | | | | 9,650,275 | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents - end of the period | | $ | 5,376,931 | | | $ | 4,614,538 | | | $ | 10,554,464 | | | $ | 5,376,931 | | | $ | 4,614,538 | | | | | | | | | | | | | | | | | | | | | | | | | RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: | RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Loss | | $ | (2,397,042 | ) | | $ | (1,137,203 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) | | $ | (1,137,203 | ) | | Adjustments: | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | | 1,372,563 | | | | 739,297 | | | | 1,139,228 | | | | 1,372,563 | | | | 739,297 | | | Provision for (benefit from) deferred taxes | | | (1,170,969 | ) | | | (403,375 | ) | | | 5,800,818 | | | | (1,170,969 | ) | | | (403,375 | ) | | Provision for (recovery of) doubtful accounts | | | - | | | | 28,000 | | | | - | | | | - | | | | 28,000 | | | Share based compensation | | | 334,386 | | | | 447,100 | | | | 304,154 | | | | 334,386 | | | | 447,100 | | | Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | Accounts receivable | | | 5,915,918 | | | | (3,774,768 | ) | | | (960,758 | ) | | | 5,915,918 | | | | (3,774,768 | ) | | Inventories | | | 60,274 | | | | (449,573 | ) | | | 242,837 | | | | 60,274 | | | | (449,573 | ) | | Prepaid expenses and other current assets | | | (190,960 | ) | | | 32,906 | | | | (136,258 | ) | | | (190,960 | ) | | | 32,906 | | | Deposits and other assets | | | - | | | | (279,223 | ) | | | 1,480 | | | | - | | | | (279,223 | ) | | Accounts payable and accrued liabilities | | | (2,144,598 | ) | | | 636,540 | | | | 211,701 | | | | (2,144,598 | ) | | | 636,540 | | | Customer deposits and deferred revenue | | | 13,406 | | | | 340,000 | | | | 39,111 | | | | 13,406 | | | | 340,000 | | | Net cash provided by (used in) operating activities | | $ | 1,792,978 | | | $ | (3,820,299 | ) | | $ | (6,704,734 | ) | | $ | 1,792,978 | | | $ | (3,820,299 | ) | | | | | | | | | | | | | | | | | | | | | | | | Supplemental disclosures for non-cash investing and financing activities: | | | | | | | | | | | | | | | | | | | | | | Deposits on manufacturing equipment transferred to fixed assets | | $ | 20,017 | | | $ | 603,627 | | | $ | - | | | $ | 20,017 | | | $ | 603,627 | |
See accompanying notes to condensed consolidated financial statements NOTE 1 — DESCRIPTION OF BUSINESS: Chembio Diagnostics, Inc. and its subsidiary, Chembio Diagnostic Systems, Inc. (collectively, the "Company" or "Chembio"), develop, manufacture, and market rapid diagnostic tests that detect infectious diseases. The Company's main lateral flow products are three rapid tests for the detection of HIV antibodies in whole blood, serum and plasma samples, two of which were approved by the FDA in 2006; the third is sold for export only. Lateral Flow Rapid HIV tests represented nearly 46%58% of the Company's product revenues in 2015.2016. The Company's products based on its patented DPP® platform represented approximately 51%40% of the Company's product revenues in 2015.2016. The Company also has other rapid tests that together represented approximately 3%2% of sales in 2015.2016. The Company's products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments both domestically and internationally. Chembio's products are sold under the Company's STAT-PAK®, SURE CHECK®, STAT VIEW® or DPP® registered trademarks, or under the private labels of its marketing partners, for example the Clearview® label owned by Alere, Inc. ("Alere"), which is the Company's exclusive marketing partner for one of its rapid HIV lateral flow test products in the United States.partners. All of the Company's products that are currently being developed are based on its patented Dual Path Platform (DPP®), which is a unique diagnostic point-of-care platform that has certain advantages over lateral flow technology. In December 2012, the Company received FDA approval for its DPP® HIV 1/2 Assay for the detection of HIV antibodies in saliva, whole blood, serum and plasma samples, which was CLIA-Waived in October 2014.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES:
| (a) | Principles of Consolidation: |
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods covered thereby. Actual results could differ from these estimates. Judgments and estimates of uncertainties are required in applying the Company's accounting policies in certain areas. The following are some of the areas requiring significant judgments and estimates: determinations of the useful lives of assets, estimates of allowances for doubtful accounts, inventory reserves, stock-based compensation and deferred tax assets.
| (c) | Fair Value of Financial Instruments: |
The carrying value for cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of the immediate or short-term maturity of these financial instruments.
| (d) | Statements of Cash Flows: |
For purposes of the statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
| (e) | Concentrations of Credit Risk: |
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash instruments with well-known financial institutions and, at times, may maintain balances in excess of the FDIC insurance limit. The Company monitors the credit ratings of the financial institutions to mitigate this risk. Concentration of credit risk with respect to trade receivables is principally mitigated by the Company's ability to obtain letters of credit from certain foreign customers, and its diverse customer base both in number of customers and geographic locations. As of December 31, 2014, we had a significant concentration of outstanding credit with one customer in Brazil. We currently do not require collateral for accounts receivable.
Inventories, consisting of material, labor and manufacturing overhead, are stated at the lower of cost or market. Cost is determined on the first-in, first-out method.
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, which range from three to seven years. Leasehold improvements are amortized over the useful life of the asset or the lease term, whichever is shorter. Deposits paid for fixed assets are capitalized and not depreciated until the related asset is placed in service.
In February 2008, the Company entered into a sublicense agreement for which it had initially recorded an asset of $1,000,000. This asset is being expensed over an estimated economic life of ten years, based on the expected lifespan of our then current HIV products. The current portion of this asset is $100,000 as of December 31, 20152016 and 20142015 and is reported in prepaid expenses and other current assets. The long-term portion as of December 31, 2016 and 2015 is $- and 2014 is $100,000, and $200,000, respectively and is reflected in other assets on the consolidated balance sheet.
In January 2015, the Company entered into a sublicense agreement for which it had initially recorded an asset of $400,000. This asset is being expensed over the life of the patent of 22 months. The current portion of this asset is $- and $181,818 as of December 31, 2016 and 2015, respectively and is reported in prepaid expenses. The long-term portion as of December 31, 2016 and 2015 is $- and $-, respectively and is reflected in other assets on the consolidated balance sheet.
In August 2015, the Company entered into a sublicense agreement for which it had initially recorded an asset of $100,000. This asset is being validated and will be expensed over the estimated economic life of the product(s) which will utilize this sublicense. ThisThe current portion of this asset is $100,000 as of December 31, 2016 and 2015 and is reported in prepaid expenses.expenses and other current assets. The long-term portion of this asset is $- as of December 31, 2016 and 2015.
Amortization expenses for the licenses above for the years ended December 31, 2016, 2015 and 2014 were $357,000, $479,000 and $122,000.
| (i) | Impairment of Long-Lived Assets and Intangible Assets |
Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. We believe that the carrying values of our long-lived tangible and intangible assets were realizable at December 31, 20152016 and 2014,2015, respectively.
The Company recognizes revenue for product sales in accordance with ASC 605, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed and determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.
For certain contracts, the Company recognizes revenue from non-milestone contracts and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned. The Company follows Financial Accounting Standards Board ("FASB") issued authoritative guidance ("guidance") prospectivelyAccounting Standards for the recognition of revenue under the milestone method. The Company applies the milestone method of revenue recognition for certain collaborative research projects defining milestones at the inception of the agreement.
| (k) | Research and Development: |
Research and development (R&D) costs are expensed as incurred.
| (l) | Stock-Based Compensation: |
Stock-based compensation expense is calculated using the Black-Scholes valuation model based on awards ultimately expected to vest, reduced for forfeitures, and expensed on a straight-line basis over the requisite service period of the grant.
The Company accounts for income taxes under an asset and liability approach which recognizes deferred tax assets and liabilities based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
The Company follows a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. The guidance relates to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to uncertain tax positions will be recorded in tax expense.
The Company assesses the realizability of its net deferred tax assets on an annual basis. If, after considering all relevant positive and negative evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, the Company would reduce the net deferred tax assets by a valuation allowance. The realization of the net deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of net operating loss carryforwards.
The following weighted average shares were used for the computation of basic and diluted earnings per share:
| | For the years ended | For the years ended | | | December 31, 2015 | | December 31, 2014 | December 31, 2016 | | December 31, 2015 | | December 31, 2014 | | Basic | 9,626,028 | | 9,530,320 | 10,622,331 | | 9,626,028 | | 9,530,320 | | | - | | - | | | | | | | Diluted | 9,626,028 | | 9,530,320 | 10,622,331 | | 9,626,028 | | 9,530,320 |
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share for the year ended December 31, 2016, 2015 and 2014 reflects the potential dilution from the exercise or conversion of other securities into common stock, if dilutive.
The following securities, presented on a common share equivalent basis, have been used in the diluted per share computations:
| | For the years ended | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 | | 1999, 2008 and 2014 Plan Stock Options | - | | - | | - |
There were 600,549, 658,631 and 798,475 options and warrants outstanding as of December 31, 2016, 2015 and 2014, respectively, which were not included in the calculation of diluted income per share for the years ended because their effect would have been anti-dilutive.
F-8
| (o) | Recent Accounting Pronouncements Affecting the Company: |
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under accounting principles generally accepted in the United States ("U.S. GAAP"). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2016,2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2018. The Company has conducted a preliminary analysis of its sales contracts which are based on the shipment of goods to the customer, and currently this new accounting standard will not have a material impact on its consolidated financial statement for our sales contracts. The Company has conducted a preliminary analysis of its current R&D contracts which are currently based on "as expenses are incurred" basis, and currently this new accounting standard will not have a material impact on its consolidated financial statement for our current R&D contracts.
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under the new guidance. This guidance will be effective for Chembio beginning in 2018, with early adoption permitted. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, which amends the ASC and creates Topic 842, Leases. Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous US GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. We are in the initial stages of evaluating the effect of the standard on our financial statements and will continue to evaluate. While not yet in a position to assess the full impact of the application of the new standard, the Company expects that the impact of recording the lease liabilities and the corresponding right-to-use assets will have a significant impact on its total assets and liabilities with a minimal impact on equity.
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will change certain aspects of accounting for share-based payments to employees. ASU 2016-09 is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2016. The Company is currently assessingin the initial stages of evaluating the impact of the provisions of ASU 2016-09. We are still evaluating this standard and currently the Company does not believe this new accounting standard will have a material impact on its consolidated financial position and results of operations.statement.
NOTE 3 — INVENTORIES:
Inventories consist of the following at:
| | | December 31, 2015 | | | December 31, 2014 | | | December 31, 2016 | | | December 31, 2015 | | | Raw materials | | $ | 2,248,371 | | | $ | 2,323,863 | | | $ | 1,824,248 | | | $ | 2,248,371 | | | Work in process | | | 370,340 | | | | 346,494 | | | | 535,320 | | | | 370,340 | | | Finished goods | | | 959,314 | | | | 967,942 | | | | 975,620 | | | | 959,314 | | | | | $ | 3,578,025 | | | $ | 3,638,299 | | | $ | 3,335,188 | | | $ | 3,578,025 | |
NOTE 4 — FIXED ASSETS:
Fixed assets consist of the following at:
| | | December 31, 2015 | | | December 31, 2014 | | | December 31, 2016 | | | December 31, 2015 | | | Machinery and equipment | | $ | 3,862,698 | | | $ | 3,508,944 | | | $ | 3,962,051 | | | $ | 3,862,698 | | | Furniture and fixtures | | | 436,588 | | | | 388,040 | | | | 437,962 | | | | 436,588 | | | Computer and telephone equipment | | | 326,170 | | | | 315,916 | | | | 343,167 | | | | 326,170 | | | Leasehold improvements | | | 2,012,945 | | | | 1,955,817 | | | | 2,012,945 | | | | 2,012,945 | | | | | | 6,638,401 | | | | 6,168,717 | | | | 6,756,125 | | | | 6,638,401 | | | Less accumulated depreciation and amortization | | | (4,264,093 | ) | | | (3,370,788 | ) | | | (5,046,804 | ) | | | (4,264,093 | ) | | | | $ | 2,374,308 | | | $ | 2,797,929 | | | $ | 1,709,321 | | | $ | 2,374,308 | |
There were no capital leases at the end of December 31, 2015.2016. Fixed assets at December 31, 20152016 also include $100,000$199,921 in equipment, which has been delivered and set-up but is undergoing validation and as such is currently not being depreciated. Depreciation expense for the 2016, 2015 and 2014 years aggregated $782,711, $893,305 and $616,943, respectively.
As of December 31, 20152016 and 2014,2015, the Company had paid deposits on various pieces of equipment aggregating $31,900 and $30,918, and $20,017, respectively. The Company is further committed to an additional obligation of $31,008 as various milestones are achieved by the various vendors.
NOTE 5 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following at:
| | | December 31, 2015 | | | December 31, 2014 | | | December 31, 2016 | | | December 31, 2015 | | | Accounts payable – suppliers | | $ | 1,260,520 | | | $ | 1,980,120 | | | $ | 1,437,290 | | | $ | 1,260,520 | | | Accrued commissions | | | 129,192 | | | | 947,451 | | | | 221,982 | | | | 129,192 | | | Accrued royalties / license fees | | | 732,301 | | | | 1,034,062 | | | | 352,660 | | | | 732,301 | | | Accrued payroll | | | 146,962 | | | | 106,487 | | | | 167,575 | | | | 146,962 | | | Accrued vacation | | | 244,810 | | | | 219,924 | | | | 289,587 | | | | 244,810 | | | Accrued bonuses | | | 177,700 | | | | 265,500 | | | | 282,500 | | | | 177,700 | | | Accrued expenses – other | | | 109,947 | | | | 392,486 | | | | 261,539 | | | | 109,947 | | | TOTAL | | $ | 2,801,432 | | | $ | 4,946,030 | | | $ | 3,013,133 | | | $ | 2,801,432 | |
NOTE 6 — DEFERRED RESEARCH AND DEVELOPMENT REVENUE:
The Company recognizes income from R&D milestones when those milestones are reached and non-milestone contracts and grants when earned. Grants are invoiced after expenses are incurred. Any projects or grants funded in advance are deferred until earned. As of December 31, 20152016 and 2014,2015, there were $353,406$392,517 and $340,000$353,406 unearned advanced revenues, respectively.
NOTE 7 — TERM NOTE, REVOLVING DEMAND NOTE, VEHICLE FINANCING AND LICENSE FEE PAYABLE:
On April 30, 2013, the Company entered into a new demand loan agreement ("Demand Note") with HSBC Bank, USA ("HSBC"). The Demand Note allowed the Company to draw on the line from time to time an amount up to an aggregate of $2,000,000 outstanding at any one time. The accrued interest on the Demand Note was payable monthly at an interest rate equal to one-quarter percent above prime per annum. The Company could repay any or all of the principal balance outstanding at any time. This was a demand note for which the bank lender could demand repayment of the entire loan, with accrued interest, at any time. The loan was subject to annual reviews, as well as an annual 30-day clean-up, during which there could be no amounts outstanding. In January 2016 HSBC notified the Company that it could no longer extend the credit and the Demand Note was cancelled.
The Security Agreement, related to the Demand Note, contained covenants that placed restrictions on the Company's operations, including covenants relating to mergers, debt restrictions, capital expenditures, tangible net worth, net profit, leverage, fixed charge coverage, employee loan restrictions, distribution restrictions (common stock and preferred stock), dividend restrictions, restrictions on lease payments to affiliates, restrictions on changes in business, asset sale restrictions, restrictions on acquisitions and intercompany transactions, and restrictions on fundamental changes in the Company and in its business.
The Company currently maintains its operating, payroll, and primary cash accounts at HSBC. During the year ended December 31, 2015, the Company had drawn down an aggregate of $700,000 on the Demand Note and each withdrawal was paid back within 30 days and all covenants were met.
NOTE 8 — INCOME TAXES:
The (benefit from) provision for income taxes for the years ended December 31, 20152016 and 2014,2015, is comprised of the following:
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | | | 2014 | | | Current | | | | | | | | | | | | | | | | | Federal | | $ | - | | | $ | (16,119 | ) | | $ | - | | | $ | - | | | $ | (16,119 | ) | | State | | | 10,726 | | | | 6,576 | | | | - | | | | 10,726 | | | | 6,576 | | | Total current (benefit) provision | | | 10,726 | | | | (9,543 | ) | | | - | | | | 10,726 | | | | (9,543 | ) | | | | | | | | | | | | | | | | | | | | | | | | Deferred | | | | | | | | | | | | | | | | | | | | | | Federal | | | (1,171,865 | ) | | | (449,452 | ) | | | 5,778,185 | | | | (1,171,865 | ) | | | (449,452 | ) | | State | | | 896 | | | | 46,077 | | | | 22,633 | | | | 896 | | | | 46,077 | | | Total deferred (benefit) provision | | | (1,170,969 | ) | | | (403,375 | ) | | | 5,800,818 | | | | (1,170,969 | ) | | | (403,375 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total (benefit) provision | | $ | (1,160,243 | ) | | $ | (412,918 | ) | | $ | 5,800,818 | | | $ | (1,160,243 | ) | | | (412,918 | ) |
The Company had an ownership change as described in Internal Revenue Code Sec. 382 during 2004 ("2004 change"). As a result, the Company's net operating losses prior to the 2004 change of $5,832,516 were subject to an annual limitation of $150,608 and for the first five (5) years are entitled to a BIG (Built-In-Gains) of $488,207 per year. These net operating losses expire in 2018 through 2024.
The Company had a second ownership change during 2006 ("2006 change"). The net operating losses incurred between the 2004 change and the 2006 change of $8,586,861 were subject to an annual limitation of $1,111,831 and for the first five (5) years are entitled to a BIG of $1,756,842 per year. These net operating losses expire in 2018 through 2028.
After applying the above limitations, at December 31, 2015,2016, the Company has post-change net operating loss carry-forwards of approximately $15,815,108$21,960,362 which expire between 2020 and 2035.2036. In addition the Company has research and development tax credit carryforwards of approximately $1,518,414$1,461,351 for the year ended December 31, 2015,2016, which expire between 2025 and 2035.2036.
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | | | Current assets | | | | | | | | | | | | | | Inventory reserves | | $ | 242,532 | | | $ | 311,931 | | | $ | 253,380 | | | $ | 242,532 | | | Accrued expenses | | | 91,143 | | | | 286,616 | | | | 53,140 | | | | 91,143 | | | Current deferred tax assets | | | 333,675 | | | | 598,547 | | | | 306,520 | | | | 333,675 | | | Less valuation allowances | | | - | | | | - | | | | (306,520 | ) | | | - | | | Net current deferred asset | | $ | 333,675 | | | $ | 598,547 | | | $ | - | | | $ | 333,675 | | | | | | | | | | | | | | | | | | | | | Noncurrent assets | | | | | | | | | | | | | | | | | | Net operating loss carry-forwards | | $ | 5,365,401 | | | $ | 3,986,618 | | | $ | 7,487,937 | | | $ | 5,365,401 | | | Research and development credit | | | 1,518,414 | | | | 1,175,725 | | | | 1,461,351 | | | | 1,518,414 | | | Other credits | | | 97,339 | | | | 107,967 | | | | 97,339 | | | | 97,339 | | | Depreciation | | | | 31,285 | | | | (206,150 | ) | | Other | | | 210,553 | | | | 149,923 | | | | 292,556 | | | | 210,553 | | | Gross noncurrent deferred tax assets | | | 7,191,707 | | | | 5,420,233 | | | | Depreciation | | | (206,150 | ) | | | (213,206 | ) | | | Noncurrent deferred tax assets | | | 6,985,557 | | | | 5,207,027 | | | | 9,370,468 | | | | 6,985,557 | | | Less valuation allowances | | | (1,518,414 | ) | | | (1,175,725 | ) | | | (9,370,468 | ) | | | (1,518,414 | ) | | Net noncurrent deferred tax assets | | $ | 5,467,143 | | | $ | 4,031,302 | | | $ | - | | | $ | 5,467,143 | |
A reconciliation of the Federal statutory rate to the effective rate applicable to income (loss) before income taxes is as follows:
| | Year Ending December 31, | Year Ending December 31, | | | 2015 | | 2014 | 2016 | | 2015 | | 2014 | | Federal income tax at statutory rates | (34.00)% | | (34.00)% | (34.00)% | | (34.00)% | | (34.00)% | | State income taxes, net of federal benefit | .23% | | 0.28% | .21% | | 0.23% | | 0.28% | | Nondeductible expenses | 1.38% | | 4.54% | .57% | | 1.38% | | 4.54% | | Change in valuation allowance | 9.46% | | 9.47% | 114.81% | | 9.46% | | 9.47% | | Tax credits | (9.46)% | | (9.47)% | .00% | | (9.46)% | | (9.47)% | | Change in tax rates | .00% | | 1.96% | .00% | | 0.00% | | 1.96% | | Other | .34% | | 0.58% | .04% | | 0.34% | | 0.58% | | Income tax (benefit) | (32.05)% | | (26.64)% | 81.63% | | (32.05)% | | (26.64)% |
Interest and penalties, if any, related to income tax liabilities are included in income tax expense. As of December 31, 2015,2016, the Company does not have a liability for uncertain tax positions.
The Company files Federal and state income tax returns. Tax years for fiscal 20122013 through 20142015 are open and potentially subject to examination by the federal and state taxing authorities.
NOTE 9 — STOCKHOLDERS' EQUITY:
In August of 2016, the Company closed on an underwritten public offering of 2,300,000 shares of its common stock at $6.00 per share. The net proceeds of the offering, after deducting the underwriters' discounts and other offering expenses payable by the Company, was approximately $12,493,000. The Company intends to use the net proceeds for business expansion and working capital.
During 2016, options to purchase 191,804 shares of the Company's common stock were exercised on a cashless basis into 98,599 shares of common stock at exercise prices ranging from $2.80 to $5.56 by surrendering options and shares of common stock already owned.
During 2015, options to purchase 41,141 shares of the Company's common stock were exercised, on aeither for cash or cashless, basis into 17,109 shares of common stock at exercise prices ranging from $2.16 to $3.60. by paying cash or surrendering options already owned.
During 2014, options to purchase 318,750 shares of the Company's common stock were exercised, either for cash or cashless, into 286,356 shares of common stock at an exercise price of $1.04.$1.04 by paying cash or surrendering options already owned
The Company has 10,000,000 shares of preferred stock authorized and none outstanding. These shares can become issuable upon an approved resolution by the board of directors and the filing of a Certificate of Designation with the state of Nevada.
During the fourth quarter of 2016, the Company issued options to purchase 36,000 shares of common stock to a newly-hired president of the EMEA and APAC regions. The options are exercisable in three equal annual installments starting on the first anniversary of the date of issue. The options issued have an exercise price of $7.15 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
During the second quarter of 2016 the Company issued options to purchase 46,875 shares of common stock to one of its directors pursuant to the Company's compensation policy for directors. The options become exercisable in five equal annual installments starting on the date of issue. The options issued have an exercise price of $8.860 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
The Company entered into an employment agreement, effective as of March 5, 2016 (the "Employment Agreement"), with Javan Esfandiari to serve as the Company's Chief Scientific and Technical Officer, for an additional term of three years through March 5, 2019. Pursuant to the Employment Agreement, the Company issued to Mr. Esfandiari incentive and non-qualified stock options to purchase 60,000 shares of the Company's common stock. Of these stock options, options to purchase 20,000 shares vest on each of the first three anniversaries of March 11, 2016 which is the date on which the Employment Agreement was entered into. The exercise price for these options was to be equal to the trading price for the Company's common stock on March 11, 2016, which was $5.64 per share. Each option granted will expire and terminate, if not exercised sooner, upon the earlier to occur of (a) 30 days after termination of Mr. Esfandiari's employment with the Company or (b) the fifth anniversary of the effective date of the grant.
During 2015, the Company did not issue options to purchase common stock.
During the fourth quarter of 2014, the Company issued 36,000 options to purchase 36,000 shares of common stock to a newly-hired vice-president of the Company. The options are exercisable in three equal annual installments starting on the first anniversary of the date of issue. The options issued have an exercise price of $4.35 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
During the second quarter of 2014 the Company issued options to two of its directors pursuant to the Company's compensation policy for directors. Each director was issued 46,875 options to purchase 46,875 shares of common stock. The options become exercisable in five equal annual installments starting on the date of issue. The options issued have an exercise price of $3.480 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
The Company entered into an employment agreement, effective March 13, 2014 ("Employment Agreement"), with Mr. Sperzel to serve as the Company's Chief Executive Officer, which included issuing incentive and non-incentive stock options to purchase 250,000 shares of the Company's common stock. The options become exercisable in five equal annual installments starting on the first anniversary of the effective date of the Employment Agreement. The exercise price for these options was to be equal to the volume-weighted average trading price for the Company's common stock on March 13, 2014, which was $3.416 per share. The options expire seven years from date of issue.
As of December 31, 20152016 and 2014,2015, the Company had no warrants outstanding to purchase shares of common stock.
NOTE 10 — RIGHTS AGREEMENT:
In March 2010, the Company entered into a Rights Agreement (the "Rights Agreement") between the Company and Action Stock Transfer Corp., as Rights Agent. The Rights Agreement expired at the end of November 2015. Pursuant to the Rights Agreement, the Company declared a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of Common Stock, $0.01 par value (the "Common Stock"), of the Company. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2010, and the Rights were distributed to the Company's shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable.The Rights were not exercisable until a Distribution Date. Until a Right was exercised, the holder thereof, as such, would have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights. The Rights were to be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) acquired a Combined Ownership (as defined in the Rights Agreement) of 15%20% or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date") or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 15%20% or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date").
NOTE 11 — EMPLOYEE STOCK OPTION PLAN:
Effective June 3, 2008, the Company's stockholders voted to approve the 2008 Stock Incentive Plan ("SIP"), with 625,000 shares of Common Stock available to be issued. At the Annual Stockholder meeting on September 22, 2011 the Company's stockholders voted to approve an increase to the shares of Common Stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee. As of December 31, 2015,2016, there were 353,935467,685 options exercised, 312,860275,931 options outstanding and 83,2056,384 options still available to be issued under the SIP.
Effective June 19, 2014, the Company's stockholders voted to approve the 2014 Stock Incentive Plan ("SIP14"), with 800,000 shares of Common Stock available to be issued. Under the terms of the SIP14, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee. As of December 31, 2015,2016, there were no12,000 options exercised, 129,750117,750 options outstanding and 670,250 options still available to be issued under the SIP14.
The Company's results for the years ended December 31, 2016, 2015 and 2014 include stock-based compensation expense totaling $304,100, $334,400, and $447,100 respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold ($-, $-, and $700 respectively), research and development ($62,70089,200, $62,700, and $44,500 respectively) and selling, general and administrative expenses ($271,700214,900, $271,700, and $401,900 respectively). In accordance with ASC 718 the Company has not recorded a deferred tax asset related to the net operating losses resulting from the exercise of disqualifying stock options in the accompanying financial statements. The cumulative amount of unrecognized tax benefits at December 31, 2015 was immaterial, and if the Company is able to utilize this benefit in the future it would result in a credit to additional paid-in capital.
Stock option compensation expense in the years ended December 31, 2016, 2015 and 2014 represents the estimated fair value of options outstanding which is being amortized on a straight-line basis over the requisite vesting period of the entire award.
The weighted average estimated fair value of stock options granted in the year ended December 31, 2016 was $2.75 per share. The Company did not grant any stock options during the year ended December 31, 2015.2015 . The weighted average estimated fair value of stock options granted in the year ended December 31, 2014 was $3.52 per share. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based on the Company's historical experience with similar type options.
The weighted-average assumptions made in calculating the fair values of options are as follows:
| For the year ended | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 | | Expected term (in years) | | 4.71 | | n/a | | 4.50-6.30 | | Expected volatility | | 45.78 % | | n/a | | 61.50-96.10% | | Expected dividend yield | | n/a | | n/a | | n/a | | Risk-free interest rate | | 0.92 % | | n/a | | .83-1.52% |
The Company granted no142,875 new options during the year ended December 31, 20152016 to employees.employees and directors.
The following table provides stock options activity for the year ended December 31, 2015:2016:
| Stock Options | | Number of Shares | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | | Number of Shares | | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | | | Outstanding at December 31, 2013 | | | | 656,398 | | | | 2.57 | | 1.65 years | | $ | 801,888 | | | | | | | | | | | | | | | | | | | Granted | | | | 379,750 | | | | 3.52 | | | | | | | | Exercised | | | | 318,750 | | | | 1.04 | | | | | 341,729 | | | Forfeited/expired/cancelled | | | | 25,529 | | | | 3.17 | | | | | | | | Outstanding at December 31, 2014 | | | | 691,869 | | | | 3.66 | | 3.97 years | | $ | 334,636 | | | | | | | | | | | | | | | | | | | Exercisable at December 31, 2014 | | | | 265,619 | | | | 3.67 | | 1.94 years | | $ | 158,149 | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2014 | | 691,869 | | $ | 3.66 | | 3.97 years | | $ | 334,636 | | | 691,869 | | | | 3.66 | | 3.97 years | | $ | 334,636 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Granted | | - | | $ | - | | | | | | | | - | | | | - | | | | | | | | Exercised | | 41,141 | | $ | 2.25 | | | | | | | | 41,141 | | | | 2.25 | | | | | 65,449 | | | Forfeited/expired/cancelled | | 1,250 | | $ | 4.30 | | | | | | | | 1,250 | | | | 4.30 | | | | | | | | Outstanding at December 31, 2015 | | 649,478 | | $ | 3.75 | | 3.21 years | | $ | 1,032,362 | | | 649,478 | | | | 3.75 | | 3.21 years | | $ | 1,032,362 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercisable at December 31, 2015 | | 359,228 | | $ | 3.89 | | 2.03 years | | $ | 522,039 | | | 359,228 | | | | 3.89 | | 2.03 years | | $ | 522,039 | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2015 | | | | 649,478 | | | $ | 3.75 | | 3.21 years | | $ | 1,032,362 | | | | | | | | | | | | | | | | | | | Granted | | | | 142,875 | | | $ | 7.08 | | | | | | | | Exercised | | | | 191,804 | | | $ | 3.73 | | | | | 629,143 | | | Forfeited/expired/cancelled | | | | - | | | $ | - | | | | | | | | Outstanding at December 31, 2016 | | | | 600,549 | | | $ | 4.55 | | 3.43 years | | $ | 1,463,052 | | | | | | | | | | | | | | | | | | | Exercisable at December 31, 2016 | | | | 267,549 | | | $ | 4.14 | | 2.66 years | | $ | 731,997 | |
The following table summarizes information about stock options outstanding at December 31, 2015:2016:
| | | Stock Options Outstanding | | Stock Options Exercisable | Range of Exercise Prices | | Shares | | Average Remaining Contract Life (Year) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | 0.0000 to 3.000 | | 92,063 | | 0.73 | | $ | 2.80 | | $ | 232,919 | | 92,063 | | $ | 2.80 | | $ | 232,919 | | 3.0001 to 3.500 | | 343,750 | | 4.73 | | | 3.43 | | | 651,863 | | 87,500 | | | 3.44 | | | 165,060 | | 3.5001 to 4.000 | | 15,720 | | 1.05 | | | 3.95 | | | 21,689 | | 15,720 | | | 3.95 | | | 21,689 | | 4.0001 to 4.500 | | 122,320 | | 1.87 | | | 4.37 | | | 117,971 | | 98,320 | | | 4.37 | | | 94,451 | | 4.5001 to 6.000 | | 75,625 | | 1.90 | | | 5.30 | | | 7,920.00 | | 65,625 | | | 5.28 | | | 7,920 | | Total | | 649,478 | | 3.21 | | $ | 3.75 | | $ | 1,032,362 | | 359,228 | | $ | 3.89 | | $ | 522,039 |
| | | Stock Options Outstanding | | Stock Options Exercisable | Range of Exercise Prices | | Shares | | Average Remaining Contract Life (Year) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | 1 to 2.79999 | | - | | - | | $ | - | | $ | - | | - | | $ | - | | $ | - | | 2.8 to 4.59999 | | 419,719 | | 3.30 | | | 3.60 | | | 1,342,788 | | 220,219 | | | 3.71 | | | 681,333 | | 4.6 to 6.39999 | | 97,955 | | 3.02 | | | 5.57 | | | 120,264 | | 37,955 | | | 5.47 | | | 50,664 | | 6.4 to 8.19999 | | 36,000 | | 4.78 | | | 7.15 | | | - | | - | | | - | | | - | | 8.2 to 10 | | 46,875 | | 4.44 | | | 8.86 | | | - | | 9,375 | | | 8.86 | | | - | | Total | | 600,549 | | 3.43 | | $ | 4.55 | | $ | 1,463,052 | | 267,549 | | $ | 4.14 | | $ | 731,997 |
As of December 31, 2015,2016, there was $297,000$386,000 of net unrecognized compensation cost related to stock options that are not vested, which is expected to be recognized over a weighted average period of approximately 2.052.32 years. The total fair value of shares vested during the yearsyear ended December 31, 2015 and 2014,2016, was $357,000 and $283,000, respectively.
$262,000.
NOTE 12 — GEOGRAPHIC INFORMATION AND ECONOMIC DEPENDENCY:
FASB Guidance establishes standards for the way that business enterprises report information about operating segments in financial statements and requires that those enterprises report selected information. It also establishes standards for related disclosures about product and services, geographic areas, and major customers.
The Company produces only one group of similar products known collectively as "rapid medical tests". Management believes that it operates in a single business segment. Net sales by geographic area are as follows:
| | | For the years ended | | | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2014 | | | Africa | | $ | 2,363,944 | | | $ | 3,673,199 | | | $ | 2,097,353 | | | Asia | | | 227,564 | | | | 172,250 | | | | 96,061 | | | Europe | | | 1,131,193 | | | | 1,164,476 | | | | 191,947 | | | North America | | | 5,082,319 | | | | 6,525,951 | | | | 11,134,691 | | | South America | | | 4,875,087 | | | | 10,350,812 | | | | 12,429,717 | | | | | $ | 13,680,107 | | | $ | 21,886,688 | | | $ | 25,949,769 | |
Sales to Africa decreased in 2016 primarily due to decreased sales in Uganda by approximately $1,122,400, and Nigeria by approximately $220,900. Sales in Asia increased slightly by $55,300. European sales decreased by $68,600. Sales decreased in 2016 to North America from decreased sales in the U.S by approximately $1,579,800 and partially offset by increased sales to Mexico of $123,200. Sales decreased in 2016 to South America were primarily from decreased sales in Brazil of approximately $5,340,250.
Sales to Africa increased in 2015 primarily due to increased sales in Uganda by approximately $1,344,500, and Nigeria by approximately $287,500. Sales in Asia increased slightly by $76,200. European sales increased by $972,500. Sales decreased in 2015 to North America from decreased sales to Mexico of $3,913,400 and by decreased sales in the U.S fromby approximately $7,208,000 to $6,563,000.$1,545,000. Sales decreasesdecreased in 2015 to South America were primarily from decreased sales in Brazil fromof approximately $12,253,500 to $10,141,800$2,111,700.
The Company produces only one group of similar products known collectively as "rapid medical tests". Management believes that it operates in a single business segment. Net sales by geographic area are as follows:
| | | For the years ended | | | | | December 31, 2015 | | | December 31, 2014 | | | Africa | | $ | 3,673,199 | | | $ | 2,097,353 | | | Asia | | | 172,250 | | | | 96,061 | | | Europe | | | 1,164,476 | | | | 191,947 | | | North America | | | 6,525,951 | | | | 11,134,691 | | | South America | | | 10,350,812 | | | | 12,429,717 | | | | | $ | 21,886,688 | | | $ | 25,949,769 | |
Sales to Africa increased in 2015 primarily due to increased sales in Uganda by approximately $1,344,500, and Nigeria by approximately $287,500. Sales in Asia increased slightly by $76,200. European sales increased by $972,500. Sales decreased in 2015 to North America from decreased sales to Mexico of $3,913,400 and by decreased sales in the U.S from approximately $7,208,000 to $6,563,000. Sales decreases in 2015 to South America were primarily from decreased sales in Brazil from approximately $12,253,500 to $10,141,800.
NOTE 13 — COMMITMENTS AND CONTINGENCIES:
Employment Contracts:
The Company has contracts with three key employees. The contracts call for salaries presently aggregating $944,500$975,000 per year. One contract expires in May 2017, one expires in March 20162019 and one contract expires in March 2017. The following table is a schedule of future minimum salary commitments:
| 2016 | | $ | 690,800 | | | | 2017 | | | 181,200 | | | $ | 516,200 | | | 2018 | | | | 335,000 | | | 2019 | | | | 55,800 | |
Pension Plan: The Company has a 401(k) plan established for its employees. Effective January 1, 2011 the Company elected to match 40% of the first 5% (or 2% of salary) that an employee contributes to their 401(k) plan. Expenses related to this matching contribution aggregated $96,051, $90,915 and $82,750 for the years ended December 31, 2016, 2015, and 2014 respectively. Obligations Under Operating Leases:
The Company leases industrial space used for office, R&D and manufacturing facilities, currently with a monthly rent of $27,988.$28,688. The current lease expires on April 30, 2017. The lease provides for annual increases of 2 1/22.50% percent each year starting May 1, 2016. In February of 2014, the Company entered into a lease, effective March 1, 2014, for another facility located a short distance from its current facility currently with a monthly rent of $15,097.$15,550. The space is used primarily for warehousing and provides for additional office space. The lease expires on April 30, 2018. The lease provides for annual increases of three3.00% percent each year starting March 1, 2016. The following is a schedule of future minimum rental commitments (assuming no increases):
Years ending December 31,
| 2016 | | $ | 527,151 | | | | 2017 | | | 306,018 | | | $ | 306,018 | | | 2018 | | | 64,067 | | | | 64,067 | | | 2019 | | | | - | | | | | $ | 897,236 | | | $ | 370,085 | |
Rent expense was $516,708, $511,900 and $476,000 for the years ended December 31, 2016, 2015, and 2014 respectively.
Economic Dependency:
The following table delineates sales the Company had to customers in excess of 10% of total sales for the periods indicated:
| | For the years ended | | Accounts Receivable As of | For the years ended | | Accounts Receivable | | | December 31, 2015 | | December 31, 2014 | | December 31, 2015 | | December 31, 2014 | December 31, 2016 | | December 31, 2015 | | | December 31, 2014 | | December 31, 2016 | | December 31, 2015 | | | Sales | | % of Sales | | Sales | | % of Sales | | | | | Sales | | % of Sales | | Sales | | % of Sales | | | | Sales | | % of Sales | | | | | | Customer 1 | | $ | 10,132,512 | | 46 | % | $ | 12,253,526 | | 47 | % | $ | 775,209 | | $ | 6,230,886 | | $ | 4,801,577 | | 35 | % | | $ | 10,132,512 | | 46 | % | | $ | 12,253,526 | | 47 | % | | $ | 828,848 | | | $ | 775,209 | | Customer 2 | | | 4,526,908 | | 21 | % | | 6,618,251 | | 26 | % | | 700,656 | | | 386,270 | | | 1,796,477 | | 13 | % | | | 4,526,908 | | 21 | % | | | 6,618,251 | | 26 | % | | | - | | | | 700,656 |
The following table delineates purchases the Company had with vendors in excess of 10% of total purchases for the periods indicated.indicated:
| | For the years ended | | Accounts Payable As of | For the years ended | | Accounts Payable | | | December 31, 2015 | | December 31, 2014 | | December 31, 2015 | | December 31, 2014 | December 31, 2016 | | December 31, 2015 | | | December 31, 2014 | | December 31, 2016 | | December 31, 2015 | | | Purchases | | % of Purc. | | Purchases | | % of Purc. | | | | | Purchases | | % of Purc. | | Purchases | | % of Purc. | | | | Purchases | | % of Purc. | | | | | | Vendor 1 | | $ | 794,536 | | 11 | % | $ | 1,331,647 | | 14 | % | $ | 90,075 | | $ | 200,855 | | $ | 652,273 | | 11 | % | | $ | * | | * | | | $ | * | | * | | | $ | 26,984 | | | $ | * | | Vendor 2 | | | * | | * | | $ | 1,594,838 | | 17 | % | | * | | | - | | | * | | * | | | | 794,536 | | 11 | % | | | 1,331,647 | | 14 | % | | | * | | | | 90,075 |
In the table above the asterisk (*) indicates that purchases from the vendor did not exceed 10% for the period indicated.
The Company currently buys materials which are purchased under intellectual property rights agreements and are important components in its products. Management believes that other suppliers could provide similar materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely.
NOTE 14 — COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS:
In 2016, 2015, and 2014 the Company earned $2,316,044$3.7 million, $2.3 million, and $1,672,258$1.7 million, respectively, from research revenues and milestones. The Company is now involved in additional feasibility and development contracts related to its DPP® technology. The total expended on R&D, excluding regulatory, in 2016, 2015, and 2014, was approximately $6.9 million, $5.4 million, and $4.1 million, respectively. | a. | National Institutes of Health (NIH) Grant: |
In March 2011, the Company received a $2.9 million, three-year grant from the United States National Institutes of Health to complete development of a test for Tuberculosis. Grants are invoiced after expenses are incurred. The Company earned, for the years ended December 31, 2015 and 2014, $- and $388,000, respectively from this grant. The Company has earned $2,850,000 from this grant from inception through December 31, 2015, of which $1,019,000 was paid to sub-contractors.
| b. | Battelle/CDC DPP® Influenza Immunity Test: |
In November 2014, the Company entered into a follow-on, milestone-based development agreement bringing the total up to $1,253,100 based on Chembio's previous successful initial development of a multiplex rapid point-of-care ("POC") influenza immunity test utilizing its patented Dual Path Platform (DPP®) technology. The follow-on agreement contemplates a period of approximately six months in which the follow-on development activity is to be completed. For the years ended December 31, 2015 and 2014, the Company earned $216,850 and $115,000, respectively from this grant. The Company has earned $1,253,100 from this grant from inception through December 31, 2015.
| c. | Cooperative research agreement with a U.S. government agency: |
In May 2013, the Company was awarded a cooperative research agreement with a U.S. government agency for up to $883,000 for an eight-month development project to develop rapid POC diagnostic tests for five infectious diseases associated with febrile illness. For the years ended December 31, 2015 and 2014, the Company earned $- and $117,000, respectively from this grant. The Company has earned $883,000 from this grant from inception through December 31, 2015.
d.a. RVR DPP® technology transfer agreement:
In February 2014, the Company entered into a technology transfer agreement with RVR Diagnostics for $1,500,000. The agreement was modified in September 2014 and September 2015. Per the agreement, as modified, the Company earned $-, $125,000 and $1,125,000 in milestone payments during 2016, 2015 and 2014. The Company has earned $1,250,000 from this grant from inception through December 31, 2015.2016. See subsequent event note describing the Company's acquistion of RVR Diagnostics in January 2017.
e.b. Dengue agreement:
In October 2014, the Company entered into a development agreement with an international diagnostics company for $300,000. Revenue for this agreement is being recognized under a proportional performance method. For the years ended December 31, 2016, 2015 and 2014, the Company earned $-, $240,000 and $60,000, respectively from this grant. The Company has earned $300,000 from this grant from inception through December 31, 2015.2016.
| f.c. | Brain Injury agreement: |
In January 2015, the Company entered into a technology development agreement with Perseus Science Group LLC for $946,000.$946,000 and a follow-on agreement in December 2016 for $350,000. Revenue for this agreement is being recognized under a proportional performance method. The Company earned $297,000 and $469,600 for the year ended December 31, 2016 and 2015, respectively from this agreement. The Company has earned $766,600 from this grant from inception through December 31, 2016.
In January 2015, the Company was awarded a grant from The Bill & Melinda Gates Foundation for $307,000. Revenue for this agreement is being recognized under a proportional performance method. The Company earned $- and $307,000 for the year ended December 31, 2016 and 2015, respectively from this agreement. The Company has earned $307,000 from this grant from inception through December 31, 2016.
In April 2016, the Company was awarded a grant from the Bill & Melinda Gates Foundation for $677,944. The Company earned $518,761 for the year ended December 31, 2016 from this agreement, which is the total amount earned from this grant from inception through December 31, 2016.
In October 2014, the Company entered into a technology development agreement with an international diagnostics company for $320,000. Revenue for this agreement is being recognized under a proportional performance method. The Company earned $205,000 forFor the yearyears ended December 31, 2016, 2015 and 2014, the Company earned $65,000, $205,000 and $-, respectively from this agreement.grant. The Company has earned $270,000 from this grant from inception through December 31, 2016.
| i.f. | Fever panel agreement: |
In October 2015, the Company entered into an agreement with Paul G. Allen Ebola Program for $2,118,265.$2,118,265 and a follow-on agreement in February 2016 for $550,000. Revenue for this agreement is being recognized under a proportional performance method. The Company earned $2,259,800 and $408,500 for the year ended December 31, 2016 and 2015, respectively from this agreement. The Company has earned $2,668,265 from this grant from inception through December 31, 2016.
g. BARDA Zika agreement:
In August 2016, the Company was awarded a grant for $5,933,742 from BARDA, which is part of the U.S. Department of Health And Human Resources. The Company earned $472,700 for the year ended December 31, 2016 from this agreement. The Company earned $472,700 from this grant from inception through December 31, 2016.
In September 2016, the Company entered into an agreement with the USDA for $669,423 to develop a Bovid TB assay. Revenue for this agreement is being recognized under a proportional performance method. The Company earned $121,500 for the year ended December 31, 2016 from this agreement.
Governmental Regulation:
All of the Company's existing and proposed diagnostic products are regulated by the United States Food and Drug Administration (FDA), United States Department of Agriculture, certain state and local agencies, and/or comparable regulatory bodies in other countries. Most aspects of development, production, and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing, and record keeping are subject to review. After marketing approval has been granted, Chembio must continue to comply with governmental regulations. Failure to comply with these regulations can result in significant penalties.
NOTE 15 — QUARTERLY FINANCIAL DATA (UNAUDITED)
The sum of the earnings per common share may not equal the corresponding annual amounts due to interim quarter rounding.
For the Quarters Ended in Fiscal 2016 | | March 31 | | | June 30 | | | September 30 | | | December 31 | | | Total revenues | | $ | 6,601,099 | | | $ | 3,266,405 | | | $ | 3,746,461 | | | $ | 4,254,876 | | | Gross profit | | | 3,165,548 | | | | 1,580,305 | | | | 1,952,097 | | | | 1,753,386 | | | Net loss | | | (303,590 | ) | | | (8,347,482 | ) | | | (2,138,218 | ) | | | (2,557,757 | ) | | Basic loss per share | | | (0.03 | ) | | | (0.86 | ) | | | (0.19 | ) | | | (0.21 | ) | | Diluted loss per share | | | (0.03 | ) | | | (0.86 | ) | | | (0.19 | ) | | | (0.21 | ) | | | | | | | | | | | | | | | | | | | For the Quarters Ended in Fiscal 2015 | | March 31 | | | June 30 | | | September 30 | | | December 31 | | | Total revenues | | $ | 6,231,137 | | | $ | 6,716,158 | | | $ | 6,887,374 | | | $ | 4,420,816 | | | Gross profit | | | 2,686,618 | | | | 3,019,132 | | | | 2,910,534 | | | | 1,870,543 | | | Net loss | | | (646,817 | ) | | | (664,085 | ) | | | (437,157 | ) | | | (648,984 | ) | | Basic loss per share | | | (0.07 | ) | | | (0.07 | ) | | | (0.05 | ) | | | (0.07 | ) | | Diluted loss per share | | | (0.07 | ) | | | (0.07 | ) | | | (0.05 | ) | | | (0.07 | ) |
NOTE 16 — SUBSEQUENT EVENTS:
February 19, 2016,On January 9, 2017, the Company, announced it had been awardedcompleted the acquisition of RVR Diagnostics Sdn Bhd, a $550,000 grant from philanthropist and entrepreneur Paul G. AllenMalaysia corporation ("RVR"), pursuant to immediately initiate developmentthe previously reported Amended And Restated Stock Purchase Agreement, dated as of simple, cost-effective POC diagnostic tests to identify Zika virus and related febrile illnesses. The grant is managed by Mr. Allen's company, Vulcan Inc., and the funds come from the Paul G. Allen Family Foundation.
On MarchDecember 7, 2016 (the "Stock Purchase Agreement"), by and among the Company, announced plans to collaborate with Bio-Manguinhos/Fiocruz to undertake to develop, registerRVR, Avijit Roy and commercialize POC DPP® Zika Assays for Brazil. The Company has developed a prototype DPP® Zika AssayMagentiren Vajuram (Messrs. Roy and prototype DPP® Zika/Dengue/Chikungunya Assay, and we hope to receive additional funding, along withVajuram, the grant mentioned above, to accelerate the development and testing of our DPP® Zika Assays. The Company anticipates receiving significant orders for DPP® Zika Assays in 2016."Sellers").
On March 8, 2016, the Company entered into a Rights Agreement (the "Rights Agreement") between the Company and Action Stock Transfer Corp., as Rights Agent. Pursuant to the RightsStock Purchase Agreement, the Company declared a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of Common Stock, $0.01 par value (the "Common Stock"),acquired all of the Company, inissued and outstanding common stock and other equity interests of RVR from the manner described below. The BoardSellers for (i) a cash payment of Directors set the payment date for the distribution of the Rights as March 8, 2016,$1,400,000 and the Rights were distributed to the Company's shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable. The Rights are not exercisable until a Distribution Date. Until a Right is exercised, the holder thereof, as such, has no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights. The Rights are to be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) has acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding(ii) 269,236 shares of the CommonCompany's common stock, of which 7,277 shares are being held back to satisfy certain potential claims under the Stock (the "Shares Acquisition Date") or (ii)Purchase Agreement and will become issuable to the later of (A) the close of businessSellers, if at all, on the tenth business day (or such later dateone-year anniversary of the closing.
In addition, the Stock Purchase Agreement provides that the Sellers may become entitled to receive certain milestone payments based on the achievement of performance goals related to sales by RVR during the 12 months ending December 31, 2017. Based on the actual sales achieved by RVR, the Sellers will be entitled to receive (i) a cash milestone payment equal to $100,000 multiplied by the Milestone Proration Amount, for a maximum cash milestone payment of $100,000, and (ii) a stock milestone payment equal to 21,830 shares of the Company's common stock multiplied by the Milestone Proration Amount, with a maximum stock milestone payment of 21,830 shares of the Company's common stock.
In connection with the closing of the transaction under the Stock Purchase Agreement, each of the Sellers entered into an employment agreement with RVR, pursuant to which, among other things, each of the Sellers agreed to serve as may be determined by actionan employee of RVR for the one-year period following the closing in exchange for a monthly base salary of $10,000. In addition, at the closing, John J. Sperzel III, the Company's President, Chief Executive Officer and a member of the Company's board of directors, Richard J. Larkin, the Company's Chief Financial Officer and Executive Vice President, and Katherine L. Davis, the Company's Chairman of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date thatand a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 20% or moremember of the outstanding sharesCompany's board of directors, were appointed as the directors of RVR, with each of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given beforeSellers continuing as the dateother two directors of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date").RVR.
Schedule II Valuation and Qualifying Accounts
| | | | | | Additions | | | | | | | | | Description | | Balance at beginning of period | | | Charged to statement of income | | | Charged to other accounts | | | Deductions | | | Balance at end of period | | | Year ended December 31, 2016 | | | | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 52,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 52,000 | | | Inventory Reserve | | $ | 218,000 | | | $ | 221,478 | | | $ | - | | | $ | 194,478 | | | $ | 245,000 | | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 52,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 52,000 | | | Inventory Reserve | | $ | 218,000 | | | $ | 256,302 | | | $ | - | | | $ | 256,302 | | | $ | 218,000 | | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 52,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 52,000 | | | Inventory Reserve | | $ | 218,000 | | | $ | 274,506 | | | $ | - | | | $ | 274,506 | | | $ | 218,000 | |
F-19
|