To date, we have not encountered any costs relating to compliance with any environmental laws.
Our intellectual property strategy is to: (1) build our own intellectual property portfolio around our DPP®DPP® technology; (2) pursue licenses, trade secrets and know-how within the area of rapid point-of-care testing,testing; and, (3) develop and acquire proprietary positions to reagents and new hardware platforms for the development and manufacturecertain reagents.
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 Rights Agreement also provides that Rights are issued with respect to any shares of our common stock that are newly issued after March 8, 2016, such as with respect to the Company's underwritten public offering in February 2018. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable.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 producingantibody-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 BrazilBrazil. |
ARVs | Anti-retroviral medications developed to fight AIDSAIDS. |
CDC | United States Centers for Disease Control and PreventionPrevention. |
CLIA waiver | Clinical Laboratory Improvement Act designation that allows simple tests to be performed in point-of-care settings such as doctor'sdoctor’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 BrazilBrazil. |
FDA | United States Food and Drug AdministrationAdministration. |
IgG | IgG or Immunoglobulin 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 OrganizationOrganization. |
OTC | Over-the-CounterOver-the-Counter. |
PEPFAR | The President'sPresident’s Emergency Plan for AIDS ReliefRelief. |
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 AgricultureAgriculture. |
WHO | World Health OrganizationOrganization. |
You should carefully consider each of the following risk factors and all of the other information provided in this Form 10-K before purchasingin considering whether to make or continue to hold an investment in 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.
Risks related Although we believe that these risks are the most important for you to consider, you should read this section in conjunction with our industry, businessfinancial statements, the notes to those financial statements and strategy
Because we may not be able to obtain or maintain the necessary regulatory approvals for someour management's discussion and analysis 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 haveincluded in our periodic reports and incorporated into this Form 10-K by reference.
Risks Related 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.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 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 useCompetitors May Develop and Commercialize More Effective or Successful Products, and Our Research, Development and Commercialization Efforts May Not Succeed.
We must regularly commit substantial resources to research and development and the commercialization of third-party suppliers, someour new or enhanced products. The research and development process usually takes a long time from inception to commercial launch. During each stage of which may constitute our sole supply source, for certain important product components presentsthis process there is a substantial 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 product if our suppliers cannot orwe will not deliver those materialsachieve our goals in a timely fashion, or at all, dueand we may have to an interruptionabandon a new or enhanced product in their supply, qualitywhich we have invested substantial time and money. We expect to continue to incur significant costs related to our research and development activities.
Our products require significant development and investment prior to commercialization, including testing to demonstrate the products performance capabilities, cost-effectiveness or technical issues, or any other reason. If this occurs, we could incur substantial expensebenefits. We must obtain regulatory approval before most products may be sold and time toadditional development efforts on these products may be able to reestablishrequired before the appropriate quality, cost,products will be reviewed. However, regulatory and market-acceptance circumstances neededauthorities may not approve these products for commercial success. Even withsale or may substantially delay or condition such approval. There may be little or no market for the needed expenseproduct and time,entry into or development of new markets for our products may require an investment of substantial resources even if all applicable regulatory approvals are obtained. Furthermore, we may spend a significant amount of money on advertising or other activities and still fail to develop a market for the product. The success of our efforts may be affected by our ability to manufacture products in a cost-effective manner, whether we can obtain necessary intellectual property rights and protection and our ability to obtain reimbursement authorizations in the markets where the product will be sold. Therefore, if we fail to develop and gain commercial acceptance for our products, or if competitors develop more effective products or a greater number of successful new products, customers may decide not to purchase our products.
Our Products May Not be ableAble to reestablish anyCompete With New Diagnostic Products or allExisting 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 factors. The absence of any oneand/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 of these factors could prevent us from being ableeffectively marketed and sold.
Our Business Prospects May be Negatively Affected if We Fail to commercially produceAchieve Our Financial and market the affected product or products.Strategic Objectives.
New developmentsThere is no assurance that we will be successful in health treatments or new non-diagnostic products may reduce or eliminate the demand forimplementing our products.
The developmentfinancial and commercialization of products outside of the diagnostics industry could adversely affectstrategic objectives, including our efforts to increase sales of our products. For example, the funds for research, clinical development of a safe and effective vaccine to HIV or treatments for other diseases or conditions thatprojects have in the past come primarily from our business operations. If the sale of our products slows and we have less money available to fund research and development and clinical programs, we will have to cut certain programs. If adequate financial, personnel, equipment or other resources are designednot available, we may be required to detect,delay or scale back our business. If our total revenue and gross profits do not correspondingly increase or if our technology, product, clinical and market development efforts are unsuccessful or delayed, our operations will be negatively affected. Furthermore, our failure to successfully introduce new or enhanced products and develop new markets could have a material adverse effect on our business and prospects.
Our Future Revenues and Operating Results May be Negatively Affected by the Ongoing Consolidation in the Healthcare Industry.
There has been a significant amount of consolidation in the healthcare industry. This consolidation has increased the competition to provide goods and services to customers. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. Due to ongoing consolidation, there could be additional pressure on the prices of our products.
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 Financial Officer, Neil Goldman; our President of the Americas, 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 expires March 2020. The contract with Mr. Esfandiari has a term of three years ending March 2019. The contract with Ms. Klugewicz expires May 2019. The contract with Mr. Goldman expires December 2018. The Company has obtained a key man insurance policy on Mr. Esfandiari.
We May Not Generate the Expected Benefits of Our Acquisitions or Investments and They Could Disrupt Our Ongoing Business, Distract Our Management, Increase Our Expenses and Negatively Affect Our Business.
As a way for us to grow our business, we may pursue strategic acquisitions or investments. These activities, and their impact on our business, are subject to many risks, including the following: (i) the benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new businesses or markets, general economic conditions and increased competition; (ii) we may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products and/or technology into our business; (iii) we may not be able to accurately forecast the performance or ultimate impact of an acquired business; and (iv) an acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business.
If these factors occur, we may be unable to achieve all or a significant part of the benefits expected from an acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial and strategic objectives.
Third-Party Reimbursement Policies and Potential Cost Constraints Could Negatively Affect Our Business.
The list of our product end-users includes hospitals, physicians and other healthcare providers. If these end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors, the use of our products could be negatively impacted. Furthermore, the net sales of our products could also be adversely affected by changes in reimbursement policies of government or private healthcare payors.
Hospitals, physicians and other healthcare providers who purchase diagnostic products in the United States generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product. Due to the overall escalating cost of medical products and services, there is increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States, available levels of reimbursement may change for our existing products or eventually eliminateproducts under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for our products or our ability to sell our products on a profitable basis.
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.
The Ongoing Changes in Healthcare Regulation Could Negatively Affect Our Revenues, Business and Financial Condition.
There have been several proposed changes in the United States at the federal and state level for comprehensive reforms regarding the payment for, the availability of and reimbursement for healthcare services. These proposals have ranged from fundamentally changing federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (the “Affordable Care Act”).
Healthcare reform initiatives will continue to be proposed, and may reduce healthcare related funding in an effort. It is impossible to predict the ultimate content and timing of any healthcare reform legislation and its resulting impact on us. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase our costs or otherwise negatively effect on our financial condition and results of operations.
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 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.
Developing Testing Guidelines Could Negatively Affect The Sales of Our Products.
Government agencies may issue diagnostic testing guidelines or recommendations, which can alter the usage of our HIV testing products. New laws or guidelines, or changes to existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied, could impact the degree to which our testing products are used. These developments could affect the frequency of testing, the number of people tested and whether the testing products are used broadly for screening large populations or in a more limited capacity. These factors could in turn affect the level of sales of our products and our results of operations.
Legislative and Other Regulatory Changes Could Have An Effect On Our Business.
The current U.S. Presidential Administration has promised to repeal and replace the Affordable Care Act, expressed concerns with respect to existing trade agreements, and has indicated a desire to make other diagnostic productsregulatory changes during his administration. Changes in regulatory or economic conditions or in the laws and policies governing foreign trade, taxes, manufacturing, and development in the United States could impact our business. Economic and regulatory changes could also affect foreign currency exchange rates which, in turn, could affect our reported financial results and our competitiveness on a worldwide basis.
Developments Related To The U.K.’s Referendum On Membership in The E.U. Could Adversely Affect Us.
On June 23, 2016, the United Kingdom (“U.K.”) voted in favor of leaving the European Union, or E.U. Following this “Brexit” referendum there has been increased political and economic uncertainty, particularly in the U.K. and E.U. and this uncertainty may last for the foreseeable future. Until the terms and timing of the U.K.’s exit from the E.U. are finalized, it will be difficult to predict the impact of Brexit. Our business in the U.K., the E.U. and world-wide could be negatively affected during this period of uncertainty, and perhaps longer. The decision of voters in the U.K. to exit the E.U. could cause volatility in global financial markets, such as global currency exchanges, resulting in a slow-down in economic activity in the U.K., Europe or globally, and result in a losssignificant regulatory changes and uncertainty. These events could make it more difficult or costly to sell our products, particularly in the U.K. and Europe, and negatively affect our revenues and results of revenues.operations. The Brexit referendum may also influence other countries and result in additional countries deciding to leave the E.U. This in turn could result in additional changes and uncertainty, any or all of which could negatively impact our business.
We Could be Exposed To Liability if We Experience Security Breaches or Other Disruptions and it Could Harm Our Reputation and Business.
We may be subject to cyber-attacks whereby computer hackers may attempt to access our computer systems or our third party IT service provider’s systems and, if successful, misappropriate personal or confidential information. In addition, a contractor or other third party with whom we do business may attempt to circumvent our security measures or obtain such information, and may purposefully or inadvertently cause a breach involving sensitive information. We will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, but cyber-attacks are becoming more sophisticated and frequent and the techniques used in such attacks change rapidly. Even though we take cyber-security measures that are continuously reviewed and updated, our information technology networks and infrastructure may still be vulnerable due to sophisticated attacks by hackers or breaches.
Even the most well protected IT networks, systems, and facilities remain potentially vulnerable because the techniques used in security breaches are continually evolving and generally are not have sufficientrecognized until launched against a target and, in fact, may not be detected. Any such compromise of our or our third party’s IT service providers’ data security and access, public disclosure, or loss of personal or confidential business information, could result in legal claims proceedings, liability under laws to protect, privacy of personal information, and regulatory penalties, disrupt our operations, require significant management attention and resources to remedy any damages that result, damage our reputation and customers willingness to transact business with us, any of which could adversely affect our business.
Our Ability to Efficiently Operate Our Business is Reliant on Information Technology and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Business.
We rely heavily on complex information technology systems across our operations and on the internet, including for management of inventory, invoices, purchase orders, shipping, interactions with our third-party logistics provider, revenue and expense accounting, consumer call support, online business, and various other processes and transactions. Our ability to effectively introducemanage our business, coordinate the production, distribution and marketsale of our products, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the reliability and capacity of these systems and the internet.
If any of the foregoing systems fails to operate effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales and reduced efficiency of our operations. Significant expenditures could be required to fix any such problem.
If There is an Increase in Demand for Our Products, it Could Require Us to Expend Considerable Resources or Harm Our Customer Relationships if We are Unable to Meet That Demand.
If there are significant or unexpected increases in the demand for our products, we may not be able to meet that demand without expending additional capital resources. This would increase our capital costs, which could materiallynegatively affect our earnings. In addition, new manufacturing equipment or facilities may require FDA approval before they can be used to manufacture our products. To the extent we are unable to obtain or are delayed in obtaining such approvals, our ability to meet the demand for our products could be adversely affected. Furthermore, our suppliers may be unable or unwilling to expend the necessary capital resources or otherwise expand their capacity, which could negatively affect our business.
Our business could be negatively affected if we or our suppliers are unable to develop necessary manufacturing capabilities in a timely manner. If we fail to increase production volumes in a cost effective manner or if we experience lower than anticipated yields or production problems as a result of changes that we or our suppliers make in our manufacturing processes to meet increased demand, we could experience shipment delays or interruptions and increased manufacturing costs, which could also have a material adverse effect on our revenues and profitability.
If there are unexpected increases in demand for our products, we may be required to obtain additional raw materials in order to manufacture products to meet the increase in demand. However, some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. It is also possible that one or more of our suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits.
If we are unable to meet customer demand for our products, it could also harm our operating results.relationships with our customers and impair our reputation within the industry. This, in turn, could have a material adverse effect on our business.
Risks Related to Our Products
For Our Business to Succeed in the Future, Our Current and Future Products Must Receive Market Acceptance.
The market acceptance and the timing of such acceptance, of our new products or technologies is necessary for our future success. To achieve market acceptance, we and/or our distributors will likely be required to undertake substantial efforts and spend significant funds to inform every one of the existence and perceived benefits of our products. We also may require government funding for the purchase of our products may be needed to help create market acceptance and expand the use of our products.
It may be difficult evaluate the market reaction to our products and our marketing efforts for new products may not be successful. The government funding we receive may be limited for new products. As such, there can be no assurance that any products will obtain significant market acceptance and fill the market need that is perceived to exist on a timely basis, or at all.
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 successOther Providers of Diagnostic Tests and Sample Collection Products Will Likely Provide Us with Substantial Competition.
Our competitors make similar products to ours. A number of our business depends on,competitors are making investments in technologies and products, and may have a competitive advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines and may have greater name recognition than we have. We also face competition from certain of our distributors or former customers that have created or may decide to create, their own products to compete with ours. If our competitors’ products take market share from our products through more effective marketing or competitive pricing, our revenues, margins and operating results could be adversely affected. In addition, to the market successour revenues and operating results could be negatively impacted if some of our customers internally develop or acquire their own sample collection devices and use those devices in place of our products in order to reduce costs.
New Developments in Health Treatments and 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 abilityproducts. For example, the development of a safe and effective vaccine to raise additional capital throughHIV or treatments for other diseases or conditions that our products are designed to detect, could reduce or eventually eliminate the saledemand for our HIV or other diagnostic products and result in a loss of debtrevenues.
The Sales Cycles for Our Products Can Be Lengthy, Which Can Cause Variability and Unpredictability in Our Business.
Some of our products may require lengthy and unpredictable sales cycles, which makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Our products may involve sales to large public and private institutions which may require many levels of approval and may be dependent on economic or equitypolitical conditions and the availability of grants or through borrowing, andfunding from government or public health agencies which can vary from period to period. There can be no assurance that purchases or funding from these agencies will occur or continue, especially if current negative economic conditions continue or intensify. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to raise capitalcomplete transactions at all or borrow funds on attractivea schedule and in an amount consistent with our objectives.
Our Insurance May be Inadequate to Cover Our Potential Business Risks.
We believe that our present product liability and other insurance coverage is sufficient to cover our current estimated exposures, but we cannot be sure that we will not incur liabilities in excess of our policy limits. Although we believe that we will be able to continue to obtain adequate coverage in the future, there is no assurance that we will be able to do so.
Due to the Use of Our Products, We May Face Product Liability Claims for Injuries.
If any of our products, or any product which is made with the use or incorporation of any of our technologies, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage, we may subject to liability. We may not be successful in defending any product liability lawsuits brought against us. Regardless of merit or eventual outcome, product liability claims could result in (i) decreased demand for our products; (ii) damage to our image or reputation; (iii) lost revenues; and (iv) incurrence of damages payable to plaintiffs
Legal Proceedings May Cause Us to Suffer Monetary Damages or Incur Substantial Costs.
In the future we may become involved in various legal proceedings arising out of our businesses. These may include negligence claims, commercial disputes or other lawsuits arising in the ordinary course of business. These lawsuits may result in damages, sometimes in substantial amounts, for commercial or personal injuries allegedly suffered. An adverse ruling or rulings in one or more such lawsuits could result in the termination or modification of a material contract or otherwise have a material adverse effect on our business.
Our Customers May Not Adopt Rapid Point-of-Care Diagnostic Testing.
Rapid point-of-care tests are beneficial because, among other things, they can be administered by healthcare providers in their own facilities or used by consumers at home without sending samples to central laboratories. But currently the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. are provided by clinical reference laboratories and hospital-based laboratories. In some international markets, such as Europe, diagnostic testing is performed primarily by centralized laboratories. Future sales of our products will depend, in part, on our ability to expand market acceptance of rapid point-of-care testing and successfully compete against laboratory testing methods and products. However, we expect that clinical reference and other hospital-based laboratories will continue to compete vigorously against our rapid point-of-care products. Even if we can demonstrate that our products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. If we fail to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers, it would have a negative effect on our future sales growth.
If Our Products Do Not Perform Properly, It May Affect Our Revenues, Stock Price and Reputation.
Our products may not perform as expected. For example, a defect in one of our diagnostic products or a failure by a customer to follow proper testing procedures may cause the product to report inaccurate information. Identifying the root cause of a product performance or quality issue can be difficult and time consuming.
If our products do not to perform in accordance with the applicable label claims or otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be negatively affected. If this occurs, we may be required to implement holds or product recalls and incur warranty obligations. Furthermore, the poor performance by one or more of our products could have an adverse effect on our reputation, our continuing ability to sell products and the price of our Common Stock.
If We Expand Our International Presence, It May Increase Our Risks and Expose Our Business to Regulatory, Cultural or Other Challenges.
We will continue to try to increase revenue derived from international sales of our products. There are several of factors that could adversely affect the performance of our business and/or cause us to incur substantially increased costs because of our international presence and sales, including: (i) uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; (ii) cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of our products; (iii) exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or representatives; (iv) trade protection measures, trade sanctions and import/export licensing requirements; (v) our inability to obtain or maintain regulatory approvals or registrations for our products; (vi) Economic conditions, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign countries; (vii) Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign countries; (viii) our inability to identify international distributors and negotiate acceptable terms for distribution agreements; and (ix) restrictions on our ability to repatriate investments and earnings from foreign operations.
Economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of the supply of our products could reduce revenues or cause us to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of manufacturing our products in foreign countries.
Financial Results, Economic, and Financing Risks
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 necessaryAmounts Necessary to continue our business,Continue Our Business, or at all.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 each year for 2014 and 2015.through 2017. We estimate that our resources are sufficient to fund our needs through the end of 20162018 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 20162018 or, in the alternative, be successful in raising sufficient capital to fund our needs after 2016.2018.
Our U.S. market sales are difficult to predict in 20162018 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 sales increases or cause 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 Were Profitable From 2009 Through 2013, We Incurred a Net Loss For Each Year From 2014 Through 2017 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, 2016 and 2017, 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.
We Base Our Estimates or Judgments Relating to Critical Accounting Policies on Assumptions That Can Change or Prove to be Incorrect.
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States and our discussion and analysis of financial condition and results of operations is based on such statements. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We continuously evaluate significant estimates used in preparing our financial statements, including those related to (i) revenue recognition; (ii) stock-based compensation; (iii) allowance for uncollectible accounts receivable; (iv) customer sales returns and allowances; (v) contingencies; and (vi) income taxes.
Our estimates are based on historical experience and various other assumptions that we believe to be reasonable, as set forth in our discussion and analysis of financial condition and results of operations, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these and other estimates if our assumptions change or if actual circumstances differ from those in our assumptions. If our operating results fall below the expectations of securities analysts and investors, the price of our Common Stock may decline.
We May Fail to Meet Our Financial Projections and There May be Fluctuations in Our Financial Results.
From quarter to quarter and year to year, our operating results can fluctuate, which could cause our growth or financial performance to fail to meet the expectations of investors and securities analysts. Our financial projections are based on a number of assumptions, including the estimated demand for our products. However, sales to our distributors and other customers may not meet expectations because of lower than expected customer demand or other factors, including continued economic volatility and disruption, reduced governmental funding, and other circumstances described elsewhere in this Form 10-K. A variety of factors could also contribute to the variability of our financial results, including infrequent, unusual or unexpected changes in revenues or costs.
Different products provide dissimilar contributions to our gross product margin. Accordingly, our operating results could also fluctuate and be negatively affected by the mix of products sold and the relative prices and gross product margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts could adversely affect our reputation and the price of our Common Stock.
Our Operating Results May be Negatively Affected by Changes in Foreign Currency Exchange Rates.
In the past our exposure to foreign currency exchange rate risk has not been material. Nevertheless, sales of our products are subject to currency risks, since changes in the values of foreign currencies relative to the value of the U.S. Dollar can render our products comparatively more expensive. The fluctuations in the exchange rate could negatively impact international sales of our products, as could changes in the general economic conditions.
The revenues and expenses of Chembio Diagnostics Malaysia, one of our subsidiaries, are recorded in Malaysian Ringgit. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of reporting our consolidated financial results. Our expectation is that the Chembio Diagnostics Malaysia business will continue to grow and, consequently, our exposure to foreign currency exchange rates may grow as well.
Chembio Diagnostics Malaysia’s revenues and expenses and the translation of Chembio Diagnostics Malaysia’s financial results into U.S. Dollars may be negatively affected by fluctuations in the exchange rate. Favorable movement in exchange rates have benefited us in prior periods. However, where there are unfavorable currency exchange rate fluctuations, our consolidated financial statements could be negatively affected. Furthermore, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, we have not generally entered into hedging instruments to manage our currency exchange rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. If we are unable to successfully hedge against unfavorable foreign currency exchange rate movements, our consolidated financial results may be adversely impacted.
Economic Volatility Around the World Could Adversely Affect Our Results.
Volatility in the economy may continue or exist in the future. This could negatively impact our financial performance or those of our customers and suppliers. These circumstances could inhibit our access to liquidity needed to conduct or expand our business. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of economic conditions. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase our products or supply us with necessary equipment, raw materials or components. Even with the improvement of economic conditions, it may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of an economic recovery.
The New U.S. Tax Cuts and Jobs Act of 2017 and Any Subsequent Tax Law Changes Could Adversely Affect Us.
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA includes, among other matters, changes to U.S. federal tax rates, allows for the expensing of capital expenditures, imposes significant additional limitations on the deductibility of interest, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We do not expect tax reform to have a material impact to our projection of minimal cash taxes or to our net operating losses. Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate of 21 percent, and the impact will be recognized in our tax expense in the year of enactment. We continue to evaluate the TCJA may have on our business. The impact of this tax reform on holders of our common stock is uncertain and could be adverse. In addition, subsequent unforeseen changes in U.S. or other countries’ tax laws could adversely affect us. We urge our stockholders to consult with their legal and tax advisors with respect to the TCJA and the potential tax consequences of investing in our common stock.
We May Require Additional Capital in the Future.
Our liquidity and ability to meet capital requirements will depend on numerous factors, including, but not limited to, the following: (i) the costs and timing of expansion of sales and marketing activities; (ii) the extent to which we gain or expand market acceptance for existing, new or enhanced products; (iii) the timing and success of the commercial launch of new products; (iv) the success of our research and product development efforts; (v) changes in existing and potential relationships with distributors and other business partners; (vi) the costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; and (vii) Competing technological and market developments.
If we require new financing, we may seek to raise funds by selling equity or other securities or through bank borrowings. There can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all.
Our Business May be Negatively Affected by Terrorist Attacks or Natural Disasters.
Terrorist attacks or natural disasters could cause economic instability. These events could negatively affect economic conditions both within and outside the United States and harm demand for our products. The operations of our customers and suppliers could be negatively impacted and eliminate, reduce or delay our customers’ ability to purchase and use our products and our suppliers’ ability to provide raw materials and finished products.
Our facilities, including some pieces of manufacturing equipment and our computer systems, may be difficult to replace. Various types of disasters, including fires, earthquakes, floods and acts of terrorism, may affect our facilities and computer systems. In the event our existing facilities or computer systems are affected by man-made or natural disasters, we may have difficulty operating our business and may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business.
Risks Related to Intellectual Property
Our Success Depends on Our Ability to Protect Our Proprietary Technology. 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.
Our industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in other countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenues and gross profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other technologies may not be adequate for the operation of our business.
As appropriate, we intend to file patent applications and obtain patent protection for our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to the use or manufacture of those products. However, there have been changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, which may impact our ability to protect our technology and enforce our intellectual property rights. For example, in 2011, the U.S. enacted sweeping changes to the U.S. patent system under the Leahy-Smith America Invents Act (the “AIA”), including changes that would transition the U.S. from a “first-to-invent” system to a “first-to-file” system and alter the processes for challenging issued patents. These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.
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 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.
Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how.
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.
If We Become Involved in Intellectual Property Disputes, Such Disputes Could Increase Our Costs and Limit or Eliminate Our Ability to Sell Products or Use Certain Technologies.
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. We may seek to enforce our patents or other intellectual property rights through litigation. Such litigation is prevalent and is expected to continue. In our business, there are a large number of patents and patent applications similar to our products, and additional patents may be issued to third parties relating to our product areas. We, our customers or our suppliers may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of our products. We may also have disputes with parties that license patents to us if we believe the license is no longer needed for our products or the licensed patents are no longer valid or enforceable.
There are a large number of patents in our industry, and the claims of these patents appear to overlap in many cases. Therefore there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing that cover technologies we incorporate in our products. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third party’s proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another party’s proprietary rights.
If we are involved in litigation or other legal proceedings with respect to patents or other intellectual property and proprietary technology, it could adversely affect our revenues, results of operations, market share and business because (i) it could consume a substantial portion of managerial and financial resources; (ii) its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by our products; (iii) the pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products; (iv) a court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products; and (v) an adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect our future earnings.
Under certain contracts with third parties, we may indemnify the other party if our products or activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Furthermore, our products may contain technology provided to us by third parties, and we may be unable to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the event that an infringement or misappropriation claim is asserted against us.
There may also be other types of disputes that we become involved in regarding intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reissue, patent reexamination, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office as well. These proceedings permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Risks Related to Our Third Party Collaborators
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 Our 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 certain 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.
If Needed, We May Work with Strategic Collaborators to Assist in Developing and Commercializing Our Products.
Some business opportunities that require a technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic collaborators. As part of our strategy for development and commercialization of our products, we may enter into arrangements with distributors or other third-parties. Relying on such collaborative relationships could be risky to our business for a number of reasons, including: (i) we may be required to transfer material rights to such strategic collaborators, licensees and others; (ii) our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; (iii) our collaborators may decide to terminate our collaborative arrangement or become insolvent; (iv) our collaborators may develop technologies or components competitive with our products; (v) disagreements with collaborators could result in the termination of the relationship or litigation; and (vi) we may not be able to agree to future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all.
We expect our collaborators will have an economic motivation to succeed in performing their contractual responsibilities under our agreements, there is no assurance that they will do so. Due to our reliance on strategic agreements, it can make it difficult to accurately forecast our future revenues and operating results.
If We Fail to Maintain Existing Distribution Channels, or Develop New Distribution Channels, It May Result in Lower Revenues.
We collaborate with laboratories, diagnostic companies and distributors in order to sell our products. The sale of our products depends in large part on our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate and work with.
By relying on distributors or third-parties to market and sell our products could negatively impact our business for various reasons, including: (i) we may not be able to find suitable distributors for our products on satisfactory terms, or at all; (ii) agreements with distributors may prematurely terminate or may result in litigation between the parties; (iii) our distributors or other customers may not fulfill their contractual obligations and distribute our products in the manner or at the levels we expect; (iv) our distributors may prioritize their own private label products that compete with our products; (v) Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements with other distributors; and (vi) we may not be able to negotiate new or renew existing distribution agreements on acceptable terms, or at all.
We will try to maintain and expand our business with distributors and customers and make every effort to require that they fulfill their contractual obligations, but there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. If we are unable to do so, our business will be negatively impacted.
Risks Related to Regulations
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.
If We Do Not Comply With FDA or Other Regulatory Requirements, We May Be Required to Suspend Production or Sale of Our Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues.
FDA Regulations and regulations by other federal, state and foreign regulatory agencies has an effect on many aspects of our operations, and the operations of our suppliers and distributors, including packaging, labeling, manufacturing, adverse event reporting, recalls, distribution, storage, advertising, promotion and record keeping. We are subject to routine inspection by the FDA and other agencies to determine compliance with QSRs and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. We believe that our facilities and procedures are in material compliance with the FDA requirements and ISO standards, but the regulations may be unclear and are subject to change, and we cannot be sure that the FDA or other regulators will agree with our compliance with these requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products. Regulatory agencies may impose restrictions on our or our distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market.
Our inability to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, recall or seizure of products, civil penalties, withdrawal of product registrations, total or partial suspension of production, refusal to grant premarket clearance or PMA approval for devices, marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations.
We must frequently make judgment decisions with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with how we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. Our reputation could be substantially impaired if we are assessed any civil and criminal penalties and limit our ability to manufacture and market our products which could have a material adverse effect on our business.
Demand For Our Products May be Affected by FDA Regulation of Laboratory-Developed Tests and Genetic Testing.
Regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical laboratories is covered by the FDA. The FDA has previously taken the position that it has regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion by not regulating most LDTs performed by high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. These laboratories are subject to CLIA regulation but such laboratories have previously not been subject to regulation by FDA under the agency’s medical device requirements.
However, the FDA has announced that it would begin regulating LDTs, and in October 2014 the FDA issued proposed guidance on the regulation of LDTs for public comment. But, on November 18, 2016, the FDA announced that it would not finalize the proposed guidance prior to the end of the Obama administration. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. We cannot predict what policies the Trump administration will adopt with respect to LDTs. If the FDA increases regulation of LDTs, it could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could reduce demand for our products and adversely impact our revenues.
In Addition to FDA Requirements, We Are Subject to Several Government Regulations, the Compliance With Which Could Increase Our Costs and Affect Our Operations.
In addition to the FDA regulations previously described, laws and regulations in some states may restrict our ability to sell products in those states.
We must comply with numerous laws related to safe working conditions, environmental protection, disposal of hazardous substances, fire hazard control, manufacturing practices and labor or employment practices. Compliance with these laws or any new or changed laws regulating our business could result in substantial costs. Due to the number of laws and regulations governing our industry, and the actions of a number of government agencies that could affect our operations, it is impossible to reliably predict the full nature and impact of these laws and regulations. To the extent the costs and procedures associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely affected.
We May Incur Additional Costs If We Do Not Comply With Privacy, Security and Breach Notification Regulations.
We believe we are not a covered entity nor a business associate of a covered entity and the Company is not responsible for complying with the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”). Even though the Company is likely not a covered entity under HIPAA, the Company does have in place administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information.] The Company is required to comply with varying state privacy, security and breach reporting laws. If we fail to comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. Also, there are other federal and state laws that protect the privacy and security of consumers’ personal information, and we may be subject to enforcement by various governmental authorities and courts resulting in complex compliance issues. We could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information.
If We Are Not Able to Manufacture Products in Accordance With Applicable Requirements, It Could Adversely Affect Our Business.
Our products must meet detailed specifications, performance standards and quality requirements. As a result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in materials or production methods, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our label claims or the expectations of our customers.
If we are not able to meet the applicable specifications, performance standards, quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations.
Healthcare Fraud and Abuse Laws Could Adversely Affect Our Business and Results of Operations.
There are various federal and state laws targeting fraud and abuse in the healthcare industry that the Company is subject to, including anti-kickback laws, laws constraining the sales, false claims laws, marketing and promotion of medical devices by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. There are other laws the Company is subject to that require the Company to report certain transactions between it and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs. Many of the existing requirements are new and have not been definitively interpreted by state authorities or courts, and available guidance is limited. We could face enforcement action and fines and other penalties, and could receive adverse publicity, unless and until we are in full compliance with these laws, all of which could materially harm the Company. Furthermore, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require us to change our business practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations.
Our Compliance With Regulations Governing Public Companies is Complex and Expensive.
Public companies are subject to various laws and regulations, which have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. For example, we are subject to the Sarbanes-Oxley Act of 2002, The Dodd-Frank Wall Street Reform and Consumer Protection Act, the requirements of The NASDAQ Global Market, and the SEC’s requirements for public companies to provide financial statements in interactive data format using the eXtensible Business Reporting Language (“XBRL”). The implementation of certain aspects of these laws and regulations has required and will continue to require substantial management time and oversight and may require us to incur significant additional accounting and legal costs. We continually review changes with respect to new and proposed rules and cannot predict or estimate the amount of additional costs, and the timing of such costs, we may incur. There are several interpretations of these laws and regulations, in many cases due to their lack of specificity, and as a result, their application in practice may change as new guidance is provided by regulatory and governing bodies. This may result in continuing uncertainty regarding compliance matters and higher costs. We are committed to maintaining high standards of corporate governance and public disclosure, but if we fail to comply with any of these requirements, legal proceedings may be initiated against us, which may adversely affect our business.
Although we haveWe Have an ethicsEthics and anti-corruption policyAnti-Corruption Policy in place,Place, and have no knowledgeHave No Knowledge or reasonReason to knowKnow of any practicesAny Practices by our employees, agentsOur Employees, Agents or distributors that couldDistributors That Could be construedConstrued as in violationViolation of such policies, our business includes salesSuch Policies, Our Business Includes Sales of productsProducts to countries where thereCountries Where There is or may be widespread corruption.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. The Company has obtained a key man insurance policy on Mr. Esfandiari. The contract with Mr. Sperzel provides that Mr. Sperzel will serve as the Chief Executive Officer and as a Director of the Company through March 13, 2017.
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, 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 and 2015 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 and 2015, 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 relatedRelated to ourOur 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 21,60016,368 shares per day over the three months ended December 31, 20152017 as compared with approximately 109,00019,300 shares per day over the three months ended December 31, 2014.2016. 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.
The Price of Our Common Stock Could Continue to be Volatile.
The price of our Common Stock has been volatile and may be volatile in the future. The following factors, among others, could have a significant impact on the market for our Common Stock: (i) the performance of our business; (ii) clinical results with respect to our products or those of our competitors; (iii) the gain or loss of significant contracts and availability of funding for the purchase of our products; (iv) actions undertaken by the Congress or the Presidential Administration; (v) changes in our relations with our key customers, distributors or suppliers; (vi) developments in patent or other proprietary rights; (vii) litigation or threatened litigation; (viii) general market and economic conditions; (ix) the relatively low trading volume for our Common Stock; (x) changes in competition; (xi) Complaints or concerns about the performance or safety of our products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; (xii) failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; (xiii) announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or our customers; (xiv) changes in our operating results; and (xv) terrorist attacks, civil unrest, war and national disasters.
Overall, the stock market has experienced price and volume fluctuations that have affected the market price of our Common Stock, as well as the stock of many other similar companies. Such price fluctuations are generally unrelated to the operating performance of the specific companies whose stock is affected.
After the volatility in the market price of a company’s stock, class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and the attention and resources of our management could be diverted, each of which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities.
Sales of Our Common Stock by Existing Stockholders, Executive Officers or Directors Could Depress the Market Price of Our Common Stock.
If our existing stockholders, officers or directors sell our Common Stock in the public market, or the perception that such sales may occur, it could negatively affect the price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors.
Institutional stockholders own significant amounts of our Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, the prevailing price of our Common Stock could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock.
We Do Not Intend to Pay Cash Dividends on Our Common Stock, Therefore an Investor in Our Common Stock Will Benefit Only if the Value of Our Common Stock Increases.
We do not expect to pay any cash dividends on our Common Stock and currently intend to retain our earnings, if any, to finance the expansion of our business. Therefore, the success of an investment in our Common Stock will depend entirely upon any future increase in value of our Common Stock. There is no guarantee that our Common Stock will gain value or even maintain the price at which investors purchased their shares.
If We and/or Our Independent Registered Public Accounting Firm Conclude That Our Internal Control Over Financial Reporting is Not Effective, Investor Confidence and the Value of Our Common Stock May be Adversely Impacted.
The SEC has adopted rules requiring us, as a public company, to include a report in our Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must report on the effectiveness of these internal controls.
We believe our internal controls will continue to evolve as our business develops. We continue to review our internal control over financial reporting in an effort to ensure compliance with SEC rules and regulations, any control system, regardless of how well designed and operated, can provide only reasonable assurance that its objectives will be met. In addition, the overall quality of our internal controls may be affected by the internal control over financial reporting implemented by any business we acquire and our ability to assess and successfully integrate the internal controls of any such business.
If our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, implemented, or tested, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then it may issue a report noting such dissatisfaction. We also could conclude that our internal control over financial reporting is not effective. These events could result in an adverse reaction in the financial marketplace, which ultimately could negatively impact the market price of our Common Stock.
Any Future Issuances of Shares of Our Common Stock by Us Could Harm the Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings.
Any future sales of a substantial number of our shares of Common Stock or other equity-related securities, or the perception that such sales may occur, could adversely affect the price of our Common Stock, and could impair our ability to raise capital through future offerings of equity or equity-related securities.
Our managementStockholder Rights Agreement Could Make a Third-Party Acquisition of Us Difficult.
Our Stockholder Rights Agreement, which is described above under "BUSINESS: Stockholder Rights Agreement" contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders.
Our Management and larger stockholders exercise significant control overLarger Stockholders Exercise Significant Control Over the Company.
As of December 31, 2015,2017, our named executive officers, directors and 5% stockholders beneficially owned approximately 24.0%44.35% of our voting power, which includes twofour large investors that beneficially ownsown approximately 11.4%13.97%, 10.42%, 7.46%, and 9.2%7.09%, 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 corporate headquarters and U.S. manufacturing, administrative offices, and research facilities are located in leased space in Medford, New York. In addition we have warehousingYork, together with nearby warehouse space as well as someand additional administrative offices located in Holbrook, New York. We lease approximately 39,660 square feet of industrialOur Southeast Asia manufacturing, warehouse, and commercial facilities are located in leased space in Medford for $27,988 per month. The space is utilized for researchKuala Lumpur, Malaysia. We regularly review our real estate portfolio and development activities (approximately 5,440 square feet), offices (approximately 2,640 square feet)develop footprint strategies to support our customers’ global plans, while at the same time supporting our technical needs 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 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.controlling operating expenses.
ITEM 3. | ITEM 3. LEGAL PROCEEDINGS |
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. | 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."“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 2015 | High Bid | | Low Bid | | |
Fiscal Year 2017 | | | High | | | Low | |
First Quarter | | | $ | 4.18 | | | | $ | 3.41 | | | $ | 6.80 | | | $ | 5.05 | |
Second Quarter | | | $ | 5.21 | | | | $ | 3.90 | | | $ | 7.04 | | | $ | 5.15 | |
Third Quarter | | | $ | 5.19 | | | | $ | 2.85 | | | $ | 6.70 | | | $ | 5.75 | |
Fourth Quarter | | | $ | 5.48 | | | | $ | 3.48 | | | $ | 8.35 | | | $ | 5.90 | |
| | | | | | | | | | | | | | | | | | |
Fiscal Year 2014 | High Bid | | Low Bid | | |
Fiscal Year 2016 | | | High | | | Low | |
First Quarter | | | $ | 3.88 | | | | $ | 2.81 | | | $ | 6.10 | | | $ | 4.03 | |
Second Quarter | | | $ | 3.56 | | | | $ | 2.81 | | | $ | 9.40 | | | $ | 5.87 | |
Third Quarter | | | $ | 3.85 | | | | $ | 3.02 | | | $ | 8.48 | | | $ | 5.08 | |
Fourth Quarter | | | $ | 5.19 | | | | $ | 3.40 | | | $ | 7.45 | | | $ | 6.10 | |
Holders
As of March 1, 2016,5, 2018, there were approximately 1391,590 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, 2017 that were not previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 8-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, 2017.
ITEM 6. | SELECTED FINANCIAL DATA |
PresentedThe following selected consolidated financial data were derived from our audited consolidated financial statements and should be read in conjunction with, and are qualified by reference to, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included elsewhere in this table are selectedAnnual Report on Form 10-K. The financial data for the past five years ended December 31, 2015.information presented may not be indicative of our future performance.
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
|
SELECTED HISTORICAL FINANCIAL DATA
|
As of and For the Years Ended
|
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES | |
SELECTED HISTORICAL FINANCIAL DATA | |
As of and For the Years Ended December 31, | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 (1) | | | (2 | ) | | 2016 (3) | | | (2 | ) | | 2015 | | | (2 | ) | | 2014 | | | (2 | ) | | 2013 | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL REVENUES | | $ | 24,015,427 | | | | | | $ | 17,868,841 | | | | | | $ | 24,255,485 | | | | | | $ | 27,645,284 | | | | | | $ | 29,549,609 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of product sales | | | 12,921,157 | | | | | | | 9,417,505 | | | | | | | 13,768,658 | | | | | | | 16,831,261 | | | | | | | 17,249,450 | | | | |
Research and development expenses | | | 8,555,381 | | | 36 | % | | | 8,427,554 | | | 47 | % | | | 6,377,839 | | | 26 | % | | | 4,832,537 | | | 17 | % | | | 5,834,249 | | | 20 | % |
Selling, general and administrative expenses | | | 9,021,439 | | | 38 | % | | | 7,595,559 | | | 43 | % | | | 7,663,035 | | | 32 | % | | | 7,531,739 | | | 27 | % | | | 5,461,083 | | | 18 | % |
| | | 30,497,977 | | | | | | | 25,440,618 | | | | | | | 27,809,532 | | | | | | | 29,195,537 | | | | | | | 28,544,782 | | | | |
INCOME (LOSS) FROM OPERATIONS | | | (6,482,550 | ) | | | | | | (7,571,777 | ) | | | | | | (3,554,047 | ) | | | | | | (1,550,253 | ) | | | | | | 1,004,827 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
OTHER INCOME (EXPENSES): | | | 22,485 | | | | | | | 25,548 | | | | | | | (3,238 | ) | | | | | | 132 | | | | | | | 12,943 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
INCOME (LOSS) BEFORE INCOME TAXES | | | (6,460,065 | ) | | (27 | )% | | | (7,546,229 | ) | | (42 | )% | | | (3,557,285 | ) | | (15 | )% | | | (1,550,121 | ) | | (6 | )% | | | 1,017,770 | | | 3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax provision (benefit) | | | (88,305 | ) | | | | | | 5,800,818 | | | | | | | (1,160,243 | ) | | | | | | (412,918 | ) | | | | | | 486,952 | | | | |
NET INCOME (LOSS) | | $ | (6,371,760 | ) | | | | | $ | (13,347,047 | ) | | | | | $ | (2,397,042 | ) | | | | | $ | (1,137,203 | ) | | | | | $ | 530,818 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic income (loss) per share | | $ | (0.52 | ) | | | | | $ | (1.26 | ) | | | | | $ | (0.25 | ) | | | | | $ | (0.12 | ) | | | | | $ | 0.06 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted income (loss) per share | | $ | (0.52 | ) | | | | | $ | (1.26 | ) | | | | | $ | (0.25 | ) | | | | | $ | (0.12 | ) | | | | | $ | 0.06 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average number of shares outstanding, basic | | | 12,300,031 | | | | | | | 10,622,331 | | | | | | | 9,626,028 | | | | | | | 9,530,320 | | | | | | | 8,994,080 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average number of shares outstanding, diluted | | | 12,300,031 | | | | | | | 10,622,331 | | | | | | | 9,626,028 | | | | | | | 9,530,320 | | | | | | | 9,519,968 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Working capital (4) | | $ | 7,757,340 | | | | | | $ | 14,707,876 | | | | | | $ | 9,479,968 | | | | | | $ | 12,372,169 | | | | | | $ | 14,221,011 | | | | |
Total assets | | | 16,616,021 | | | | | | | 20,575,236 | | | | | | | 20,816,344 | | | | | | | 25,010,192 | | | | | | | 24,486,592 | | | | |
Total liabilities | | | 3,536,825 | | | | | | | 3,405,650 | | | | | | | 3,154,838 | | | | | | | 5,286,030 | | | | | | | 4,309,490 | | | | |
Shareholders' equity | | | 13,079,196 | | | | | | | 17,169,586 | | | | | | | 17,661,506 | | | | | | | 19,724,162 | | | | | | | 20,177,102 | | | | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | | | | | | December 31, 2014 | | | | | | December 31, 2013 | | | | | | December 31, 2012 | | | | | | December 31, 2011 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL REVENUES | | $ | 24,255,485 | | | | | | $ | 27,645,284 | | | | | | $ | 29,549,609 | | | | | | $ | 25,610,595 | | | | | | $ | 19,388,036 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
GROSS MARGIN(1) | | | 10,486,827 | | | | 43 | % | | | 10,814,023 | | | | 39 | % | | | 12,300,159 | | | | 42 | % | | | 10,789,991 | | | | 42 | % | | | 9,390,303 | | | | 48 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | % |
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 | % |
| | | 14,405,874 | | | | | | | | 12,364,276 | | | | | | | | 11,295,332 | | | | | | | | 9,337,889 | | | | | | | | 8,302,416 | | | | | |
INCOME (LOSS) FROM OPERATIONS | | | (3,554,047 | ) | | | | | | | (1,550,253 | ) | | | | | | | 1,004,827 | | | | | | | | 1,452,102 | | | | | | | | 1,087,887 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
OTHER INCOME (EXPENSES): | | | (3,238 | ) | | | | | | | 132 | | | | | | | | 12,943 | | | | | | | | (1,584 | ) | | | | | | | (12,325 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax provision (benefit) | | | (1,160,243 | ) | | | | | | | (412,918 | ) | | | | | | | 486,952 | | | | | | | | 509,237 | | | | | | | | (5,133,229 | ) | | | | |
NET INCOME (LOSS) | | $ | (2,397,042 | ) | | | | | | $ | (1,137,203 | ) | | | | | | $ | 530,818 | | | | | | | $ | 941,281 | | | | | | | $ | 6,208,791 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | �� | | | | | | | |
Basic income (loss) per share | | $ | (0.25 | ) | | | | | | $ | (0.12 | ) | | | | | | $ | 0.06 | | | | | | | $ | 0.12 | | | | | | | $ | 0.79 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted income (loss) per share | | $ | (0.25 | ) | | | | | | $ | (0.12 | ) | | | | | | $ | 0.06 | | | | | | | $ | 0.11 | | | | | | | $ | 0.73 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average number of shares outstanding, basic | | | 9,626,028 | | | | | | | | 9,530,320 | | | | | | | | 8,994,080 | | | | | | | | 7,986,030 | | | | | | | | 7,874,807 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average number of shares outstanding, diluted | | | 9,626,028 | | | | | | | | 9,530,320 | | | | | | | | 9,519,968 | | | | | | | | 8,614,944 | | | | | | | | 8,556,284 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Working capital | | $ | 9,479,968 | | | | | | | $ | 12,372,169 | | | | | | | $ | 4,221,011 | | | | | | | $ | 7,630,368 | | | | | | | $ | 6,133,956 | | | | | |
Total assets | | | 20,816,344 | | | | | | | | 25,010,192 | | | | | | | | 24,486,592 | | | | | | | | 17,335,150 | | | | | | | | 15,485,744 | | | | | |
Total liabilities | | | 3,154,838 | | | | | | | | 5,286,030 | | | | | | | | 4,309,490 | | | | | | | | 3,460,630 | | | | | | | | 2,991,110 | | | | | |
Shareholders' equity | | | 17,661,506 | | | | | | | | 19,724,162 | | | | | | | | 20,177,102 | | | | | | | | 13,874,520 | | | | | | | | 12,494,634 | | | | | |
(1) percentage shown reflects the percentage of total revenues
(1) | On January 9, 2017, we completed the acquisition of RVR Diagnostics Sdn Bhd, a Malaysia manufacturer and distributor of rapid medical assays, which subsequently changed its name to Chembio Diagnostic Malaysia Sdn Bhd. Accordingly, the acquisition impacts comparability to the results in prior years. |
(2) | Percentage shown reflects the percentage of Total Revenues. |
(3) | In 2016, we completed an underwritten public equity offering and issued 2.3 million common shares that raised approximately $12.5 million, net of underwriting commissions and other expenses. |
(4) | Working capital is calculated as total current assets minus total current liabilities. |
ITEM 7. | MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
ThisThe following management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to help you understand the business operations and financial condition of the Company for the three-year period ended December 31, 2017. This discussion should be read in conjunction with the accompanying ConsolidatedItem 8. Financial Statements and related notes.Supplementary Data. Our discussionMD&A is presented in six sections:
| ● | Consolidated Results of Operations |
| ● | Liquidity and Capital Resources |
| ● | Significant Accounting Policies and Critical Accounting Estimates |
| ● | Recently Issued Accounting Pronouncements |
Executive Overview
Our Business
Through our wholly-owned subsidiaries, Chembio Diagnostic Systems Inc. and analysisChembio Diagnostics Malaysia Sdn Bhd, we develop, manufacture, and commercialize point-of-care (“POC”) diagnostic tests that are used to detect or monitor diseases. All products that are currently being developed are based on the Company’s patented DPP® technology, a novel POC diagnostic platform that offers certain customer advantages as compared to traditional lateral flow technology. Chembio was formed in 1985.
Business Strategy
Recent accomplishments and highlights:
● | Achieved total revenue of $24.0 million for full year 2017, an increase of 34% over prior year |
● | Achieved product sales of $19.3 million for full year 2017, an increase of 41% over prior year |
● | Received purchase commitment from Bio-Manguinhos related to DPP® HIV Assays and DPP® Leishmania Assays in Brazil, with a total value of $8.5 million in 2018 |
● | Received conditional award from UNICEF to purchase DPP® Zika System, for a total value of $1.5 million to $4.9 million, in 2018-2019 |
● | Submitted PMA Application to the FDA for the DPP® HIV-Syphilis Assay and DPP® Micro Reader following completion of U.S. clinical trials |
● | Entered collaboration with AstraZeneca to develop a quantitative DPP® Assay to detect an undisclosed biomarker, from which Chembio will receive up to $2.9 million in R&D funding over 18 months |
● | Won three-year tender from the Ethiopian Pharmaceuticals Fund and Supply Agency to deliver HIV STAT-PAK® Assay, with a total contract value of $15.8 million between 2018-2020 |
In addition, in February 2018, we strengthened our balance sheet with net proceeds of $11.0 million in capital from an underwritten public offering, which is more fully discussed under “Recent Developments”.
Our product commercialization and product development efforts are focused in three areas: sexually transmitted disease, tropical & fever disease, and technology collaborations. In sexually transmitted disease, we are commercializing tests for HIV and Syphilis. In tropical and fever disease, we are commercializing a test for Zika virus, dengue virus, and chikungunya virus, and developing tests for malaria, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi, individually or as part of a fever panel test. Through technology collaborations, we are developing tests for a specific form of cancer, concussion, bovine tuberculosis, and for an undisclosed biomarker, the latter in collaboration with global biopharmaceutical company AstraZeneca.
Large and growing markets have been established for these kinds of tests, initially in high prevalence regions where they are indispensable for large scale prevention and treatment programs. Our product development is focused on areas where the availability of rapid POC screening, diagnostic, or confirmatory results can improve health outcomes. More generally, we believe there is and will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the point of care.
Our 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, under our STAT-PAK®, SURE CHECK®, STAT-VIEW® or DPP® registered trademarks, or under the private labels of our financial condition andmarketing partners.
Consolidated Results of Operations
2017 compared to 2016
The results of operations for the years ended December 31, 2017 and 2016 were as follows:
| | December 31, 2017 | | | December 31, 2016 | |
| | | | | | | | | | | | |
TOTAL REVENUES | | $ | 24,015,427 | | | 100 | % | | $ | 17,868,841 | | | 100 | % |
| | | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | |
Cost of product sales | | | 12,921,157 | | | 54 | % | | | 9,417,505 | | | 53 | % |
Research and development expenses | | | 8,555,381 | | | 36 | % | | | 8,427,554 | | | 47 | % |
Selling, general and administrative expenses | | | 9,021,439 | | | 38 | % | | | 7,595,559 | | | 43 | % |
| | | 30,497,977 | | | | | | | 25,440,618 | | | | |
LOSS FROM OPERATIONS | | | (6,482,550 | ) | | | | | | (7,571,777 | ) | | | |
| | | | | | | | | | | | | | |
OTHER INCOME | | | 22,485 | | | | | | | 25,548 | | | | |
| | | | | | | | | | | | | | |
LOSS BEFORE INCOME TAXES | | | (6,460,065 | ) | | (27 | )% | | | (7,546,229 | ) | | (42 | )% |
| | | | | | | | | | | | | | |
Income tax (benefit) provision | | | (88,305 | ) | | | | | | 5,800,818 | | | | |
NET LOSS | | $ | (6,371,760 | ) | | | | | $ | (13,347,047 | ) | | | |
Percentages in the table reflect the percent of total revenues.
Total Net Revenues
Total net revenues during the year ended December 31, 2017 were $24.0 million, an increase of $6.1 million, or 34% compared to 2016. The increase in total net revenues was comprised of the following:
| ● | $5.6 million, or 41.2% increase in net product sales, reflecting gains in every region of the world except North America, which in 2016 benefited on a one-time basis from a former U.S. distributor's "end-of-contract purchase" of certain products following our notice of termination of that distribution agreement. The last of those products reached their normal expiration date in February 2018, and the Company has been building its own distribution channels consistent with our commercial strategy. As part of these regional successes and as highlighted above, during 2017, the Company re-secured its DPP® HIV Assay and DPP® Leishmania Assay sales to Brazil and established both a commercial and lower cost manufacturing footprint with its acquisition of RVR Diagnostics Sdn Bhd (now Chembio Diagnostics Malaysia Sdn Bhd). Refer to Note 2 – Acquisition to the audited consolidated financial statements included herein for further information regarding the acquisition. |
| ● | $0.5 million, or 12.0% increase in R&D milestone and grant, and license and royalty revenues compared to 2016, reflecting the Company’s continued success in securing governmental, non-governmental, and commercial partnerships, in particular associated with our DPP® technology platform. |
Gross Product Margin
Cost of sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross product margin percentage is gross product margin as a percentage of net product sales.
Gross product margin increased by $2.1 million, or 50.2% compared to 2016. The following schedule calculates gross product margin:
| | For the years ended | | | | | | | |
| | December 31, 2017 | | | December 31, 2016 | | | | | | % Change | |
| | | | | | | | | | | | |
Net product sales | | $ | 19,322,302 | | | $ | 13,680,107 | | | $ | 5,642,195 | | | | 41.2 | % |
Less: Cost of product sales | | | (12,921,157 | ) | | | (9,417,505 | ) | | | (3,503,652 | ) | | | 37.2 | % |
Gross product margin | | $ | 6,401,145 | | | $ | 4,262,602 | | | $ | 2,138,543 | | | | 50.2 | % |
Gross product margin % | | | 33.13 | % | | | 31.16 | % | | | | | | | | |
The $2.1 million increase in gross product margin was comprised of the following:
| ● | $1.7 million from favorable product sales volume as described above, and |
| ● | $0.4 million from favorable product margins, principally related to favorable overhead application. |
Research and Development
This category includes costs incurred for clinical & regulatory affairs and other research & development, as follows:
| | For the years ended | | | | | | | |
| | December 31, 2017 | | | December 31, 2016 | | | | | | % Change | |
Clinical & regulatory affairs | | $ | 2,298,206 | | | $ | 1,444,410 | | | $ | (853,796 | ) | | | (59.1 | %) |
Other research & development | | | 6,257,175 | | | | 6,983,144 | | | | 725,969 | | | | 10.4 | % |
Total Research and Development | | $ | 8,555,381 | | | $ | 8,427,554 | | | $ | (127,827 | ) | | | (1.5 | %) |
The increase in clinical & regulatory affairs costs for the year ended December 31, 2017 as compared to 2016 is primarily associated with the Company’s U.S. clinical trial evaluating its DPP® HIV-Syphilis System, which it completed in December 2017, as discussed above. The decrease in other research & development costs is primarily associated with a reduction in spending on materials & supplies associated with R&D milestone and grant revenue-related projects.
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A”) includes administrative expenses, sales and marketing costs including commissions, and other corporate items.
The $1.4 million, or 18.8%, increase in SG&A for the year ended December 31, 2017 as compared to 2016 is primarily associated with increases in the following: $0.7 million compensation, travel, entertainment, and trade show costs associated with the growth in our sales and commercial team, $0.4 million intangible asset amortization related to the acquisition of RVR Diagnostics in January 2017, and $0.3 million corporate regulatory costs.
Other Income and Expense
Other income and expenses are based uponprincipally interest income earned on the Company's deposits, which decreased by approximately $3,000 for the year ended December 31, 2017 as compared to 2016.
Income Tax Provision
For the year ended December 31, 2017 the Company recognized a tax benefit of $88,000 associated with anticipated refunds of accumulated alternative minimum tax (AMT) credits to be received between 2019 and 2021 pursuant to recently enacted tax legislation net of state tax provisions. Accordingly, the benefit had no cash impact in 2017. In 2016, the Company recorded a non-cash income tax provision and decreased its deferred tax assets by $5.8 million as the Company took a full valuation allowance against its carryforward losses.
2016 versus 2015
The results of operations for the years ended December 31, 2016 and 2015 were as follows:
| | December 31, 2016 | | | December 31, 2015 | |
| | | | | | | | | | | | |
TOTAL REVENUES | | $ | 17,868,841 | | | 100 | % | | $ | 24,255,485 | | | 100 | % |
| | | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | |
Cost of product sales | | | 9,417,505 | | | 53 | % | | | 13,768,658 | | | 57 | % |
Research and development expenses | | | 8,427,554 | | | 47 | % | | | 6,377,839 | | | 26 | % |
Selling, general and administrative expenses | | | 7,595,559 | | | 43 | % | | | 7,663,035 | | | 32 | % |
| | | 25,440,618 | | | | | | | 27,809,532 | | | | |
LOSS FROM OPERATIONS | | | (7,571,777 | ) | | | | | | (3,554,047 | ) | | | |
| | | | | | | | | | | | | | |
OTHER INCOME | | | 25,548 | | | | | | | (3,238 | ) | | | |
| | | | | | | | | | | | | | |
LOSS BEFORE INCOME TAXES | | | (7,546,229 | ) | | (42 | %) | | | (3,557,285 | ) | | (15 | %) |
| | | | | | | | | | | | | | |
Income tax provision (benefit) | | | 5,800,818 | | | | | | | (1,160,243 | ) | | | |
NET LOSS | | $ | (13,347,047 | ) | | | | | $ | (2,397,042 | ) | | | |
| | | | | | | | | | | | | | |
Percentages in the table reflect the percent of total revenues.
Total Net Revenues
Total net revenues during the year ended December 31, 2016 were $17.9 million, a decrease of $6.4 million, or 26.3% compared to 2015. The decrease in total net revenues was comprised of the following:
| ● | $8.2 million, or 37.5% decrease in net product sales compared to 2015, reflecting decreased sales in Brazil and Mexico, partially offset by increased sales in the U.S., which in 2016 benefited on a one-time basis from a former U.S. distributor's "end-of-contract purchase" of certain products following our termination of that distribution agreement. |
| ● | $1.8 million, or 76.8% increase in R&D milestone and grant revenues compared to 2015, reflecting the Company’s continued success in securing governmental, non-governmental, and commercial partnerships, in particular associated with our DPP® technology platform. |
Gross Product Margin
Cost of sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross product margin percentage is gross product margin as a percentage of net product sales.
Gross product margin fell by $3.9 million, or 47.5% compared to 2015. The following schedule calculates gross product margin:
| | For the years ended | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | Favorable/ (unfavorable) | | | % Change | |
| | | | | | | | | | | | |
Net product sales | | $ | 13,680,107 | | | $ | 21,886,688 | | | $ | (8,206,581 | ) | | | (37.5 | )% |
Less: Cost of product sales | | | (9,417,505 | ) | | | (13,768,658 | ) | | | 4,351,153 | | | | (31.6 | )% |
Gross product margin | | $ | 4,262,602 | | | $ | 8,118,030 | | | $ | (3,855,428 | ) | | | (47.5 | )% |
Gross product margin % | | | 31.16 | % | | | 37.09 | % | | | | | | | | |
The $3.9 million decrease in gross product margin was comprised of the following:
| ● | $3.0 million from unfavorable product sales volume as described above, and |
| ● | $0.9 million from unfavorable product margins, reflecting the increased absorption of overhead at lower unit volumes. |
Research and Development
This category includes costs incurred for clinical & regulatory affairs and other research & development, as follows:
| | For the years ended | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | | | | % Change | |
Clinical & regulatory affairs | | $ | 1,444,410 | | | $ | 982,366 | | | $ | (462,044 | ) | | | (47.0 | )% |
Other research development | | | 6,983,144 | | | | 5,395,473 | | | | (1,587,671 | ) | | | (29.4 | )% |
Total Research and Development | | $ | 8,427,554 | | | $ | 6,377,839 | | | $ | (2,049,715 | ) | | | (32.1 | )% |
Expenses for Clinical & Regulatory Affairs increased by $0.5 million for the year ended December 31, 2016, as compared to 2015, primarily related to an increase in clinical trial expenses and additional wages and related costs.
Other R&D expenses increased by $1.6 million in the year ended December 31, 2016, as compared to 2015. The increase is primarily related to an increase in wages, benefits, materials, and supplies to support the growth in sponsored research and internal development programs.
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A”) includes administrative expenses, sales and marketing costs including commissions, and other corporate items.
The $0.1 million decrease in SG&A for the year ended December 31, 2016 as compared to 2015 reflects reduced commissions (principally for lower sales in Brazil) and other selling costs related to the lower 2016 sales volume, somewhat offset by increases in wages and travel costs associated with the growth in our sales and commercial team.
Other Income and Expense
Other income and expenses are principally interest income earned on the Company's deposits, which increased by approximately $29,000 for the year ended December 31, 2016 as compared to 2015, reflecting interest on funds raised in the 2016 public offering.
Income Tax Provision
For the year ended December 31, 2016, the Company recognized a $5.8 million non-cash income tax provision and decreased its deferred tax assets by a corresponding amount, together with a full valuation allowance. By comparison, for the year ended December 31, 2015, the Company recognized a $1.2 million non-cash income tax benefit and increased its deferred tax assets by a corresponding amount.
Liquidity and Capital Resources
Overview
Our liquidity requirements are primarily to fund our business operations, including capital expenditures and working capital requirements, as well as to fund opportunistic investments that align with our focused business strategy. Our primary sources of liquidity are cash flows from operations, our existing cash balance, and as necessary, additional capital. We will continually explore ways to enhance our capital structure.
Acquisition
On January 9, 2017, Chembio acquired 100% of the equity interests of RVR Diagnostics Sdn Bhd, a Malaysia manufacturer and distributor of rapid medical assays, for $1.4 million in cash and for common shares with a value at closing of approximately $1.7 million. As further described in Note 2 – Acquisition to the audited consolidated financial statements whichcontained herein, the acquisition was accounted for as a business combination, with the operating results of RVR Diagnostics included within the Company’s operating results from the date of acquisition. The Company financed the cash portion of the acquisition with funds raised in its 2016 public equity offering. After the acquisition, RVR Diagnostics Sdn Bhd changed its name to Chembio Diagnostics Malaysian Sdn Bhd.
Government, Non-Governmental Organization, and Non-Profit Programs
Chembio commonly seeks research and development programs that may be awarded by government, non-governmental organization (“NGO”), and non-profit entities including private foundations. Chembio currently has or has recently undertaken development programs that are competitively awarded from agencies of the U.S. Federal Government including the U.S. Department of Health and Human Services and U.S. Department of Agriculture, as well as from FIND, the Bill & Melinda Gates Foundation, and The Paul G. Allen Family Foundation.
Contractual Commitments
The following table summarizes the Company’s expected cash outflows resulting from financial contracts and commitments as of December 31, 2017, with amounts denominated in foreign currencies translated using foreign currency rates as of December 31, 2017.
| | Payments due by period | |
| | Total | | | Less than one year | | | 1 - 3 years | | | 3-5 years | | | Thereafter | |
Operating leases1 | | $ | 1,058,000 | | | $ | 603,000 | | | $ | 455,000 | | | $ | - | | | $ | - | |
Employment contracts2 | | | 1,341,000 | | | | 770,000 | | | | 571,000 | | | | - | | | | - | |
Purchase obligations3 | | | 548,000 | | | | 548,000 | | | | - | | | | - | | | | - | |
Minimum commitments under contracts4 | | | 239,000 | | | | 56,000 | | | | 112,000 | | | | 51,000 | | | | 20,000 | |
Total | | $ | 3,186,000 | | | $ | 1,977,000 | | | $ | 1,138,000 | | | $ | 51,000 | | | $ | 20,000 | |
1Represents payments required under our operating leases.
2Represents salary payments payable under the terms of employment agreements with certain executives with terms that extend beyond December 31, 2018.
3Represents payments required by non-cancellable purchase orders related to capital expenditures.
4Represents payments required pursuant to certain licensing agreements. Such agreements are cancellable within a specified number of days following notice by the Company.
Cash Flows
As of December 31, 2017, we had cash and equivalents of $3.8 million and no outstanding debt except for a $0.1 million seller-financed note payable associated with automated manufacturing equipment.
| | For the years ended | | | | | | | |
| | December 31, 2017 | | | December 31, 2016 | | | | | | % Change | |
| | | | | | | | | | | | |
Net cash used in operating activities | | $ | (5,034,515 | ) | | $ | (6,704,734 | ) | | $ | 1,670,219 | | | | 24.9 | % |
Net cash used in investing activities | | | (1,876,954 | ) | | | (668,706 | ) | | | (1,208,248 | ) | | | (180.7 | )% |
Net cash provided by financing activities | | | 134,280 | | | | 12,550,973 | | | | (12,416,693 | ) | | | (98.9 | )% |
Effect of exhange rate changes on cash | | | 13,027 | | | | - | | | | 13,027 | | | | 100.0 | % |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | $ | (6,764,162 | ) | | $ | 5,177,533 | | | $ | (11,941,695 | ) | | | (230.6 | )% |
The Company's cash as of December 31, 2017 decreased by $6.8 million vs. December 31, 2016, primarily due to net cash used in operating and investing activities.
Cash used in operating activities in 2017 was $5.1 million, primarily due to the net loss adjusted for non-cash items of $4.9 million and a $1.1 million increase in inventory, offset by a $1.3 million reduction in accounts receivable related to favorable collections.
Cash used in investing activities during 2017 related to the acquisition of RVR Diagnostics and the purchase of manufacturing equipment and other fixed assets.
During 2016, the Company completed an underwritten registered public offering, whereas no such offering occurred during 2017. Please see the “Recent Developments” section, below, for further information regarding the Company’s February 2018 underwritten registered public offering.
Off-Balance Sheet Arrangements
The Company does not have been preparedany off-balance sheet arrangements, as defined in accordance withItem 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
Recent Developments
As described in Note 16 – Subsequent Event to the audited consolidated financial statements included herein, on February 13, 2018, the Company consummated an underwritten registered public offering of 1,783,760 shares of its common stock at a public offering price of $6.75 per share for gross proceeds of approximately $12.0 million. The net proceeds, after underwriting discounts and commissions, and estimated expenses, are approximately $11.0 million.
Significant Accounting Policies and Critical Accounting Estimates
Our significant accounting principles generally acceptedpolicies are described in Note 3 – Significant Accounting Policies to the audited consolidated financial statements included herein. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the United States. industry, information provided by our customers and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:
| ● | It requires us to make assumptions about matters that were uncertain at the time we were making the estimate, and |
| ● | Changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations. |
The preparationfollowing listing is not intended to be a comprehensive list of financial statements in conformity withall 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, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure ofwith no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting 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 doviable alternative would 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 beproduce a 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.result.
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 which 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 year ended December 31, 2015 increased to $2,369,000 from $1,696,000 in the prior-year, which was the result of additional grants awarded in 2015 over 2014. R&D expenses in the year of 2015 were $6.38 million, compared with $4.83 million in the prior-year.
Research & Development Activities
Sexually Transmitted Disease
·
| DPP® HIV-Syphilis 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 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. 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 are 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 expect that the trial will be completed in six to nine months from initiation. |
Fever Disease
·
| DPP® Malaria 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 The 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: a ten-fold improvement in sensitivity. Given these results, we plan to develop and commercialize a family of DPP® Malaria Assays.
|
·
| DPP® Fever Panel 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 follow-on grant to add a test for the detection of Zika virus. We plan to be ready for field testing in the fourth quarter of 2016.
|
·
| DPP® Ebola Assay and DPP®Malaria-Ebola 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). 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: 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 a 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 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. |
·
| DPP® Traumatic Brain Injury 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 stage. We are currently working with several hospitals to finalize institutional review board (IRB) agreements and develop the plan for conducting initial studies of the DPP® Traumatic Brain Injury Assay using patient samples. |
·
| DPP® FLU Immunostatus Assay: The DPP® FLU Immunostatus Assay is a rapid, POC, multiplex influenza immunity test. In November 2014, we entered into a follow-on, milestone-based development agreement with a contracting organization acting on behalf of the U.S. government, for a multiplex POC influenza immunity test utilizing our patented DPP® technology. We successfully completed the product development of a 7-band multiplex DPP® Flu Immunostatus Assay with a digital reader during the first quarter of 2015 and subsequently applied for additional funding in response to a new request for proposal (RFP) from the U.S. Government, for which we expect a response in the second quarter of 2016. |
Revenue Recognition
Regulatory Activities
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, the Company announced it had been awarded a $550,000 grant from philanthropist and entrepreneur Paul G. Allen to immediately initiate development 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 March 7, 2016, the Company announced plans to collaborate with Bio-Manguinhos/Fiocruz to undertake to develop, register and commercialize POC DPP® Zika Assays for Brazil. The Company has developed a prototype DPP® Zika Assay 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.
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) compared to Loss before income taxes of $(1,550,000) for the year ended December 31, 2014. Net Loss for the 2015 period was $(2,397,000) as compared to a Net Loss of $(1,137,000) for 2014. The change in Net Loss 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.
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 | | | | | | | |
| | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Other (expense) | | $ | (4,814 | ) | | $ | (5,707 | ) | | $ | 893 | | | | 15.65 | % |
Interest income | | | 2,412 | | | | 5,839 | | | | (3,427 | ) | | | -58.69 | % |
Interest expense | | | (836 | ) | | | - | | | | (836 | ) | | | 100.00 | % |
| | | - | | | | - | | | | - | | | | | |
Total Other Income and (Expense) | | $ | (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) 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) income tax benefit and increased its deferred tax assets by $(403,000). 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 credits
MATERIAL CHANGES IN FINANCIAL CONDITION
Selected Changes in Financial Condition | | As of | | | | | | | |
| | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | |
Cash and cash equivalents | | $ | 5,376,931 | | | $ | 4,614,538 | | | $ | 762,393 | | | | 16.52 | % |
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 | % |
Prepaid expenses and other current assets | | | 1,256,879 | | | | 1,066,473 | | | | 190,406 | | | | 17.85 | % |
Fixed assets, net of accumulated depreciation | | | 2,374,308 | | | | 2,797,929 | | | | (423,621 | ) | | | -15.14 | % |
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 | % |
Accounts payable and accrued liabilities | | | 2,801,432 | | | | 4,946,030 | | | | (2,144,598 | ) | | | -43.36 | % |
| | | | | | | | | | | | | | | | |
Cash increased by $762,000 from December 31,2014, primarily due to net cash provided by operating activities for the year of 2015. In addition there were decreases in accounts receivable, net of allowance, of $5,916,000, fixed assets of $424,000 after depreciation, license agreements of $157,000, accounts payable and accrued liabilities of $2,145,000, and increases in non-current deferred tax asset of $1,436,000 and in prepaid expenses of $190,000.
The decrease in accounts receivable was primarily attributable to the lower amount of credit sales at the end of December 2015 versus December 2014. The decrease in fixed assets is primarily due to depreciation. The increase in prepaid and other current assets is due to the current portion of additional licenses. Deferred tax asset decrease is related to recording of a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
| | For the years ended | | | | | | | |
| | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | 1,792,978 | | | $ | (3,820,299 | ) | | $ | 5,613,277 | | | | 146.93 | % |
Net cash used in investing activities | | | (1,030,585 | ) | | | (1,452,601 | ) | | | 422,016 | | | | 29.05 | % |
Net cash provided by financing activities | | | - | | | | 237,163 | | | | (237,163 | ) | | | -100.00 | % |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | $ | 762,393 | | | $ | (5,035,737 | ) | | $ | 5,798,130 | | | | 115.14 | % |
| | | | | | | | | | | | | | | | |
The Company's cash increased as of December 31, 2015 by $762,000 from December 31, 2014, primarily due to net cash provided by operating activities and partially offset by cash used in investing activities for year of 2015.
The cash provided by operations in 2015 was $1,793,000, primarily due to a decrease 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 increase in prepaid and other current assets of $191,000, a decrease in accounts payable and other accrued liabilities of $2,145,000 and a net loss net of non-cash items of $1,861,000. Net loss net of non-cash items includes net loss of $2,397,000, $1,171,000 in income tax benefit, partially offset by $1,373,000 in depreciation and amortization, and $334,000 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, the Company had paid deposits on various pieces of equipment aggregating $30,918 which is reflected in Other Assets on the balance sheet. The Company is further committed to additional equipment-purchase obligation of $31,000 as various milestones are achieved by the various vendors.
RECENT DEVELOPMENTS AND CHEMBIO'S PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
During 2015, Chembio took important strategic steps to expand our patented DPP® technology to new markets. While the Company continues to strengthen its sexually transmitted disease business, we are also building robust product pipelines in two new areas: fever disease and technology collaborations. As sexually transmitted disease products continue to make important contributions to our business, we believe our new fever disease portfolio and technology collaborations will pave the way for future growth.
Sexually Transmitted Diseases
In the U.S. during 2015, Chembio recorded an increase in lateral flow sales of approximately $440,000 and an increase of DPP® sales of more than $1.0 million (primarily as a result of sales to 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 products in the U.S. We will also have full control 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 of 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 be 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. It is an important corporate priority to be the first-to-market in the U.S. with an HIV-Syphilis combination test. While 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 completion 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 the 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:
·
| 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;
|
·
| 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;
|
· | The DPP® Dengue Fever Assays which have been funded by an undisclosed entity, are currently being field tested in Asia;
|
·
| 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,
|
· | The recently-announced DPP® Zika Assay, which has received initial funding from the Paul G. Allen Family Foundation.
|
· | 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 Panel 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. We are fortunate that the Paul G. Allen Family Foundation, recognizing the urgency of the matter, moved swiftly to provide Chembio with a grant 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 with the DPP® Zika Assay, like our DPP® Ebola Assay, will further demonstrate Chembio's ability to rapidly and effectively deploy our DPP® technology to address the world's most serious health threats with POC treatment in a practical and efficient manner. The Company anticipates receiving significant orders for DPP® Zika Assays in 2016.
Technology Collaborations
Chembio's 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 the 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.
We are pleased with the progress made with each of these programs in 2015. The DPP® Cancer Assay, which is funded by an undisclosed entity, targets a specific form of cancer. During 2015, we successfully completed the feasibility phase of the program and moved into the product development stage, which is also funded by an 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. This project, which is funded by Perseus Science Group, LLC, is in the feasibility phase. We are currently working with several hospitals to finalize institutional review board (IRB) agreements and develop the plan for 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 of 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 horizon for the utility of our DPP® technology. This has led us 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 selected the DPP® technology to address some of the world's most serious diagnostic obstacles. The events and opportunities of 2015 have considerably changed Chembio by significantly expanding the potential application and markets for our DPP® technology. For many diseases, infections or conditions that requires exceptional sensitivity, specificity and/or the ability to multiplex, we believe our DPP® technology may become the development platform of choice. Looking ahead to 2016, we will continue to advance each of our development programs, and look for new opportunities and applications.
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'smodel’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.
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.$44,000.
Allowance for doubtful accounts –Accounts Receivable
Our policy is to review our accounts receivable on a periodic basis, no less frequently 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.$21,000.
Acquisitions
In accordance with accounting guidance for the provisions in FASB ASC 805, Business Combinations, we allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. In addition, an acquisition may include a contingent consideration component, such as our acquisition agreements for RVR Diagnostics. The fair value of the contingent consideration is estimated as of the date of the acquisition and is recorded as part of the purchase price. This estimate is updated in future periods and any changes in the estimate, which are not considered an adjustment to the purchase price, are recorded in our consolidated statements of operations.
We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed.
Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
Other estimates used in determining fair value include, but are not limited to, future cash flows or income related to intangibles, market rate assumptions, actuarial assumptions for benefit plans and appropriate discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but that are inherently uncertain, and therefore, may not be realized. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
Goodwill and Intangible Assets
We periodically review goodwill for impairment indicators. We review goodwill for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company performs the goodwill impairment review at the reporting unit level. We perform a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If so, we perform the step discussed hereafter. Our qualitative assessment involves significant estimates, assumptions, and judgments, including, but not limited to, macroeconomic conditions, industry and market conditions, financial performance of the Company, reporting unit specific events and changes in the Company's share price.
If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered to be impaired. We would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. We review indefinite-lived intangible assets for impairment annually or more frequently if events or changes in circumstances indicate the assets might be impaired. Similar to the goodwill assessment described above, the Company first performs a qualitative assessment of whether it is more likely than not that an indefinite-lived intangible asset is impaired. If necessary, the Company then performs a quantitative impairment test by comparing the estimated fair of the asset, based upon its forecasted cash flows, to its carrying value. Other intangible assets with definite lives are amortized over their useful lives and are subject to impairment testing only if events or circumstances indicate that the asset might be impaired, as described above.
Income Taxes –
Income taxes are accounted for under ASC 740 authoritative guidance ("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'scompany’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 likely 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 list30
Recently Issued Accounting Pronouncements
26
Refer to Note 3 – Significant Accounting Policies to the audited consolidated financial statements included herein for a complete description of recent accounting standards which we have not yet been required to implement which may be applicable to our operations. Additionally, the significant accounting standards that have been adopted during the year ended December 31, 2017 are described.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, has no material derivative risk to report under this Item. As of December 31, 2017, the Company did not have any foreign currency exchange contracts nor purchase currency options to hedge local currency cash flows.
We are exposed to market risks from changes in currency exchange rates and certain commodity prices. All sales from our U.S. subsidiary, regardless of the customer location, are denominated in U.S. dollars. Sales denominated in foreign currencies are associated with a portion of the sales from our subsidiary Chembio Diagnostics Malaysia and comprised approximately 6.1% of our total net revenues for the year ended December 31, 2017.
ITEM 8. | 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. | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not Applicable.
ITEM 9A. | 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"“Exchange Act”)), as of the end of the period covered by this report (the "Evaluation Date"). Based on that evaluation, the Company'sCompany’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. | 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
| 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. | 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 has designed its internal control over financial reporting to provide reasonable assurance on the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles.
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, 2017, 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, 2015.2017.
This annual report does not include an attestation report of ourBDO USA, LLP, the Company's independent registered public accounting firm regardingthat audited the Company's consolidated financial statements included in this report, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting.reporting, a copy of which appears on the following page.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Chembio Diagnostics, Inc.
Medford, New York
Management'sOpinion on Internal Control over Financial Reporting
We have audited Chembio Diagnostics, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedule and our report was not subjectdated March 8, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
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 “Item 9A, Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to attestation byexpress an opinion on the Company’s internal control over financial reporting based on our registeredaudit. We are a public accounting firm pursuantregistered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that permitwe plan and perform the Companyaudit 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, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
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 management's report in this annual report.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 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.
/s/ BDO USA, LLP
New York, NY
March 8, 2018
(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'sCompany’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. | ITEM 9B. OTHER INFORMATION |
Not applicable.
PART III
ITEM 10. | ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive Officers
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 electedThe information required in response to this Item 10 is incorporated herein by reference to our Definitive Proxy Statement to be filed with 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 FellowSEC pursuant to Regulation 14A of the American AssociationExchange Act not later than 120 days after the end 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 focusedfiscal year covered by this Annual Report 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 CompliancesForm 10-K.
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. | 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.
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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.
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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. | 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% |
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Ippolito, Tom (4) 3661 Horseblock Road Medford, NY 11763 | 38,916 | | .40% |
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Steele, Michael (5) 3661 Horseblock Road Medford, NY 11763 | 36,785 | | .38% |
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Lambotte, Paul (6) 3661 Horseblock Road Medford, NY 11763 | 51,630 | | .53% |
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Klugewicz, Sharon (7) 3661 Horseblock Road Medford, NY 11763 | 12,000 | | .12% |
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Meller, Gary (8) 3661 Horseblock Road Medford, NY 11763 | 123,750 | | 1.28% |
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Davis, Katherine L. (9) 3661 Horseblock Road Medford, NY 11763 | 77,046 | | .80% |
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DeBuono, Barbara (10) 3661 Horseblock Road Medford, NY 11763 | 46,188 | | .48% |
| | | |
Kissinger, Peter (11) 3661 Horseblock Road Medford, NY 11763 | 50,629 | | .52% |
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GROUP (12) | 738,302 | | 7.36% |
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Wellington Management Company, LLP 280 Congress Street Boston, MA 02210 | 1,092,780 | | 11.35% |
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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. | 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. | 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.
PART IV
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 | | under Rights Agreement dated March 8, 2016 (14) |
4.8 | | Form of Warrant (to be filed by amendment) |
10.1* | | |
10.2* | | |
10.3* | | |
10.4* | | |
10.310.5* | | HIV |
10.6* | | |
10.7 | | |
10.410.8 | | |
10.510.9 | | |
10.610.10 | | |
10.810.11 | | Secured Revolving Demand Note, dated as of April 30, 2013, by and among the Registrant, Chembio Diagnostics Systems, Inc. and HSBC Bank, NA |
10.910.12 | | Loan and SecurityAmended And Restated Stock Purchase Agreement, dated as of April 30, 2013,December 7, 2016, by and among the Registrant, Chembio Diagnostics, Systems, Inc., RVR Diagnostics Sdn Bhd, Avijit Roy and HSBC Bank, NA (11)Magentiren Vajuram (14) |
10.1010.13 | | 2015 Omnibus |
14.1 | | |
21 | | List of Subsidiaries (12) |
23.1 | | |
31.1 | | |
31.2 | | |
32 | | |
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, 2015.27, 2017. |
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. |
14 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on January 10, 2017. |
15 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 9, 2017. |
16 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on November 8, 2017. |
17 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on February 13, 2018. |
| | |
(*) | | 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, 20162017 | 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, 20162017 |
John J. Sperzel III | | Member Of The Board | | |
| | (Principal Executive Officer) | | |
| | | | |
| | | | |
| | | | |
/s/ Richard J. LarkinNeil A. Goldman | | Executive Vice President & Chief Financial Officer (Principal Financial & | | March 8, 20162017 |
Richard J. LarkinNeil A. Goldman | | (Principal Financial & Accounting Officer) | | |
| | | | |
| | | | |
| | | | |
/s/ Gary Meller | | Director | | March 8, 2016 |
Gary Meller | | | | |
| | | | |
| | | | |
| | | | |
/s/ Katherine L. Davis | | Director & Chair of the Board | | March 8, 20162017 |
Katherine L. Davis | | | | |
| | | | |
| | | | |
| | | | |
/s/ Peter T. Kissinger | | Director | | March 8, 20162017 |
Peter T. Kissinger | | | | |
| | | | |
| | | | |
| | | | |
/s/ Barbara DeBuonoGail S. Page | | Director | | March 8, 20162017 |
Barbara DeBuonoGail S. Page | | | | |
| | | | |
| | | | |
37
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARYSUBSIDIARIES
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, 20152017 and 20142016 | F-2 |
| |
Statements of Operations for each of the years ended December 31, 20152017, 2016 and 20142015 | F-3 |
| |
Statements of Comprehensive Loss for each of the years ended December 31, 2017, 2016 and 2015 | F-4 |
| |
Statements of Changes in Stockholders'Stockholders’ Equity for each of the years ended December 31, 20152017, 2016 and 20142015 | F-4F-5 |
| |
Statements of Cash Flows for each of the years ended December 31, 20152017, 2016 and 20142015 | F-5F-6 |
| |
Notes to Consolidated Financial Statements | F-6F-7 - F-19F-17 |
| |
Schedule II - Valuation and Qualifying Accounts | F-18 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
Shareholders and Board of Directors and Stockholders of
Chembio Diagnostics, Inc.
Medford, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Chembio Diagnostics, Inc. (the “Company”) and Subsidiary (the "Company")subsidiaries as of December 31, 20152017 and 2014 and2016, the related consolidated statements of operations, comprehensive loss, changes in stockholders'stockholders’ equity, and cash flows for each of the three years then ended. Thesein the period ended December 31, 2017, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements arepresent fairly, in all material respects, the responsibilityfinancial position of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
Company and subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, 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 8, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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 requiredmisstatement, whether due to have, nor were we engaged to perform, an audit of its internal control over financial reporting. error or fraud.
Our audits included considerationperforming procedures to assess the risks of internal control overmaterial misstatement of the consolidated financial reporting as a basis for designing auditstatements, whether due to error or fraud, and performing 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 includesrespond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. 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, 2015 and 2014, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
/s/ BDO USA, LLP
Melville, We have served as the Company's auditor since 2011.
New York, NY
March 8, 20162018
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF
- ASSETS -
| | December 31, 2015 | | | December 31, 2014 | |
CURRENT ASSETS: | | | | | | |
Cash and cash equivalents | | $ | 5,376,931 | | | $ | 4,614,538 | |
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 | |
Inventories | | | 3,578,025 | | | | 3,638,299 | |
Prepaid expenses and other current assets | | | 1,256,879 | | | | 1,066,473 | |
TOTAL CURRENT ASSETS | | | 12,634,806 | | | | 17,658,199 | |
| | | | | | | | |
FIXED ASSETS, net of accumulated depreciation | | | 2,374,308 | | | | 2,797,929 | |
| | | | | | | | |
OTHER ASSETS: | | | | | | | | |
Deferred tax asset, net of valuation allowance | | | 5,467,143 | | | | 4,031,302 | |
License agreements, net of current portion | | | 100,000 | | | | 256,875 | |
Deposits on manufacturing equipment | | | 30,918 | | | | 20,017 | |
Deposits and other assets | | | 209,169 | | | | 245,870 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 20,816,344 | | | $ | 25,010,192 | |
| | | | | | | | |
- LIABILITIES AND STOCKHOLDERS' EQUITY - | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 2,801,432 | | | $ | 4,946,030 | |
Deferred revenue | | | 353,406 | | | | 340,000 | |
TOTAL CURRENT LIABILITIES | | | 3,154,838 | | | | 5,286,030 | |
| | | | | | | | |
TOTAL LIABILITIES | | | 3,154,838 | | | | 5,286,030 | |
| | | | | | | | |
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 | |
Additional paid-in capital | | | 47,890,642 | | | | 47,556,426 | |
Accumulated deficit | | | (30,325,418 | ) | | | (27,928,376 | ) |
TOTAL STOCKHOLDERS' EQUITY | | | 17,661,506 | | | | 19,724,162 | |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 20,816,344 | | | $ | $ 25,010,192 | |
See accompanying notes to condensed consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
| | For the years ended | |
| | December 31, 2015 | | | December 31, 2014 | |
REVENUES: | | | | | | |
Net product sales | | $ | 21,886,688 | | | $ | 25,949,769 | |
License and royalty revenue | | | 52,753 | | | | 23,257 | |
R&D, milestone and grant revenue | | | 2,316,044 | | | | 1,672,258 | |
TOTAL REVENUES | | | 24,255,485 | | | | 27,645,284 | |
| | | | | | | | |
Cost of product sales | | | 13,768,658 | | | | 16,831,261 | |
| | | | | | | | |
GROSS MARGIN | | | 10,486,827 | | | | 10,814,023 | |
| | | | | | | | |
OPERATING EXPENSES: | | | | | | | | |
Research and development expenses | | | 6,377,839 | | | | 4,832,537 | |
Selling, general and administrative expenses | | | 7,663,035 | | | | 7,531,739 | |
| | | 14,040,874 | | | | 12,364,276 | |
LOSS FROM OPERATIONS | | | (3,554,047 | ) | | | (1,550,253 | ) |
| | | | | | | | |
OTHER INCOME (EXPENSE): | | | | | | | | |
Other expense | | | (4,814 | ) | | | (5,707 | ) |
Interest income | | | 2,412 | | | | 5,839 | |
Interest expense | | | (836 | ) | | | - | |
| | | (3,238 | ) | | | 132 | |
| | | | | | | | |
LOSS BEFORE INCOME TAXES (BENEFIT) | | | (3,557,285 | ) | | | (1,550,121 | ) |
| | | | | | | | |
Income tax provision (benefit) | | | (1,160,243 | ) | | | (412,918 | ) |
| | | | | | | | |
NET LOSS | | $ | (2,397,042 | ) | | $ | (1,137,203 | ) |
| | | | | | | | |
Basic loss per share | | $ | (0.25 | ) | | $ | (0.12 | ) |
| | | | | | | | |
Diluted loss per share | | $ | (0.25 | ) | | $ | (0.12 | ) |
| | | | | | | | |
Weighted average number of shares outstanding, basic | | | 9,626,028 | | | | 9,530,320 | |
| | | | | | | | |
Weighted average number of shares outstanding, diluted | | | 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, 2015 AND 2014
| | Common Stock | | | Additional Paid in Capital | | | Accumulated Deficit | | | Total | |
| | Shares | | | Amount | | | Amount | | | Amount | | | Amount | |
Balance at December 31, 2013 | | | 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 | |
Stock option compensation | | | - | | | | - | | | | 447,100 | | | | - | | | | 447,100 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (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 | |
| | | | | | | | | | | | | | | | | | | | |
Options: | | | | | | | | | | | | | | | | | | | | |
Exercised | | | 17,109 | | | | 170 | | | | (170 | ) | | | - | | | | - | |
Stock option compensation | | | - | | | | - | | | | 334,386 | | | | - | | | | 334,386 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (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 | |
| | December 31, 2017 | | | December 31, 2016 | |
CURRENT ASSETS: | | | | | | |
Cash and cash equivalents | | $ | 3,790,302 | | | $ | 10,554,464 | |
Accounts receivable, net of allowance for doubtful accounts of $42,000 and $52,000 at December 31, 2017 and 2016, respectively | | | 2,085,340 | | | | 3,383,729 | |
Inventories, net | | | 4,423,618 | | | | 3,335,188 | |
Prepaid expenses and other current assets | | | 554,383 | | | | 840,145 | |
TOTAL CURRENT ASSETS | | | 10,853,643 | | | | 18,113,526 | |
| | | | | | | | |
FIXED ASSETS, net of accumulated depreciation | | | 1,909,232 | | | | 1,709,321 | |
| | | | | | | | |
OTHER ASSETS: | | | | | | | | |
Intangible assets, net | | | 1,597,377 | | | | - | |
Goodwill | | | 1,666,610 | | | | - | |
Deposits and other assets | | | 589,159 | | | | 752,389 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 16,616,021 | | | $ | 20,575,236 | |
| | | | | | | | |
- LIABILITIES AND STOCKHOLDERS’ EQUITY - | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 3,046,303 | | | $ | 3,013,133 | |
Deferred revenue | | | 50,000 | | | | 392,517 | |
TOTAL CURRENT LIABILITIES | | | 3,096,303 | | | | 3,405,650 | |
| | | | | | | | |
OTHER LIABILITIES: | | | | | | | | |
Note payable | | | 99,480 | | | | - | |
Deferred tax liability | | | 341,042 | | | | - | |
| | | | | | | | |
TOTAL LIABILITIES | | | 3,536,825 | | | | 3,405,650 | |
| | | | | | | | |
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, 12,318,570 and 12,026,847 shares issued and outstanding at December 31, 2017 and 2016, respectively | | | 123,185 | | | | 120,268 | |
Additional paid-in capital | | | 62,821,288 | | | | 60,721,783 | |
Accumulated deficit | | | (50,044,225 | ) | | | (43,672,465 | ) |
Accumulated other comprehensive income | | | 178,948 | | | | - | |
TOTAL STOCKHOLDERS’ EQUITY | | | 13,079,196 | | | | 17,169,586 | |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 16,616,021 | | | $ | 20,575,236 | |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARYSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWSOPERATIONS
FOR THE YEARS ENDED
| | December 31, 2015 | | | December 31, 2014 | |
| | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Cash received from customers and grants | | $ | 30,174,083 | | | $ | 23,898,516 | |
Cash paid to suppliers and employees | | | (28,382,681 | ) | | | (27,724,654 | ) |
Interest received | | | 2,412 | | | | 5,839 | |
Interest paid | | | (836 | ) | | | - | |
Net cash provided by (used in) operating activities | | | 1,792,978 | | | | (3,820,299 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Acquisition of license | | | (550,000 | ) | | | - | |
Acquisition of and deposits on fixed assets | | | (480,585 | ) | | | (1,452,601 | ) |
Net cash used in investing activities | | | (1,030,585 | ) | | | (1,452,601 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from option and warrant exercises | | | - | | | | 237,163 | |
Proceeds from credit line | | | 700,000 | | | | - | |
Repayment of credit line | | | (700,000 | ) | | | - | |
Payment of capital lease obligation | | | - | | | | - | |
Net cash provided by financing activities | | | - | | | | 237,163 | |
| | | | | | | | |
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | 762,393 | | | | (5,035,737 | ) |
Cash and cash equivalents - beginning of the period | | | 4,614,538 | | | | 9,650,275 | |
| | | | | | | | |
Cash and cash equivalents - end of the period | | $ | 5,376,931 | | | $ | 4,614,538 | |
| | | | | | | | |
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: | |
| | | | | | | | |
Net Loss | | $ | (2,397,042 | ) | | $ | (1,137,203 | ) |
Adjustments: | | | | | | | | |
Depreciation and amortization | | | 1,372,563 | | | | 739,297 | |
Provision for (benefit from) deferred taxes | | | (1,170,969 | ) | | | (403,375 | ) |
Provision for (recovery of) doubtful accounts | | | - | | | | 28,000 | |
Share based compensation | | | 334,386 | | | | 447,100 | |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable | | | 5,915,918 | | | | (3,774,768 | ) |
Inventories | | | 60,274 | | | | (449,573 | ) |
Prepaid expenses and other current assets | | | (190,960 | ) | | | 32,906 | |
Deposits and other assets | | | - | | | | (279,223 | ) |
Accounts payable and accrued liabilities | | | (2,144,598 | ) | | | 636,540 | |
Customer deposits and deferred revenue | | | 13,406 | | | | 340,000 | |
Net cash provided by (used in) operating activities | | $ | 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 | |
| | For the years ended | |
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
REVENUES: | | | | | | | | | |
Net product sales | | $ | 19,322,302 | | | $ | 13,680,107 | | | $ | 21,886,688 | |
License and royalty revenue | | | 741,534 | | | | 449,685 | | | | 52,753 | |
R&D, milestone and grant revenue | | | 3,951,591 | | | | 3,739,049 | | | | 2,316,044 | |
TOTAL REVENUES | | | 24,015,427 | | | | 17,868,841 | | | | 24,255,485 | |
| | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | |
Cost of product sales | | | 12,921,157 | | | | 9,417,505 | | | | 13,768,658 | |
Research and development expenses | | | 8,555,381 | | | | 8,427,554 | | | | 6,377,839 | |
Selling, general and administrative expenses | | | 9,021,439 | | | | 7,595,559 | | | | 7,663,035 | |
| | | 30,497,977 | | | | 25,440,618 | | | | 27,809,532 | |
LOSS FROM OPERATIONS | | | (6,482,550 | ) | | | (7,571,777 | ) | | | (3,554,047 | ) |
| | | | | | | | | | | | |
OTHER INCOME (EXPENSE): | | | | | | | | | | | | |
Other expense | | | - | | | | - | | | | (4,814 | ) |
Interest income | | | 25,430 | | | | 25,548 | | | | 2,412 | |
Interest expense | | | (2,945 | ) | | | - | | | | (836 | ) |
| | | 22,485 | | | | 25,548 | | | | (3,238 | ) |
| | | | | | | | | | | | |
LOSS BEFORE INCOME TAXES (BENEFIT) | | | (6,460,065 | ) | | | (7,546,229 | ) | | | (3,557,285 | ) |
| | | | | | | | | | | | |
Income tax provision (benefit) | | | (88,305 | ) | | | 5,800,818 | | | | (1,160,243 | ) |
| | | | | | | | | | | | |
NET LOSS | | $ | (6,371,760 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
| | | | | | | | | | | | |
Basic loss per share | | $ | $ (0.52 | ) | | $ | (1.26 | ) | | $ | (0.25 | ) |
| | | | | | | | | | | | |
Diluted loss per share | | $ | $ (0.52 | ) | | $ | (1.26 | ) | | $ | (0.25 | ) |
| | | | | | | | | | | | |
Weighted average number of shares outstanding, basic | | | 12,300,031 | | | | 10,622,331 | | | | 9,626,028 | |
| | | | | | | | | | | | |
Weighted average number of shares outstanding, diluted | | | 12,300,031 | | | | 10,622,331 | | | | 9,626,028 | |
See accompanying notes to condensed consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| | For the years ended | |
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
| | | | | | | | | |
Net loss | | $ | (6,371,760 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
Other comprehensive income: | | | | | | | | | | | | |
Foreign currency translation adjustments | | | 178,948 | | | | - | | | | - | |
COMPREHENSIVE LOSS | | $ | (6,192,812 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
| | Common Stock | | | Additional Paid-in-Capital | | | Accumulated Deficit | | | AOCI | | | Total | |
| | Shares | | | Amount | | | Amount | | | Amount | | | Amount | | | Amount | |
Balance at December 31, 2014 | | | 9,611,139 | | | $ | 96,112 | | | $ | 47,556,426 | | | $ | (27,928,376 | ) | | $ | - | | | $ | 19,724,162 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Options: | | | | | | | | | | | | | | | | | | | | | | | | |
Exercised | | | 17,109 | | | | 170 | | | | (170 | ) | | | - | | | | - | | | | - | |
Stock option compensation | | | - | | | | - | | | | 334,386 | | | | - | | | | - | | | | 334,386 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | (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 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Common Stock: | | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of RVR Diagnostics Sdn Bhd | | | 269,236 | | | | 2,692 | | | | 1,680,033 | | | | - | | | | - | | | | 1,682,725 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Options: | | | | | | | | | | | | | | | | | | | | | | | | |
Exercised | | | 22,487 | | | | 225 | | | | 34,575 | | | | - | | | | - | | | | 34,800 | |
Stock option compensation | | | - | | | | - | | | | 384,897 | | | | - | | | | - | | | | 384,897 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 178,948 | | | | 178,948 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (6,371,760 | ) | | | - | | | | (6,371,760 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | | | 12,318,570 | | | $ | 123,185 | | | $ | 62,821,288 | | | $ | (50,044,225 | ) | | $ | 178,948 | | | $ | 13,079,196 | |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
| | | | | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Cash received from customers and grants | | $ | 24,971,299 | | | $ | 16,947,194 | | | $ | 30,174,083 | |
Cash paid to suppliers and employees | | | (30,028,299 | ) | | | (23,677,476 | ) | | | (28,382,681 | ) |
Interest received | | | 22,485 | | | | 25,548 | | | | 2,412 | |
Interest paid | | | - | | | | - | | | | (836 | ) |
Net cash (used in) provided by operating activities | | | (5,034,515 | ) | | | (6,704,734 | ) | | | 1,792,978 | |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
Acquisition of license | | | - | | | | - | | | | (550,000 | ) |
Purchase of RVR Diagnostics Sdn Bhd | | | (850,000 | ) | | | (550,000 | ) | | | - | |
Acquisition of and deposits on fixed assets | | | (1,026,954 | ) | | | (118,706 | ) | | | (480,585 | ) |
Net cash used in investing activities | | | (1,876,954 | ) | | | (668,706 | ) | | | (1,030,585 | ) |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
Proceeds from option and warrant exercises | | | 34,800 | | | | 57,575 | | | | - | |
Proceeds from note payable | | | 99,480 | | | | - | | | | - | |
Proceeds from credit line | | | - | | | | - | | | | 700,000 | |
Repayment of credit line | | | - | | | | - | | | | (700,000 | ) |
Proceeds from sale of common stock, net | | | - | | | | 12,493,398 | | | | - | |
Net cash provided by financing activities | | | 134,280 | | | | 12,550,973 | | | | - | |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | 13,027 | | | | - | | | | - | |
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (6,764,162 | ) | | | 5,177,533 | | | | 762,393 | |
Cash and cash equivalents - beginning of the period | | | 10,554,464 | | | | 5,376,931 | | | | 4,614,538 | |
| | | | | | | | | | | | |
Cash and cash equivalents - end of the period | | $ | 3,790,302 | | | $ | 10,554,464 | | | $ | 5,376,931 | |
| | | | | | | | | | | | |
RECONCILIATION OF NET LOSS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net Loss | | $ | (6,371,760 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
Adjustments: | | | | | | | | | | | | |
Depreciation and amortization | | | 1,276,963 | | | | 1,139,228 | | | | 1,372,563 | |
Provision for (benefit from) deferred taxes | | | - | | | | 5,800,818 | | | | (1,170,969 | ) |
Fair value adjustment to contingent consideration | | | (148,000 | ) | | | - | | | | - | |
Share based compensation | | | 384,897 | | | | 304,154 | | | | 334,386 | |
Changes in assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | 1,298,389 | | | | (960,758 | ) | | | 5,915,918 | |
Inventories | | | (1,088,430 | ) | | | 242,837 | | | | 60,274 | |
Prepaid expenses and other current assets | | | 285,762 | | | | (136,258 | ) | | | (190,960 | ) |
Deposits and other assets | | | (512,272 | ) | | | 1,480 | | | | - | |
Accounts payable and accrued liabilities | | | 182,453 | | | | 211,701 | | | | (2,144,598 | ) |
Deferred revenue | | | (342,517 | ) | | | 39,111 | | | | 13,406 | |
Net cash (used in) provided by operating activities | | $ | (5,034,515 | ) | | $ | (6,704,734 | ) | | $ | 1,792,978 | |
| | | | | | | | | | | | |
Supplemental disclosures for non-cash investing and financing activities: | | | | | | | | | | | | |
Deposits on manufacturing equipment transferred to fixed assets | | $ | 174,399 | | | $ | - | | | $ | 20,017 | |
Accrual of contingent earn-out | | | 148,000 | | | | - | | | | - | |
Issuance of common stock for net assets of business acquired | | | 1,682,725 | | | | - | | | | - | |
See accompanying notes to consolidated financial statements
NOTE 1 — DESCRIPTION OF BUSINESS:
Chembio Diagnostics, Inc. and its subsidiary, Chembio Diagnostic Systems, Inc.subsidiaries (collectively, the "Company"“Company” or "Chembio"“Chembio”), develop, manufacture, and market rapidcommercialize point-of-care (POC) diagnostic tests that are used to detect infectiousor monitor diseases. The Company's mainAll products that are currently being developed are based on the Company’s patented DPP® technology, a novel point-of-care diagnostic platform that offers certain customer advantages as compared to traditional lateral flow productstechnology. POC tests, by providing prompt and early diagnosis, can reduce patient stays, lower overall costs, improve therapeutic interventions and improve patient outcomes. POC tests can also prevent needless hospital admissions, simplify testing procedures, avoid delays from central lab batching, and eliminate the need for return visits.
Our product commercialization and product development efforts are focused in three rapidareas: sexually transmitted disease, tropical & fever disease, and technology collaborations. In sexually transmitted disease, we are commercializing tests for HIV and Syphilis. In tropical and fever disease, we are commercializing a test for Zika virus, and developing tests for malaria, dengue virus, chikungunya virus, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi, individually or as part of fever panel tests. Through technology collaborations, we are developing tests for a specific form of cancer, concussion, bovine tuberculosis, and for an undisclosed biomarker, the detectionlatter in collaboration with global biopharmaceutical company AstraZeneca.
Large and growing markets have been established for these kinds of HIV antibodiestests, initially in whole blood, serumhigh prevalence regions where they are indispensable for large scale prevention and plasma samples, twotreatment programs. Our product development is focused on areas where the availability of which were approved byrapid, POC screening, diagnostic, or confirmatory results can improve health outcomes. More generally, we believe there is and will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the FDA in 2006; the third is sold for export only. Lateral Flow Rapid HIV tests represented nearly 46%point of the Company's product revenues in 2015. The Company's products based on its patented DPP® platform represented approximately 51% of the Company's product revenues in 2015. The Company also has other rapid tests that together represented approximately 3% of sales in 2015. The Company'scare.
Our 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 soldinternationally, under the Company's STAT-PAK®our STAT PAK® SURE CHECK®, SURE CHECK®STAT-VIEW® or DPP®DPP® registered trademarks, or under the private labels of itsour 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. 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, thepartners.
The Company received FDA approval for its DPP® HIV 1/2 Assayroutinely enters into arrangements with governmental and non-governmental organizations for the detectionfunding of HIV antibodies in saliva, whole blood, serumcertain research and plasma samples, which was CLIA-Waived in October 2014.development efforts.
NOTE 2 — ACQUISITION:
On January 9, 2017, pursuant to a stock purchase agreement (the "Stock Purchase Agreement), the Company acquired all of the outstanding common stock of RVR Diagnostics Sdn Bhd ("RVR"), a privately-held Malaysia based manufacturing company focused on assembly and sales of rapid medical assays, for $3,231,000. The Company acquired RVR, which subsequently changed its name to Chembio Diagnostics Malaysia Sdn Bhd ("CDM"), to have a better presence in Asia, access to lower cost, shorter approval time of in-country regulatory approvals, and a lower cost assembly operation.
Total consideration was: (i) a cash payment of $1,400,000, of which $550,000 was paid as a deposit in December 2016; (ii) 269,236 shares of Chembio's common stock, with a value at closing of $1,683,000, of which 7,277 shares were held back to satisfy certain potential claims under the Stock Purchase Agreement and became issuable to the sellers on the one-year anniversary of the closing; and, a contingent $148,000 milestone payment based on the achievement of performance goals related to sales by CDM during the 12 months ended December 31, 2017. The performance goals were not achieved and the related $148,000 accrual was reversed during the fourth quarter of 2017 and recognized in Selling, general, and administrative expenses associated with the change in fair value.
As a result of the consideration paid exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $1,503,361 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. In addition, the Company recorded $1,800,000 in intangible assets associated with the addition of CDM’s intellectual property, customer base and distribution channels, trade names, order backlog, industry reputation, and management talent and workforce. The Condensed Consolidated Statements of Operations for the year ended December 31, 2017 include $25,000 of transaction costs related to the CDM acquisition, which are reflected as Selling, general and administrative expenses.
The acquisition was accounted for using the purchase method of accounting. The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of January 9, 2017:
| | | |
| | Amount | |
Property, plant and equipment | | $ | 235,141 | |
Goodwill | | | 1,651,361 | |
Deferred tax liability | | | (307,636 | ) |
Contingent consideration | | | (148,000 | ) |
Other intangible assets (estimated useful life): | | | | |
Intellectual property (approximate 10 year weighted average) | | | 800,000 | |
Customer contracts / relationships (approximate 10 year weighted average) | | | 700,000 | |
Order backlog (3 months) | | | 200,134 | |
Trade names (approximate 11 year weighted average) | | | 100,000 | |
Total consideration | | $ | 3,231,000 | |
The Company calculated the fair value of the fixed assets based on the net book value of CDM as that approximates fair value. The intellectual property, customer contracts and trade names were based on discounted cash flows using management estimates. The order backlog was based on an order that CDM had at the closing that was shipped in the first quarter of 2017, and valued at an estimated net income.
The following represents unaudited pro forma operating results for the year ended December 31, 2016 as if the operations of CDM had been included in the Company’s Condensed Consolidated Statements of Operations as of January 1, 2016:
| | Pro Forma | |
Total revenues | | $ | 19,151,653 | |
| | | | |
Net loss | | $ | (13,473,084 | ) |
| | | | |
Net loss per common share | | $ | (1.26 | ) |
| | | | |
Diluted net loss per common share | | $ | (1.26 | ) |
The pro forma financial information includes business combination accounting effects from the acquisition including amortization charges from acquired intangible assets of approximately $398,000. The unaudited pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2016. CDM's net revenues and pre-tax loss for the year ended December 31, 2017 were approximately $1,465,000 and ($406,000), respectively.
NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES:
| (a) | Principles of Consolidation: |
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary.subsidiaries (Chembio Diagnostic Systems, Inc. and Chembio Diagnostics Malaysia Sdn Bhd). All significant intercompany transactions and balances have beenare 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 amounts reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates ofin 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.accompanying notes. Judgments and estimates of uncertainties are required in applying the Company'sCompany’s accounting policies in certain areas. The following are someGenerally, matters subject to estimation and judgment include accounts receivable realization, inventory obsolescence, asset impairments, recognition of the areas requiring significant judgments and estimates: determinations of therevenue persuant to milestones, useful lives of intangible and fixed assets, estimates of allowances for doubtful accounts, inventory reserves, stock-based compensation, and deferred tax assets.asset valuation allowances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates.
| (c) | Fair Value of Financial Instruments: |
The carrying value for cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value because ofdue to the immediate or short-term maturity of these financial instruments. The fair value of the Company's notes payable approximates the recorded value as the rate is based upon the current rates offered to the Company for similar financial instruments.
| (d) | Statements of Cash Flows:and Cash Equivalents: |
For purposes of the statements ofCash and cash flows, the Company considers allequivalents are defined as short-term, highly liquid investments with a maturityoriginal maturities of three months or less when purchased to be cash equivalents.less.
| (e) | Concentrations of Credit Risk: |
Financial instruments whichthat 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'sCompany’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.net realizable value. 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, theThe Company entered into arecords up-front payments related to sublicense agreement for which it had initially recorded an asset of $1,000,000. This asset is being expensedagreements as prepaids and amortizes them over an estimatedtheir respective 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 aslife. As of December 31, 20152017 and 20142016, total prepaids were $100,000 and is reported in prepaid$237,500, respectively.
Amortization expenses and other current assets. The long-term portion as offor the licenses above for the years ended December 31, 2017, 2016 and 2015 were $137,500 $319,319, and 2014 is $100,000 and $200,000, respectively and is reflected in other assets on the consolidated balance sheet.$442,557, respectively.