UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
2018
or
| [ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_______ to ______.
Commission File No. 0-30379
CHEMBIO DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
| Nevada | | 88-0425691 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
| 3661 Horseblock Road, Medford, NY | | 11763 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant'sRegistrant’s telephone number, including area code (631) 924-1135
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | | Name of each exchange on which registered |
NoneCommon Stock, $0.01 par value | | NoneThe NASDAQ Stock Market LLC |
Securities registered pursuant to sectionSection 12(g) of the Act: |
Common Stock, $0.01 par valueNone |
| (Title of Class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,"filer", "accelerated filer", "smaller reporting company," and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [[X ] |
| Non-accelerated filer [ ] | Smaller reporting company [X][X ] |
(Do not check if a smaller reporting company)
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No _X_X
As of the last business day of the Company'sregistrant's most recently completed second fiscal quarter, the aggregate market value of voting and non-voting common equity held by non-affiliates*non-affiliates was $47,000,000.$154,594,062.
As of March 2, 2015,1, 2019, the registrant had 9,628,24817,166,459 shares of common sharesstock outstanding.
* Without asserting that anyDocuments Incorporated By Reference
Portions of the issuer's directors or executive officers, or the entities that own more than five percentregistrant’s proxy statement for its 2019 annual meeting of the outstanding sharesstockholders are incorporated by reference in Part III of the Registrant's common stock, are affiliates, the shares of which they are beneficial owners have not been included in shares held by non-affiliates solely for this calculation.report.
| | | Page |
| PART I | | |
| | 2 |
ITEM 1A. | RISK FACTORS | 12 |
ITEM 2. | PROPERTIES | 16 |
ITEM 3. | LEGAL PROCEEDINGS | 163
|
| MINE SAFETY DISCLOSURES | 169
|
| | 21 |
| | 21 |
| PART II | | |
| | 1622 |
ITEM 6. | SELECTED FINANCIAL DATA | 17 |
| MANAGEMENT'S | 1823 |
| | 2728
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. | 27 |
| | 27 |
ITEM 9B. | OTHER INFORMATION | 2728
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| PART III | | |
| | 28 |
ITEM 11. | EXECUTIVE COMPENSATION | 30 |
| | 30 |
| | 3330 |
| | 3530 |
| | 3530 |
| PART IV | | |
| | 3631 |
| | 3732 |
Unless the context requires otherwise, the words “our,” “our company,” “us,” “we” and similar terms refer to Chembio Diagnostics, Inc. and its consolidated subsidiaries.
DPP, SAMPLETAINER, STAT-PAK, STAT-VIEW and SURE CHECK are our registered trademarks. For convenience, these trademarks appear in this prospectus supplement without ® symbols, but that practice does not mean that we will not assert, to the fullest extent under applicable law, our rights to the trademarks. This report also includes trademarks and service marks owned by other organizations.
FORWARD-LOOKING STATEMENTS AND STATISTICAL ESTIMATES
This report contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified through the inclusion of words such as “anticipate,” “believe,” “contemplate,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “objective,” “outlook,” “plan,” “potential,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” or variations of such words or similar expressions. All statements addressing our future operating performance, and statements addressing events and developments that we expect or anticipate will occur in the future, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon currently available information, operating plans, and projections about future events and trends.
This report contains estimates, projections and other data concerning our industry, our business, and the markets for our products. Where expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by World Health Organization, or WHO. We also include data that we have compiled, obtained, identified or otherwise derived from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. Other than WHO, we do not expressly refer to the sources from which this data is derived.
Forward-looking statements and statistical estimates inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted or expressed in this report. These risks and uncertainties include those described below in “Item 1A. Risk Factors.” Investors are cautioned not to place undue reliance on any forward-looking statements or statistical estimates, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement or statistical estimate, whether as a result of new information, future events or otherwise.
PART I
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements withinOverview
We are a leading provider of point-of-care diagnostic products for the meaningdetection and diagnosis of Section 21Einfectious diseases. We have been expanding our product portfolio based upon our proprietary Dual Path Platform, which we refer to as the DPP technology platform, which uses a small drop of blood from the Securities Exchange Actfingertip to provide high-quality, cost-effective diagnostic results in approximately 15 minutes. We seek to build additional revenue streams by entering into technology collaborations with leading global healthcare companies to leverage the DPP platform.
Compared with traditional lateral flow technology, the DPP technology platform provides enhanced sensitivity and specificity, advanced multiplexing capabilities, and, when used with the DPP Micro Reader, quantitative results. Our DPP test for human immunodeficiency virus, or HIV, provides sensitivity of 1934,99.8% and Section 27Aspecificity of 100%, and has been approved by the Securities ActU.S. Food and Drug Administration, or FDA, and cleared as a waived test under the Clinical Laboratory Improvement Amendments of 1933. Any statements contained in this report that 1988, or CLIA. On November 6, 2018, we completed our acquisition of opTricon GmbH, a Berlin-based developer and manufacturer of handheld analyzers for rapid diagnostic tests, which we believe will enable us to promote DPP tests and DPP Micro Readers more actively across global markets.
We are not statements of historical fact may be forward-looking statements. When we usepursuing three corporate priorities, the words "intends," "estimates," "predicts," "potential," "continues," "anticipates," "plans," "expects," "believes," "should," "could," "may," "will" or the negative of these terms or other comparable terminology, we are identifying forward-looking statements. Forward-looking statements involve riskskey building blocks to drive growth and uncertainties, which may causeoperating efficiency: (1) expand our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors includecommercialization; (2) advance our research and development activities, distributor channels,pipeline; and (3) prepare for future growth.
Industry
The DPP technology platform addresses the lateral flow test market, demand for our products, compliance with regulatory impositions;which includes infectious diseases, cardiac markers, cholesterol and our capital needs. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levelslipids, pregnancy and fertility, and drugs 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.
We provide free of chargeabuse. Based on our website at www.chembio.com our annual report on Form 10-K, quarterlyreview of third-party reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable. Members of the public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, and Washington, DC 20549. Members of the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800–SEC–0330. The Internet address of the Commission is www.sec.gov. That website contains reports, proxy and information statements and other information, regarding issuers, like Chembio,we estimate that file electronicallythe market for lateral flow tests will increase from $5.5 billion in 2017 to $8.2 billion in 2022, representing a compound annual growth rate of 8.2%.
Infectious disease tests constitute the largest, and fastest growing, segment of the lateral flow test market. We currently are targeting lateral flow test solutions for three areas of infectious diseases: sexually transmitted disease, mosquito-borne disease and hepatitis. The market for lateral flow infectious disease tests is being driven by the high prevalence of infectious diseases globally, an increase in the geriatric population, growing demand for rapid test results, and advancements in multiplexing. Based on our review of third-party reports and other information, we estimate that the market for lateral flow infectious disease tests will increase from $1.4 billion in 2017 to $2.3 billion in 2022, representing a compound annual growth rate of 10.7%.
Products
Our point-of-care infectious disease portfolio is comprised of multiple commercial products, each serving unique customer requirements. The key advantages of our products, which are performed with a tiny drop of blood from the fingertip and provide results in approximately 15 minutes, include:
•
| enhanced sensitivity and specificity;
|
•
| advanced multiplexing; and
|
•
| quantitative results, when used with DPP Micro Reader. |
We have obtained U.S. FDA approvals and, directly or through our partners, international regulatory approvals for infectious disease tests as follows:
| Product (Assay) | U.S. | International |
DPP HIV 1/2
| ✓ | ✓ |
| DPP HIV-Syphilis | | ✓ |
| DPP Syphilis Screen & Confirm | | ✓ |
| DPP Zika | ✓ | ✓ |
| DPP Leishmaniasis | | ✓ |
| STAT-PAK HIV 1/2 | ✓ | ✓ |
| STAT-PAK Chagas | | ✓ |
| SURE CHECK HIV 1/2 | ✓ | ✓ |
| SURE CHECK HIV 1/2 Self Test | | ✓ |
Organic growth in our core infectious disease business is being driven by:
•
| growth in the overall market for lateral flow infectious disease tests, which we estimate will increase at a compound annual growth rate of 10.7% through 2022 (see “--Industry” above);
|
•
| our increased market penetration in existing markets and channels, including in the United States, Latin America, Africa and Europe;
|
•
| our registration of existing and new products in unchartered countries and regions, such as selected countries in Latin America and Southeast Asia;
|
•
| our entry into new market segments, such as international HIV Self-Testing; and
|
•
| advances in our product pipeline in infectious disease with key products including a multiplex test for HIV and syphilis in the U.S. market and tests for dengue, zika and chikungunya. |
We market and sell both stand-alone and multiplex tests for sexually transmitted infectious diseases, such as HIV and syphilis. HIV and syphilis continue to be major global public health issues. According to WHO estimates:
•
| HIV has claimed more than 35 million lives, including 940,000 in 2017. Approximately 36.9 million were living with HIV at the end of 2017, and 1.8 million were newly infected during 2017.
|
•
| There were 18.0 million prevalent cases of syphilis as of 2012, and 5.6 million new infections were estimated to occur annually.
|
•
| Elimination of mother-to-child transmission, or MTCT, of both HIV and syphilis is a global health priority. In 2013, 1.9 million pregnant women were infected with syphilis worldwide. Congenital syphilis contributes significantly to infant mortality, accounting for 305,000 annual perinatal deaths worldwide in 2013. Globally, more than 1.4 million pregnant women were infected with HIV as of 2015, and MTCT of HIV is estimated to have resulted in over 150,000 infant cases in 2015. |
We are seeking to address the global concerns related to HIV and syphilis co-infection through the development of a novel, multiplex test for both HIV and syphilis. We have developed a DPP HIV-Syphilis multiplex test and received regulatory approvals covering a number of international markets, including Brazil, Europe, Malaysia and Mexico. In the United States we have completed a DPP HIV-Syphilis clinical trial and filed a Pre-Market Approval Application with the Commission. VisitorsFDA, which is in the review process. We believe we are well-positioned to be the Commission's website may access such information by searching the EDGAR database.
For further information about these and other risks, uncertainties and factors, please review the disclosure included in this report under "Part I, Item 1A, Risk Factors."
General
The Company (Chembio Diagnostics, Inc. and its wholly-owned subsidiary Chembio Diagnostic Systems, Inc. are collectively referredfirst company to herein as the "Company") develops, manufactures, markets and licenses rapid point-of-care diagnostic tests (POCTs) that detect infectious diseases. The Company's main products presently commercially available are rapid tests for the detection of HIV 1/2 antibodies, andintroduce a multiplex rapid test for the detection of HIV and Syphilis antibodies.syphilis in the United States.
We also market and sell tests for selected fever and tropical diseases such as Chagas, ebola, leishmaniasis and Zika. The HIV 1/2 rapid tests employ in-licensed and proprietarymarket for lateral flow technologies (see "Our Rapid Test Technologies"), can be usedmosquito-borne diseases includes established markets for disease such as dengue and malaria, which WHO estimates together account for more than 600 million annual infections worldwide. There are also a number of emerging markets for lateral flow tests for infectious diseases such as burkholderia, chikungunya, lassa, leptospirosis, Marburg, rickettsia and Zika. We are developing tests, using the DPP platform, to detect all of the aforementioned fever and tropical diseases, as stand-alone or multiplex tests.
Since 2015 we have received over $9 million of funding from some of the world’s leading health organizations, which has helped us accelerate the expansion of our pipeline of infectious disease tests. Our collaborators have included Bill & Melinda Gates Foundation, The Paul G. Allen Family Foundation, The Oswaldo Cruz Foundation or FIOCRUZ, and the Foundation for Innovative New Diagnostics or FIND, as well as U.S. government agencies such as Centers for Disease Control, or CDC, and the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services or BARDA, and the U.S. Department of Agriculture, or USDA. Many of the tests in our infectious disease pipeline are approaching commercialization, and several have received initial regulatory approvals:
| Product | Collaborator | Phase I Feasibility | Phase II Development | Phase III Verification &Validation | Phase IV Clinical/ Regulatory | Phase V Commercial Launch |
| DPP HIV-Syphilis (US) | Self-funded | ✓ | ✓ | ✓ | Submitted FDA Q1 2018 | |
| DPP Dengue (International) | Fiocruz | ✓ | ✓ | ✓ | Submitted ANVISA1 Q3 2018 | |
| DPP Dengue NS1 (International) | Fiocruz | ✓ | ✓ | Ongoing | | |
| DPP Zika (US/International) | Fiocruz | ✓ | ✓ | ✓ | ✓ | Received FDA EUA2, ANVISA, CE mark |
| DPP Chikungunya (International) | Fiocruz | ✓ | ✓ | ✓ | ✓ | Received ANVISA, Malaysia |
DPP Dengue-Zika-Chikungunya (International) | Fiocruz | ✓ | ✓ | ✓ | Submitted ANVISA Q3 2018 | Received Malaysia |
| DPP Malaria (International) | Bill & Melinda Gates Foundation | ✓ | ✓ | Ongoing | | |
| DPP Ebola (US, International) | Centers for Disease Control | ✓ | ✓ | ✓ | Received FDA EUA Q4 2018 | |
| DPP Fever Panel (Africa) | The Paul G. Allen Family Foundation | ✓ | ✓ | ✓ | Field Testing: Africa, South America | |
| DPP Fever Panel (Asia) | FIND | ✓ | Ongoing | | | |
____________________________
1 Agência Nacional de Vigilância Sanitária (Brazil)
2 Emergency Use Authorization
Collaborations
We are building additional revenue streams by leveraging our patented DPP technology and scientific expertise through collaborations. Leading global healthcare organizations have chosen to collaborate with all blood matrices as samples,us based on our deep scientific expertise with our proven DPP technology platform and are manufacturedcapabilities, our successful record of developing DPP tests with a diverse set of collaborators including global commercial companies, governments and non-governmental organizations, and our extensive experience in a standard cassette format, a dipstick format, and a proprietary barrel format. The tests employing the cassette and proprietary barrel formats were approved by the FDA in 2006. The barrel format is exclusively distributed by a distributorobtaining regulatory approvals in the United States (FDA), Brazil (ANVISA), the European Union (CE mark) and by Chembio and its designated distributors outside the United States. The exclusive U.S. distribution agreement for the barrel product terminates in accordance with its terms on May 31, 2016. Chembio and any newly designated distributors will distribute the product in the U.S. after May 31, 2016. The Cassette format is distributed by Chembio and its designated distributors worldwide. Our latest generation HIV 1/2 rapid antibody detection test incorporates our patented Dual Path Platform® (DPP®) POCT technology, and this POCT platform does not require in-licensing. The DPP® HIV 1/2 Assay detects antibodies to HIV 1 & 2 in oral fluid samplesMexico (Comisión Federal para la Protección contra Riesgos Sanitarios, or COFEPRIS) as well as in all blood matrices. We have sold this product in Brazil since 2009 where it was approved by ANVISA, throughfrom WHO (Prequalification, or PQ).
| Product | Collaborator | Phase I
Feasibility | Phase II
Development | Phase III Verification &Validation | Phase IV Clinical/ Regulatory | Phase V Commercial Launch |
| DPP Eosinophilic / Respiratory | AstraZeneca | ✓ | ✓ | Ongoing | Received CE mark Q4 2018
| |
| DPP Cancer | Undisclosed | ✓ | ✓ | Ongoing | | |
| Infectious Disease Portfolio | LumiraDx | Initiated Q3 2018 | | | | |
| DPP Concussion | Perseus Science | ✓ | Ongoing | | | |
| DPP Bovine Tuberculosis | USDA | ✓ | Ongoing | | | |
| DPP Hepatitis C Ab | FIND | ✓ | Ongoing | | | |
| DPP Hepatitis C Ag | FIND | Initiated Q3 2018 | | | | |
By leveraging our agreement with the Oswaldo Cruz Foundation ("FIOCRUZ"),DPP technology platform, we are creating opportunities to expand into new markets such as cancer diagnostics, concussion and traumatic brain injury, and veterinary and we received United States FDA regulatory approval for this productare broadening the application of our technology from point-of-care diagnostics to include companion diagnostics. Research and development costs related to the collaborations are fully funded by our collaborators.
Sales Channels
Our products are sold globally, both directly and through distributors, to hospitals and clinics, physician offices, clinical laboratories, public health organizations, government agencies and consumers. Historically we marketed and sold our products only into a handful of countries and regions. In recent years we have hired sales executives to begin building our own channels in December 2012 and CLIA waiver in October 2014. We launched it inkey markets such as the United States, under Chembio's brandEurope, Latin America, Africa and Southeast Asia. With sales growth as an underlying objective, we are focused on increasing sales in existing geographies, expanding sales into new geographies, and broadening sales coverage in key markets.
Automation of U.S. Manufacturing
We are automating our U.S. manufacturing processes and expanding our manufacturing capacity. During 2018, we took delivery of our first automated manufacturing line. This automated manufacturing line will be used for DPP test production and will allow assembly of various configurations of DPP tests on the fourth quarterline. The automated line will have an annual capacity of 2014.between five and ten million tests, depending on the test configuration, and will use vision-guided, robotic operation to improve inspection and quality control. As we transition from manual to automated assembly, we believe the reduced variable costs will improve product gross margins.
DPP Technology & Development
Our product pipeline, which currently includes a multiplex rapid test for earlier detection of HIV by detecting P-24 antigencommercially available products employ either our patented DPP technology or traditional lateral flow technology. We believe products developed using our DPP technology can provide superior diagnostic performance compared with products that utilize traditional lateral flow technology.
We are executing our strategy to leverage DPP intellectual property, as well as antibodies, a test for Hepatitis-C,our scientific and a multiplex test that detects HIV and Syphilis specific antibodies (which we are already selling outside the U.S.), is based on this DPP® technology for which we were issued a United States patent in 2007 and for which additional patent protection has issued or is pending in a number of other countries. With the patented DPP® and the lateral flow platform, we participate in the estimated $8 billion point-of-care market segment of the estimated nearly $50 billion global in-vitro diagnostic market that has an overall growth rate exceeding 3% per annum. POCTs, by providing prompt and early diagnosis, can reduce patient stays, lower overall costs, improve therapeutic interventions and improve patient outcomes. POCTs can also prevent needless hospital admissions, simplify testing procedures, avoid delays from central lab batching, and eliminate the need for return visits.
In the areas of infectious and sexually transmitted diseases (such as HIV and syphilis), the utility of a rapid point–of-care (POC) test, particularly in identifying patients unaware of their disease status, has been well established. 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. More recently introduced in the United States in 2004, rapid HIV tests now also present a significant segment of the U.S. market for HIV clinical testing, which is still dominated by laboratory tests. We have focused our product development activity within areas where the availability of rapid, point-of-care 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.
PRODUCTS
Lateral Flow Rapid HIV Tests
All three of our lateral flow rapid HIV antibody detection tests are qualitative "yes/no" tests for the detection of antibodies to HIV 1 & 2 with visually interpreted results (one line "negative"; one line "positive") available within approximately 15 minutes. The tests are simple to use, have a shelf life of 24 months, and do not require refrigeration. The tests differ principally only in the method of test procedure, convenience and cost. One of our FDA-approved lateral flow HIV tests incorporates a proprietary plastic "barrel" device that houses the lateral flow strip. This barrel format enables collection of samples directly (usually from a finger-stick whole blood sample) into the barrel's capillary tip. A sealed unitized buffer vial, assembled onto the top of the barrel, is removed and seated into a stand; the seal is then pierced by the barrel's capillary tip, thereby initiating the upward flow of the resulting sample-buffer solution through a filter, up into the vertical device's chamber and onto the lateral flow strip. This results in a unique unitized and closed device system that can reduce the chance of exposure to potentially infectious samples.
In January 2015, the Company entered into an agreement with StatSure Diagnostic Systems, Inc. (SDS) to acquire SDS' interest in the barrel device format, also known as Chembio's SURE CHECK® HIV 1/2 Assay, effective June 1, 2016. Beginning June 1, 2016, Chembio will own full rights related to the SURE CHECK® HIV 1/2 Assay, including sales, marketing, distribution and trademark rights, subject to the terms of the existing marketing and distribution agreement with Alere, Inc., which grants Alere U.S. marketing and distribution rights through May 31, 2016. Prior to this newly-executed agreement between SDS and Chembio, SDS has owned a 50 percent interest in the rights to the SURE CHECK® HIV 1/2 Assay that would have continued after May 31, 2016, also subject to the existing marketing and distribution agreement with Alere. The new agreement with SDS also resolves all other matters between Chembio and SDS, including their respective sharing ratios, until June 1, 2016, concerning net revenues from sale of the SURE CHECK® product outside the U.S.
The Company's SURE CHECK® HIV 1/2 Assay is marketed exclusively in the U.S. as Clearview® Complete pursuant to an exclusive distribution agreement that terminates in accordance with its terms on May 31, 2016. After May 31, 2016, it will be marketed in the U.S. as Sure Check® HIV 1/2 Assay. Outside the U.S., Chembio markets the SURE CHECK® HIV 1/2 Assay primarily through distributors. The SURE CHECK® HIV 1/2 Assay is Food & Drug Administration (FDA) approved, CLIA-waived, European CE-marked, and has been pre-qualified by the World Health Organization (WHO). Results are obtained in 15 minutes via a 2.5uL blood sample (i.e., fingerstick, serum, plasma, or venipuncture whole blood). The assay is stable at room temperature and provides 99.7% sensitivity and 99.9% specificity.
Our other FDA-approved lateral flow HIV test uses a more conventional rectangular plastic cassette format that houses the lateral flow strip. In this case, a sample is transferred by use of a separately provided transfer device ("loop") into a sample well or port of the cassette that houses the lateral flow strip, which is positioned horizontally or flat.
Our third lateral flow HIV test, the HIV 1/2 STAT PAK® Dipstick, is our most cost competitive and compact format. It does not have any plastic housing so that 30 test strips can be packaged into a small vial that is ideal for transporting into remote settings. The test procedure is similar to the cassette format except that a user-applied adhesive backing is provided as a more cost-effective and compact "surface" on which to run the test.
Regulatory Status of the lateral flow HIV tests
The FDA approved our Pre-Market Applications (hereinafter "PMA"; see "Governmental Regulations" and Glossary) in April 2006 for our SURE CHECK® HIV 1/2 (and also now Alere Clearview® Complete HIV 1/2) and for our HIV 1/2 STAT-PAK® products. Waivers under the Clinical Laboratory Improvement Act (hereinafter "CLIA"; see Governmental Regulations) were granted by the FDA for these two FDA-approved products in 2006 and 2007, respectively. A CLIA waiver is required in order for health care providers to administer these tests in the settings where they are most suited and needed, such as public health testing clinics, hospital emergency rooms and physicians' offices. The SURE CHECK® and HIV 1/2 STAT-PAK® products received CE Marks in July 2013 and March 2014, respectively, and the CE Marking for the DPP® HIV 1/2 Assay received in May 2015. We have also updated our filing for CE Marking to reflect the new tradename of STAT-VIEW® HIV 1 / 2 Assay for sale in the EU market. Our HIV 1/2 STAT-PAK® Dipstick, although not FDA-approved, qualifies under FDA export regulations [See Government Regulation] to sell to customers outside the United States, subject to any required approval by the importing country. CE Mark has not been pursued for this product.
All three of our lateral flow HIV tests have qualified for procurement under the President's Emergency Plan for AIDS Relief ("PEPFAR"). The cassette and dipstick versions of the STAT-PAK® and the SURE CHECK® assays are also pre-qualified by the World Health Organization (WHO) for procurements by the second largest global program, known as the Global Fund, as well as other related programs funded by agencies affiliated with the United Nations, such as UNICEF and UNITAIDS (see Glossary), through qualification with the WHO bulk procurement scheme.
DPP® HIV 1/2 Assay
As in the case of our lateral flow HIV tests, our DPP® HIV 1/2 Assay is also a qualitative "yes/no" test for the detection of antibodies to HIV 1& 2, delivers visual results within as little as 15 minutes, is simple to use, has a shelf life of 23 months, and does not require refrigeration. This product, which is our first FDA-approved product incorporating our patented DPP® technology, can be used with oral fluid samples, as well as with all blood matrices. This product also incorporates our patent-pending oral fluid collection and storage system that enables samples to be fully extracted in buffer solution before application to the test device, and also enables the extracted sample to be stored and retested or potentially tested for multiple conditions in future product applications. Clinical and laboratory studies demonstrated the ability of the test to accurately detect the presence of antibodies in individuals down to two years of age. Studies have also shown this product to have improved performance compared with all of the current FDA-approved CLIA-waived lateral flow rapid tests, even including our own lateral flow tests. FDA-approved label claims include sensitivity/specificity on oral fluid and finger-stick whole blood of 98.9%/99.9% and 99.9%/100% respectively. Oral fluid sensitivity was 100% among HIV-positive patients not taking anti-retroviral medication.
Regulatory Status of the DPP® HIV 1/2 Assay
In December 2012, we received FDA approval of our Pre-Marketing Approval. In October of 2014 the FDA granted CLIA-waiver status.
The DPP® HIV 1/2 Assay product is qualified for procurement under the President's Emergency Plan for AIDS Relief ("PEPFAR") for use with all sample matrices, and we are pursuing WHO qualification in order to enable procurement of this product by the Global Fund and United Nations agencies, including programs underwritten by them. In October 2014, we completed a three-day on-site inspection by the WHO as follow-up to pre-qualification activities of our products with no major non-conformances noted during the audit. The WHO laboratory evaluation for the blood matrix is complete, while oral fluid is in progress and expected to be complete in 2016. 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.
In June 2010, ANVISA approved the DPP® HIV 1/2 Assay that is being marketed in Brazil through our collaboration with the Oswaldo Cruz Foundation, Brazil's leading public health institute (see Oswaldo Cruz Foundation OEM DPP® Agreements). Since this time, we have sold and marketed millions of DPP® HIV tests to Brazil through this partnership.
DPP® HIV-Syphilis Multiplex Test
This product, launched in 2013, allows for the detection of antibodies to both HIV and Syphilis on a single test device within approximately 15 minutes. In certain global/public health settings (see Target Markets), this product may provide a more convenient and cost-effective means of rapid detecting both markers in a single test procedure at the point of care as compared with performing separate rapid tests for each indication. This product takes advantage of the multiplexing feature of DPP® which provides for a more robust reaction between the sample and biomarkers being tested for (HIV and Syphilis antibodies in this case), resulting in a greater ability by the user to visually interpret test results. We launched this product in Mexico in the fourth quarter of 2013 as a unitized product, meaning that each test kit was separately packaged to include each of the other components necessary to run this test, as compared with other configurations where a test kit of 20 or 30 devices is accompanied by one bottle of running buffer. The initial results of this launch have been very positive, and we experienced good results in Mexico during 2014 from the program. Building on this initial success, we continue to pursue commercialization efforts for this product in a number of additional international markets, where there is a great need to detect Mother-to-Child-Transmission of HIV and Syphilis globally. According to the CDC website, "approximately 370,000 babies are born with HIV, mostly in sub-Saharan Africa. Without treatment, more than half of these children will die before the age of 2. Through key interventions, such as routinely testing pregnant women for HIV, providing antiretroviral medications to HIV-infected pregnant women and their exposed infants, and promoting safe infant feeding practices, mother-to-child transmission of HIV can be decreased from about 35% to less than 5%. Another prominent cause of infant mortality is untreated maternal syphilis, which still accounts for more than 500,000 stillbirths and infant deaths annually despite the fact that these deaths could be prevented through routine detection and treatment of syphilis during antenatal care".
Regulatory Status of the DPP® HIV-Syphilis Test
DPP® HIV-Syphilis – We have developed this product for international and U.S. marketing. For the international market, the product has been registered in Mexico, and successfully launched and sold in this region.
In February 2015, this product was granted approval from the Brazilian ANVISA. We have submitted this product both for evaluation by the CDC, acting on behalf of the United States Agency of International Development, and the WHO, which has accepted this product to be evaluated for pre-qualification in its global procurement scheme. In October 2014, WHO conducted a three-day audit of our facilities as follow up to pre-qualification activities for the DPP HIV-Syphilis Assay, including other products submitted for pre-qualification through WHO. No major non-conformances were identified during this audit, and we continue to work with WHO to obtain pre-qualification approval status for this device.
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.
DPP® TECHNOLOGY & DEVELOPMENT
Chembio is executing its strategy to leverage the DPP® intellectual property and product development and manufacturing experienceoperational expertise, to create new collaborations where Chembio serveswe will serve as an exclusive development and manufacturing partner. Examples of such collaborationcollaborations include the following:
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| The Company entered into an agreement to develop a POC diagnostic test for dengue fever virus, the DPP® Dengue Fever Assay, which would be able to detect IgG/IGM and NS1 antigens in October 2014. |
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| A collaboration also announced in October 2014, with an international diagnostics company to develop a POC diagnostic test for the early detection and monitoring of a specific type of cancer. At that time, the cancer project represented the first application of the DPP® technology outside the infectious disease field. |
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| The Company entered into a follow-on, milestone-based development agreement with a private contracting organization acting on behalf of the United States Centers for Disease Control and Prevention (CDC), for a multiplex POC influenza immunity test utilizing Chembio's patented Dual Path Platform (DPP® ) technology. |
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| In January 2015, Chembiowe entered into an agreement with the Concussion Science Group (CSG) Division of Perseus Science Group LLC to utilize Chembio's patented DPP® technology to develop a POCpoint-of-care diagnostic test for traumatic brain injury, (TBI), including sports-related concussion.concussions, utilizing both our DPP and optical analyzer technologies. |
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| In October 2017, we signed a development agreement with AstraZeneca for the development of a quantitative point-of-care test for eosinophilic respiratory disease, utilizing both our DPP and optical analyzer technologies. |
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| In April 2018, we entered into a collaboration agreement with LumiraDx to develop new point-of-care diagnostic tests for infectious diseases. Under terms of the agreement, CSG's patented biomarker will be combined with Chembio's proprietary DPP® platformwe receive funding from LumiraDx, subject to satisfying certain milestones, to develop a semi-quantitative or quantitativecertain new point-of-care testinfectious disease tests. Following the regulatory approval and commercialization of tests in accordance with this agreement, Chembio will both sell reagents to, diagnose TBI. CSG agreed to pay Chembio milestone developmentand receive royalty payments during 2015.from, LumiraDx on sales of all products developed through this collaboration. |
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| In January 2015, Chembio was awarded a grant from The Bill & Melinda Gates Foundation to expedite the feasibility testing and development of a DPP® Malaria POC rapid diagnostic to accurately identify individuals infected with Plasmodium falciparum parasite. Chembio's DPP® technology was selected for this grant due to its exceptional sensitivity and potential to aid the foundation in its goal of eradicating malaria. To achieve this goal, diagnostics must be capable of detecting the malaria parasite in infected, but asymptomatic, people. Current POC rapid diagnostics tests lack sufficient sensitivity to identify all individuals with transmissible infections. |
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| In October 2015, Chembio was awarded a grant from the Paul G. Allen Foundation to develop a POC test to identify multiple life-threatening febrile illnesses. Under the $2.1 million dollar grant, Chembio will use its patented DPP® technology to develop a DPP® Fever Panel Assay, a POC multiplex assay to simultaneously detect Malaria, Dengue, Ebola, Lassa and Marburg. The multiplex assay that is planned to be designed to include a quality control test band and seven tests bands with specific antibodies to detect different pathogens, including multiple serotypes of the same pathogen: Malaria PAN-PLDH antigen (Plasmodium falciparum, Plasmodium vivax, Plasmodium malariae, Plasmodium ovale), Malaria Falciparum HRP2 antigen, Ebola Virus PAN (Zaire, Sudan, Bundibugyo Virus), Marburg Virus, Lassa Virus, Dengue Virus (Dengue 1, Dengue 2, Dengue 3, Dengue 4) and Chikungunya Virus. In many parts of the world, these diseases are commonly misdiagnosed, resulting in a delay of treatment or failure to properly treat the underlying infection. Misdiagnosis may be due to the fact that these diseases have similar symptoms that are difficult to distinguish. Currently available POC diagnostics lack the ability to test for multiple diseases simultaneously. Further, existing POC diagnostics may lack the sensitivity and specificity required to detect infected but asymptomatic patients - information that is critical for preventing the spread of disease. |
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| Also in October 2015, Chembio signed an agreement withNovember 2018, we acquired opTricon (Berlin, Germany), a leading developer of mobile analysis devices forhandheld optical analyzers rapid diagnostic tests. Through this exclusive agreement, subject to certain terms,See “Management’s Discussion & Analysis of Financial Condition and covering the fieldsResults of sexually transmitted diseases, certain "fever" diseases, and a specific form of cancer, Chembio will launch the DPP® Micro Reader, a point-of-care instrument designed specifically to complement Chembio's patented DPP® technology as applied to those diseases. The DPP® Micro Reader will include an innovative image sensor to provide a quantitative interpretation of diagnostic results when combined with Chembio's proprietary DPP® immunoassay technology. Using a state-of-the-art camera system, the DPP® Micro Reader is designed to provide definitive diagnostic results for low analyte concentrations, which may otherwise result in faint or ambiguous test results. In addition, the DPP® Micro Reader will provide customers with various options to capture, record, transmit and store test results. With one-button operation, the palm-sized and battery-operated DPP® Micro Reader is simple, fast, portable and cost-effective. |
PARTNERS INVOLVED IN MARKETING OUR PRODUCTS
Alere
On September 29, 2006, we executed marketing and license agreements with Alere. The marketing agreements (the Barrel Agreement and the Cassette Agreement) provide Alere with a 10-year exclusive right (until May 31, 2016) to market our rapid HIV tests in the United States under Alere's brands. The agreements also provide Chembio a non-exclusive license to certain Alere lateral flow patents that may be applicable to our lateral flow products, including for manufacture of the HIV tests in the United States for sales outside the United States and even for sale in the United States should Alere enter the U.S. market with a competitive rapid HIV test product and in such case we choose to market our products directly as provided in the agreements in such event of a competitive rapid HIV test product. Simultaneous with the execution of the agreements, we also settled litigation with StatSure Diagnostics, Inc. (SDS), that had been ongoing relating to the proprietary barrel device which is incorporated into one of our two FDA-approved rapid HIV tests (See Lateral Flow HIV Tests above). SDS, pursuant to the settlement, is a party to the 3-way Barrel Agreement. As a result, until now, it is through the agreements with Alere that we have been participating in the growth of the rapid HIV test market in the United States.
In late July 2013, we received notice from Alere that it intends to commercialize its own rapid HIV test (see Competition), which test had just received FDA approval as a moderate complexity product (i.e. not CLIA-waived though this was granted in late 2014), in the United States. Under the Barrel Agreement and the Cassette Agreement such product is considered to be a Permitted Competing Product (PCP). Each of the two aforementioned agreements provides that, in the case of notice of a PCP, Chembio may make certain elections (jointly with SDS in the case of the Barrel Agreement), or elect to continue each agreement without taking any further action. Under the Cassette Agreement, Chembio may, at any time, terminate such agreement, which termination would become effective 60 days after the date notice was made. Under the Barrel Agreement, Chembio and SDS may jointly issue a non-exclusivity notice, which notice shall be effective immediately. In the event that Chembio makes this election with respect to the cassette product, or that both Chembio and SDS make this election with respect to the cassette product, then the electing party or parties could sell that respective product in the United States market under its own brand, and in such case, the lateral flow license that Chembio has from Alere for international sales would be expanded to include sales in the United States. See Lateral Flow Technology and Reagent Licenses. In April 2014, the Company gave notice to Alere of its intent to terminate the Cassette Agreement and 60 days later, the Company began marketing in the United States under the Chembio brand of HIV 1/2 STAT-PAK® assay. The barrel product continues to be marketed exclusively by Alere in the U.S only, although on May 31, 2016, the Barrel Agreement will expire pursuant to its terms, and Chembio will also market the barrel product in the U.S. under the brand of SureCheck® HIV 1/2 Assay.
We have developed our own sales and marketing departments for the sales of our products in the U.S. We have appointed distributors internationally for our lateral flow HIV tests. Our largest markets outside the U.S. for our lateral flow HIV rapid tests are certain countries in Africa, Asia, and South America, as well as Mexico. Internationally, most of the demand for our products is based on governmental and non-governmental prevention and treatment efforts. Given this, these programs can and do often result in large orders, but also can result in periods of relatively lower demand, based on the variations associated with this kind of demand.
4
Operations—Recent Developments.”OEM DPP® Products
Oswaldo Cruz Foundation OEM DPP® Agreements
During 2008-2010 we signed five separate agreements, each of which is titled and constitutes a "Technology Transfer Agreement", with the Oswaldo Cruz Foundation (FIOCRUZ) in Brazil. FIOCRUZ includes the Institute of Technology on Immunobiologicals/Bio- Manguinhos, which is the FIOCRUZ unit that produces vaccines and diagnostic kits. FIOCRUZ and Bio-Manguinhos are referred to herein interchangeably. Each of the five agreements relates to a different specific product or group of products based on our DPP® technology. FIOCRUZ is the leading public health organization in Brazil, and it is affiliated with Brazil's Ministry of Health, which is its principal client. It has extensive research, educational and manufacturing facilities for drugs and vaccines, as well as for diagnostic products.
Each of the agreements grants to FIOCRUZ the right, but not the obligation, to earn the right to request a technology transfer to be able to license and manufacture that product on its own. FIOCRUZ is not required to earn this right, but if it desires to do so, then it needs to purchase a stated amount of the product as set forth in the respective agreement for that product.
During 2010 and 2011, all of the initial products contemplated under the five agreements were approved for marketing by the applicable regulatory agencies in Brazil. The agreements between the Company and FIOCRUZ are unique examples of technology transfer collaborations between a private sector rapid test manufacturer and a public health organization. The five products categories for which FIOCRUZ can earn a separate right to request a technology transfer for that product only are: DPP® products for HIV screening, HIV Confirmatory, Leishmaniasis, Leptospirosis and Syphilis. Each technology transfer, and the provision by Chembio of the information and training that is required for this to occur, will occur only if FIOCRUZ purchases from Chembio the amount of that product that is specified in the respective agreement for that product. The actual amount of purchases for each product is totally at the discretion and option of FIOCRUZ and may be more or less than the amount needed to qualify for a technology transfer.
More specifically, the five agreements, although separate and independent of one another, are structurally similar according to the following:
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| Each agreement states: "the object of this Agreement is for the Transfer of Technology from Chembio to Bio-Manguinhos, the license by Chembio to Bio-Manguinhos for the Chembio Patents applied or granted in Brazil or other Mercosur countries for the term of the patents and the transfer of all the technical information related to the DPP® technology and the process to obtain the product by the DPP® technology. This Agreement contemplates the scientific and technological co-operation between Chembio and Bio-Manguinhos for such activities so that Bio-Manguinhos will be able to manufacture the Product in Brazil." |
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| Each agreement provides that Chembio will supply free of charge to Bio-Manguinhos prototypes of the product to demonstrate performance characteristics that are necessary for evaluation by the Brazilian Ministry of Health and for registration with ANVISA. ANVISA is the Agencia Nacional de Vigilancia Sanitaria, or the National Sanitary Vigilance Agency. The number of prototypes ranges from 15,000 to 45,000 in the various agreements. |
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| Each agreement provides that the prototypes will be utilized both for a performance study that follows a protocol prepared and approved by Bio-Manguinhos and the Brazilian Ministry of Health, and also will be used for studies in Brazil for the registration procedures at ANVISA. Bio-Manguinhos will then apply to ANVISA to register the product. Within 120 days of the registration of the product with ANVISA, Bio-Manguinhos will make an advance technology transfer payment to Chembio (the "Advance Payment"), in an amount specified in that particular agreement. All five of the Advance Payments provided for in the agreements were made in 2010 and 2011. |
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| At such time, if any, that the product for a particular agreement has been successfully registered with ANVISA, then Bio-Manguinhos has the right to qualify for the full technology transfer for that product by purchasing the amount of the product, and at the price, specified in the agreement. |
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| Bio-Manguinhos is not required to purchase any amount of any product. For each product, it only needs to purchase that product, in the amount specified in the agreement, only if it desires to be able to complete the technology transfer process in order to manufacture and sell that product on its own. Chembio does not have recourse against Bio-Manguinhos if Bio-Manguinhos does not purchase the qualifying purchase amount of any product. In that case, Chembio can only suspend further phases of the technology transfer, attempt to renegotiate the agreement, and/or retain any amounts previously paid by Bio-Manguinhos. Chembio cannot force Bio-Manguinhos to purchase any amount of any product. |
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| As a result of the terms of these agreements, Bio-Manguinhos has never been required to, and is not now required to, purchase any amount of any of the products. |
· | As of December 31, 2015 Bio-Manguinhos had earned the status described below with respect to each of the five products: |
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| With respect to Chembio's DPP® HIV1/2 Screen test, Bio-Manguinhos had qualified to request the technology transfer. It has requested, and has received, the technology transfer information. Bio-Manguinhos purchased $880,175, $4,990,840 and $291,235 of this product in 2011, 2012 and 2013, respectively, all of which applied to the qualifying amount to obtain the right to the technology transfer (the "Qualifying Amount") for this product. In 2013, 2014 and 2015, Bio-Manguinhos made $3,320,010, $4,799,250 and $5,410,350, respectively, of purchases in excess of the Qualifying Amount.
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| With respect to Chembio's Canine Leishmania test, Bio-Manguinhos had qualified to request the technology transfer and did so request. Submission of the technology transfer information is in process at this time. Bio-Manguinhos purchased $2,000,817 and $99,183 of this product in 2011 and 2012 respectively, of this product in that applied to the Qualifying Amount. In addition, Bio-Manguinhos made purchases in excess of the Qualifying Amount equal to $1,314,117, $1,736,700, $2,394,000 and $3,772,482 in 2012, 2013, 2014 and 2015, respectively. |
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| With respect to the three variations of Chembio's DPP® Syphilis test, all of which are covered by a single agreement, Bio-Manguinhos had qualified to request the technology transfer with respect to Trep only, and intends to do so in the near future. Bio-Manguinhos purchased $1,194,250, $165,750 of this product in 2011 and 2012, respectively that applied to the Qualifying Amount. In addition, Bio-Manguinhos made purchases in excess of the Qualifying Amount equal to $2,817,750, $646,340, $4,617,891 and $833,631 in 2012, 2013, 2014 and 2015, respectively. |
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| With respect to the two variations of Chembio's Screen & Confirm Test, Bio-Manguinhos had not made any purchases in 2011, 2012, 2013, 2014 or 2015, and therefore had not qualified to request the technology transfer for either of them. This agreement was terminated in December 2015. |
c. | This syphilis agreement was terminated during the fourth quarter of 2015. |
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| With respect to Chembio's DPP® Confirmatory test, Bio-Manguinhos had not qualified to request the technology transfer. Bio-Manguinhos made purchases of $560,000, $819,000, $390,000, $390,000 and $156,000 of this product in 2011, 2012, 2013, 2014 and 2015 respectively, all of which applied to the Qualifying Amount. In order to qualify for the technology transfer, Bio-Manguinhos would need to purchase an additional $39,000 of this product. |
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| With respect to Chembio's DPP® Leptospirosis test, Bio-Manguinhos had not qualified to request the technology transfer. Bio-Manguinhos made purchases of $135,000 of this product in 2011, and it made -0- purchases in 2012, $45,000 in 2013 and it made -0- purchases in 2014 and -0- in 2015. In order to qualify for the technology transfer, Bio-Manguinhos would need to purchase an additional $225,000 of this product. |
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| As stated above, Bio-Manguinhos is not obligated to make any purchases. After the specified level of sales for a particular product has been achieved, FIOCRUZ may request that the technology for that product be transferred to FIOCRUZ together with an exclusive license to produce and sell that product in a defined territory. The license is to provide that Chembio will receive a royalty on all sales. Chembio does not release the amount of this royalty because it could have an adverse effect on negotiations concerning royalties in potential transactions with other parties. |
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| All the agreements expire five years after the date of the technology transfer. If terminated earlier by default of FIOCRUZ, FIOCRUZ must stop all activity; if terminated earlier by default of Chembio, or if terminated by natural expiry, FIOCRUZ can continue to produce and commercialize the product without paying royalties. |
Other OEM And License Agreements Related to DPP® Technology
In addition to our agreements with FIOCRUZ, we have entered into certain OEM and license agreements with other parties with respect to certain products that we have developed based on our DPP® technology. In 2008 we entered into a product development and license agreement with Bio-Rad Laboratories, Inc. (Bio-Rad), a leading multinational life sciences company, for the first ever POC test for the confirmation of HIV (reflex test used after initial screening test(s) are positive). This product utilizes our DPP® technology, capitalizing on its multiplexing advantages, and is much simpler to perform than the legacy confirmatory platform, known as western blot, which requires a substantial amount of technical training and hands-on time and which is more expensive to manufacture and distribute. This product was CE marked and was launched by Bio-Rad in the second quarter of 2013 in Europe under their Geenius® brand; and an FDA PMA approval was received in 2014.
In 2013 we entered into collaboration with Labtest, a private company in Brazil, for the distribution of a number of products in Brazil that would be co-branded with Labtest and Chembio trademarks. Under this agreement, upon request from Labtest, for which there is no requirement, Chembio will sell the appropriate DPP® components to Labtest for further manufacture and assembly in Brazil.
In February 2014, Chembio entered into a technology transfer and license agreement with RVR Diagnostics SDN BHD ("RVR"), a privately-held company in Malaysia. The agreement supports Chembio's strategy of establishing a market presence in Asia, in collaboration with RVR as a licensee, distributor, and contract manufacturer, depending on the circumstances. The agreements grant exclusive distribution rights to RVR in certain countries in the region and enable RVR to manufacture Chembio's DPP® HIV 1/2 Assay and DPP® HIV-Syphilis Assay, and potentially other products developed by Chembio, such as Dengue, incorporating its patented DPP® technology as indicated in the DPP® Technology & Development section above.
Our Rapid Test Technologies
All of our commercially available current products employ either in-licensed lateral flow technology or our own patented Dual Path Platform (DPP®) technology. Both lateral flow technology and DPP® allow the development of accurate, low cost, easy-to-perform, single-use diagnostic tests for rapid, visual detection of specific antigen-antibody complexes on a test strip. These formats provide a test that is simple (requires neither electricity nor expensive equipment for test execution or reading, nor skilled personnel for test interpretation), rapid (turnaround time approximately 15 minutes), safe (minimizes handling of potentially infected specimens), non-invasive (requires 5-20 micro liters of whole blood easily obtained with a finger prick, or alternatively, serum or plasma), stable (24 months at room temperature storage in the case of our HIV tests), and highly reproducible.
We believe that products developed using DPP® technology can provide superior diagnostic performance as compared with products that use lateral flow technology. The reason for this is that one of the major differences between the two platforms is that in DPP® samples are allowed to incubate with the target analyte in the test zone before introduction of the labeling reagent/conjugate, whereas in lateral flow, samples are combined with the labeling reagent to form a complex before coming in contact with the target analyte. We believe that this complex can compromise test performance. Also, because of the usage in DPP® of a separately connected sample strip, the control and delivery of sample material is substantially improved. This feature is critical in the development of multiplex tests, as well as tests that involve viscous sample material (such as oral fluid) that can be impeded when forced to combine with labeling reagents before migration on the test strip to the test zone area.
Multiplexing is significantly improved as a result of the design of DPP® and this provides a significant advantage. For example, the HIV confirmatory test we developed for Bio-Rad that is described above employs six different markers related to various epitopes of the HIV antigen. We have a number of other products in development, including those being developed in sponsored development programs that involve the use of multiple (e.g. eight) test bands. Although all of these products could be visually read, we can also use handheld and desktop readers with our DPP® products to objectively measure, quantify, record and report DPP® test results. Certain of the products we have and/or are developing incorporate some of these readers, and we are developing other products that may be used with or will require use of a reader. Also, platforms can incorporate labeling reagents that cannot be visually read except by employing a reader, such as fluorescence, though no products are currently utilizing such reagents.
We are pursuing additional capabilities and technologies that will complement our current product portfolio and business strategy. This activity includes pursing development, license or acquisition of diagnostic technologies that complement our existing platforms, proprietary biomarkers that can result in new product applications of our existing platforms, and new platforms that would complement our commercial strategy.
Target Markets
Rapid HIV Tests
A large percentage of individuals that are HIV positive worldwide are unaware of their status. Part of the reason for this is that even those that do get tested in public health settings will often not return or call back for their test results when samples have to be sent out to a laboratory which can take up to several days to process. The increased availability, greater efficacy and reduced costs for anti-retroviral treatments (ARVs) for HIV has increased the demand for testing, as the stigma associated with the disease is lessened, and the ability to resume normal activities is substantially improved, providing a positive message to those potentially infected. The impact that rapid HIV testing has had on prevention efforts has in turn increased the demand for testing, particularly by public health programs worldwide, which have also become more effective in reducing the number of annual new infections in many, but by no means all, high prevalence regions.
Despite less attention to HIV by the media as compared with prior years, there are still approximately 50,000 new diagnoses of HIV infection in the United States each year, according to the CDC. CDC estimates that approximately 1.1 million individuals in the U.S. are living with HIV, with an estimated 1 of 8 of these U.S. individuals, or almost 13%, unaware that they are infected. It is transmissions from these infected people that are reported to account for the majority of all new infections per year. Part of the reason for this is that even those individuals that do get tested in public health settings will often not return or call back for their test results if their blood samples have to be sent out to and tested in a laboratory and then reported back, a process which can take up to several days to complete. Making more people aware of their HIV status at the point-of-care reduces the number of HIV transmissions.
Rapid HIV testing in the United States has now developed into an estimated 7.5 million test market at an average price of $10, or a total of $75 million. Public health programs, currently funded by grants distributed to states by the CDC, account for an estimated 45% of the market, with hospitals (40%) and doctor's offices (15%) comprising the other estimated market segments. Chembio's rapid HIV tests represent approximately a 20% share of this market. OraSure Technologies, Inc., which was the first FDA-approved rapid HIV test, maintains approximately 50% of this market. Trinity Biotech has an estimated 15% market share and Alere, Biolytical Laboratories, Medmira and Bio-Rad share the remaining 10%.
In 2006, the outlook for HIV testing was given a big boost with the release by the CDC of new recommendations for HIV testing. These new CDC recommendations were/are that an HIV test should be given as a routine test like any other for all patients between 13 and 64 years of age, regardless of risk, with an opt-out screening option and focused testing procedural (pre- and post-test counseling) guidelines. Though not mandatory, gradual adoption in whole or in part of the 2006 CDC recommendations by a number of states continues to have an increasing impact. Finally, in 2013, the United States Preventive Services Task Force ("USPSTF") fully embraced these CDC routine HIV testing recommendations. This USPSTF recommendation, which was given an A grade under their recommendation grading system based on the benefits of this practice and the nearly 600,000 AIDS-related deaths in the United States, requires insurance coverage under the Affordable Care Act (the "ACA") as a preventive screening test without any co-payment required. We expect this to result in an increase in HIV testing in the United States in the coming years, which we believe will include point-of-care HIV testing utilizing the Company's products. Although as stated above, currently most public health testing in the United States is funded by grants allocated to high prevalence areas by the CDC, we believe this will shift to an insurance-funded model under the ACA in the years to come, increasing the amount of testing done in doctor's offices and community health centers.
In the international market, we sell our products directly and through distributors to large screening programs overseen by ministries of health and NGOs, most but not all of which are funded by large bi-lateral and multi-lateral AIDS relief programs, the largest of which is the U.S. President's Emergency Plan for AIDS Relief (PEPFAR). Established by President George Bush as a 5-year $15 billion program in 2003, PEPFAR was reauthorized in 2008 and again in 2013. In 2012 PEPFAR directly supported HIV testing and counseling for more than 11 million pregnant women, and testing and counseling for more than 49 million people overall. The U.S. is also the first and largest donor to the Global Fund to Fight AIDS, Tuberculosis and Malaria. To date, the U.S. has provided more than $7 billion to the Fund.
In December 2013 President Obama signed into law the PEPFAR Stewardship and Oversight Act, which is the most recent reauthorization of PEPFAR. However, unlike the 2008 PEPFAR authorization, which authorized approximately $45 billion, the new law doesn't authorize a specific dollar amount for funding. Nevertheless it is widely anticipated that PEPFAR will continue to enjoy strong funding; the FY14 budget had $6 billion for global HIV/AIDS assistance, including $4 billion for PEPFAR.
Chembio, with its four U.S.-manufactured rapid HIV tests, all of which are FDA-approved, is recognized as a reputable and dependable supplier of high quality products that are available at reasonably competitive prices. As a result, certain of our products have been selected in the testing protocols in countries (national algorithms) that are large beneficiaries of PEPFAR and the Global Fund. As mentioned above, these programs can and do often result in large orders, but also can result in periods of relatively lower demand, based on the variations associated with this kind of demand. Also, even though the United States taxpayer is funding the largest share of global AIDS relief, U.S. companies do not receive any preference for these procurements, and therefore must compete with foreign suppliers that manufacture competitive products with lower costs, including those related to quality, regulatory, intellectual property, and costs of manufacturing.
Oral fluid testing is an established alternative to blood testing for diagnostic tests, including HIV tests. It is also often patient preferred, providing a more comfortable, less invasive test. In certain public health clinics, staffs choose not to handle blood specimens; thus, oral sample collection provides a viable alternative. The most well-established market for oral fluid HIV testing is the United States. Given the premium price required for an oral fluid test as compared with blood tests, the higher volume programs will not specify an oral fluid test. However, segments of these programs may want to have an oral fluid testing option, and certain programs that have greater resources may also choose to incorporate oral fluid testing into the testing protocol.
There is also now an over-the-counter market for HIV self-testing in the United States. OraSure Technologies Inc. received FDA approval for an over-the-counter (self-testing) version of its previously professional-market-approved (test performed on an individual by a health care professional) HIV test. The FDA approval was granted in July 2012, and OraSure has been investing heavily in developing this market. Initial results after over two years of marketing are well below expectations. The costs for such over-the-counter approval, including primarily the associated clinical trials, are estimated to be at least $5 million and they may take two to three years to complete, not to mention the cost of distribution. OraSure's initial results are not convincing of a large market, although this possibility remains. If it appears that there is an attractive market, we believe we are very well positioned to participate in this market.
Rapid HIV-Syphilis Test
There are significant risks relating to transmission of Syphilis from a pregnant mother to child, just as there are for transmission of HIV. Therefore we believe there is a significant opportunity to improve prevention efforts in pregnant mother to child transmission testing programs (PMTCT) that are currently not doing any or nearly enough testing for syphilis even though they are testing for HIV. In the United States, we believe there is also a significant need for this product in some of the highest HIV prevalence populations, such as among men that have sex with men (MSM), as data show high degrees of HIV and Syphilis co-infection in this segment of the population.
Marketing Strategy
Our marketing strategy is to:
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| Market our DPP® HIV 1/2 Assay, HIV 1/2 STAT-PAK® Assay and future DPP® based new products in the US through our internal sales and marketing organization and selected channel partners (e.g., McKesson/PSS, Fisher Healthcare, Henry Schein, etc.). Chembio, following the June 2014 termination of the STAT-PAK® agreement with Alere, does not have to share any portion of the net sales proceeds for STAT-PAK® with Alere. This decision resulted in incurring expenditures related to hiring sales representatives, establishing agreements and associated discounts with distributors, incurring advertising and marketing expenditures, warehousing, customer service and technical support. If Alere's new competitive product is indeed successful, our ability to retain a significant share of the market that has been established for our products may be enhanced by our having control of the marketing of our products, rather than relying on Alere to sell both our products while it is also selling its own competing product. We are leveraging the same sales force for U.S. Sales of DPP® HIV 1/2 Assay. |
· | We will support, review and assess the marketing and distribution efforts of our rapid HIV barrel test in the U.S. |
· | Outside the U.S., we will market our products primarily through commercial collaborators and distribution partners. |
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| Leverage our DPP® intellectual property and product development and manufacturing experience to continue creating new collaborations where Chembio can be the exclusive development and manufacturing partner supporting leading marketing organizations. |
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| Establish strong distribution relationships for our Chembio-branded products in the U.S and abroad, and establish a direct sales and marketing organization that is focused in the public health market segment, and that utilizes distributors for other market segments, primarily the acute care market which, together with public health, are the main market segments for rapid HIV tests in the United States. We believe that creation of a Chembio public health brand and marketing organization is fundamental to the creation of shareholder value over the long-term. |
We have increased our commercial activities and efforts in Africa, Europe and Asia for our HIV tests and product pipeline. We believe these efforts will enable us to be more closely engaged with opportunities to engage with customers and partners and to participate in the national testing algorithms that are established and revised from time to time by countries that are beneficiaries of PEPFAR, Global Fund and/or other bilateral or multilateral donor funding. In Europe, where there are a larger percentage of HIV positive people unaware of their status than in the United States, we believe that there is an emerging public health outreach opportunity, and there are relatively few strong competitors that are CE-marked. Most recently we have established new sales and marketing positions in the Company to support our efforts to increase brand awareness globally and to lead our direct sales effort in the U.S. market.
Competition
The diagnostics industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantiallysignificantly larger and have greater financial, research, manufacturing, and marketing resources. Important competitive factors include product quality, analytical performance, ease of use, price, customer service and reputation. Industry competition in general is based on these and the following:following additional factors:
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| Scientific and technological capability;patent protection; |
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| Proprietary know-how;scientific expertise; |
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| The ability to develop and market products and processes; |
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| The ability to obtain FDA or other required regulatory approvals; |
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| The ability to manufacture cost-effective products that meet applicable FDA requirements, (i.e. FDA's Quality System Regulations) (see Governmental Regulation section);
regulatory requirements; |
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| The abilityaccess to manufacture products cost-effectively;adequate capital; and,
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| Access to adequate capital; |
· | The ability to attract and retain qualified personnel; andpersonnel. |
· | The availability of patent protection. |
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We believe our scientific and technological capabilities and our proprietary know-how relating to our in-licensedpatented DPP technology and lateral flow technology rapid tests and to our proprietary know-how related to our patented DPP® technology,are very strong, particularly for the development and manufacture of tests for the detection of antibodies to infectious diseases, such as HIV, are very strong.and other diseases.
Our ability to develop and market other products is in large measure dependent on our having additional resources and/or collaborative relationships. Some of our product development efforts have been funded on a project or milestone basis. We believe that our proprietary know-how in lateral flow technology and inrelating to our DPP®patented DPP technology has been instrumental in our obtaining the collaborations we have and that we continue to pursue. We believe that theour patent protection that we have with our DPP® technology enhances our ability to both develop more profitable, collaborative relationships and to license out the technology.expand licensing revenue. However, there are a number of competitive technologies used and/or seeking to be used by others in point-of-care settings. These technologies may be based on immunoassay principles such as the Company's products or other technologies, such as molecular-based technologies.
We launched our FDA-approved DPP® HIV 1/2 Assay, which test also can be used with either oral fluid or blood samples, in the U.S. market under a Chembio brand in the fourth quarter of 2014. OraSure Technologies manufactures the only other rapid, oral fluid HIV test that is FDA-approved, and OraSure has enjoyed this position for approximately 10 years. OraSure has lost a significant share of this market as certain customers have been indifferent to using blood or oral fluid samples, because the blood tests, including those made/marketed by Chembio and marketed by Alere, are priced lower and/or are as or more accurate than the performance of OraSure's product on blood samples. OraSure has primarily retained those customers for whom the oral fluid sample feature is a strong preference, and this is an estimated $35 million business for OraSure. Although we believe we can capture a meaningful portion of this OraSure market share, we also anticipate that OraSure will defend this business aggressively.
In 2006 Alere acquired a division from Abbott Diagnostic located in Japan that manufactured and marketed a rapid HIV test product line called Determine®. The Determine® format was developed for the developing world and remote settings and, central to the needs of that market, the format is essentially a test strip that is integrated into a thin foil wrapper that, when opened, the underside of the wrapper serves as the test surface for applying the blood sample and performing the test. This design reduces costs and shipping weights and volumes and is an advantage for the developing world markets it has served. Some of the disadvantages of the platform are the amount of blood sample that is needed (50 microliters versus 2.5, 5 and 10 for our lateral flow barrel, lateral flow cassette, and DPP® products respectively), the open nature of the test surface, and the absence of a true control that differentiates biological from other kinds of samples.
The so-called "3rd generation" version of this product has been marketed for many years and is the leading rapid HIV test that is used in a large majority of the national algorithms of countries funded by PEPFAR and the Global Fund, as well as many other countries in the world. That product is not FDA-approved though it is CE-marked. The newest Determine® HIV version, which was developed and manufactured at Alere's subsidiary in Israel, Orgenics, is the so-called "4th Generation" version Determine® test. According to its claims, this product detects HIV antibodies and P24 HIV antigens. Since the P24 antigen is known to occur in HIV-positive individuals' blood samples before antibodies do, based on its performance claims, the 4th generation Determine® test is therefore able to detect HIV infection earlier than tests that solely rely on antibody detection. Chembio's tests, as well as all of the other currently FDA-approved rapid HIV tests, only detect antibodies. There are however laboratory tests that are FDA-approved that are "4th generation" tests, but they are of course neither rapid nor point-of-care.
The initial "4th generation" Alere Determine® rapid test product that was also CE-marked and that Alere launched internationally some years ago has not been successfully commercialized to the best of our knowledge and at least certain published studies were not favorable for this product. However the 4th generation product that is now FDA-approved was apparently modified as compared to the initial international version of it, and it may perform more satisfactorily. Alere received FDA approval of this modified product in August 2013 and CLIA-waiver for it in the fourth quarter of 2014. There is support by a number of key opinion leaders for the public health value of such 4th generation tests, and it represents a significant competitive threat to Chembio as well as to each of the other rapid HIV test manufacturers (OraSure and Trinity primarily).
During 2011 Biolytical, Inc. of Vancouver, Canada received FDA approval and in 2012 received CLIA waiver of a flow-through rapid HIV test called "INSTI". The technology used in the INSTI test, flow-through, is older than lateral flow, and it requires handling of multiple components (3 vials of solution) to perform the test in multiple steps. However, these steps can be accomplished in less than ten minutes, and the actual test results occur in only one minute after those steps are completed. Therefore sample-to-result time is shorter than any of the competitive products. There are settings where that reduced total test time, despite the multiple steps required, may be a distinct advantage, and we believe Biolytical has made some progress in penetrating certain public health markets.
Although we have no specific knowledge of any other competitors'competitors’ products that are a competitive threat to our products, or that willcould render our products obsolete, if we fail to maintain and enhance our competitive position or fail to introduce new products and product features, our customers may decide to use the products developed by our competitors, which could result in a loss of revenues and cash flow.
Research and DevelopmentEmployees
During 2015 and 2014,As of December 31, 2018, we spent $6.4 million and $4.8 million, respectively, onhad 295 full-time equivalent employees, of whom 15 were in administration, 215 were in manufacturing, 45 were in research and development, (including regulatory activities). These expensesand 20 were in part underwritten by funding from R&D and milestones revenues of $2.3 million in 2015 and $1.7 million in 2014. All of our new product development activities involve employment of our DPP® technology. These activities include completing development of certain products and making significant progress toward the development of additional products.
Employees
At December 31, 2015, we employed approximately155 people. We have entered into employment contracts with our Chief Executive Officer and President, John J. Sperzel, our Chief Operating Officer, Sharon Klugewicz, and our Chief Science and Technology Officer, Javan Esfandiari. Due to the specific knowledge and experience of these executives regarding the industry, technology and market, the loss of the services of any one of them would likely have a material adverse effect on the Company. The contract with 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. We have obtained a key man insurance policy for Mr. Esfandiari. The contract with Mr. Sperzel provides that Mr. Sperzel will serve as the Chief Executive Officer and President of the Company through March 2017.
Governmental Regulation
The manufacturingsales and marketing of the Company's existing and proposed diagnostic products are regulated by the United States Food and Drug Administration ("FDA"), United States Department of Agriculture ("USDA"), certain state and local agencies, and/or comparable regulatory bodies in other countries. These regulations govern almost all aspects of development, production and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing and record keeping. The Company's FDA and USDA regulated products require some form of action by each agency before they can be marketedcustomer service. Of these employees, approximately 240 were located in the United States, 27 were located in Malaysia, 20 were located in Germany, and after approval3 were located in other countries.
We have never had a work stoppage, and none of our employees are represented by a labor organization or clearance, the Company must continuesubject to comply with other FDA requirements applicableany collective bargaining arrangements. We consider our employee relations to marketed products, e.g. Quality Systems (for medical devices). Failurebe good.
Governmental Regulation
Certain of our activities are subject to comply withregulatory oversight by the FDA's requirements can lead to significant penalties, both before and after approval or clearance.
There are two review procedures by which medical devices can receive FDA clearance or approval. Some products may qualify for clearance under Section 510(k)provisions of the Federal Food, Drug, and Cosmetic Act and regulations thereunder, including regulations governing the development, marketing, labeling, promotion, manufacturing, and export of diagnostic products. Our clinical laboratory customers are subject to oversight by Centers for Medicare and Medicaid Services, or CMS, pursuant to CLIA, as well as agencies in various states. Failure to comply with applicable requirements can lead to sanctions, including withdrawal of products from the market, recalls, refusal to authorize government contracts, product seizures, civil money penalties, injunctions, and criminal prosecution.
FDA Approval/Clearance Requirements
Unless an exemption applies, each medical device that we market or wish to market in the United States must receive 510(k) clearance or Premarket Approval, or PMA. Medical devices that receive 510(k) clearance are “cleared” by the FDA to market, distribute, and sell in the United States. Medical devices that obtain a PMA by the FDA are “approved” to market, distribute and sell in the United States. We cannot be certain that 510(k) clearance or PMA approval will ever be obtained for any products that have not already obtained 510(k) clearance or PMA approval. Descriptions of the PMA and 510(k) clearance processes are provided below.
The FDA decides whether a device line must undergo either the 510(k) clearance or PMA based on statutory criteria that utilize a risk-based classification system. PMA is the FDA process of scientific and regulatory review to evaluate the safety and effectiveness of Class III medical devices and, in many cases, Class II medical devices. Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury. The FDA uses these criteria to decide whether a PMA or a 510(k) is appropriate, including the level of risk that the agency perceives is associated with the device and a determination by the agency of whether the product is a type of device that is similar to devices that are already legally marketed. Devices deemed to pose relatively less risk are placed in either Class I or II. In many cases, the FDA requires the manufacturer to submit a 510(k) requesting clearance (also referred to as a premarket notification), unless an exemption applies. The 510(k) must demonstrate that the manufacturer’s proposed device is “substantially equivalent” in intended use and in safety and effectiveness to a legally marketed predicate device. A “predicate device” is a pre-existing medical device to which equivalence can be drawn, that is either in Class I or Class II or is a Class III device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for submission of a PMA application.
Device classification depends on the device’s intended use and its indications for use. In addition, classification is risk-based, that is, the risk the device poses to the patient and/or the user is a major factor in determining the class to which it is assigned. Class I includes devices with the lowest risk and Class III includes those with the greatest risk.
Class I devices are those for which safety and effectiveness can be assured by adherence to the FDA’s general regulatory controls for medical devices, or the General Controls, which include compliance with the applicable portions of the FDA’s quality system regulations, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) process described below.
Class II devices are subject to the FDA’s General Controls, and any other special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) process. Pursuant to the Medical Device User Fee and Modernization Act of 2002, unless a specific exemption applies, 510(k) submissions are subject to user fees. Certain Class II devices are exempt from this premarket review process.
Class III includes devices with the greatest risk. Devices in this class must meet all of the requirements in Classes I and II. In addition, Class III devices cannot be marketed until they receive Premarket Approval.
The safety and effectiveness of Class III devices cannot be assured solely by the General Controls and the other requirements described above. These devices require formal clinical studies to demonstrate safety and effectiveness. Under Medical Device User Fee and Modernization Act of 2002, PMA applications (and supplemental premarket approval applications) are subject to significantly higher user fees than 510(k) applications, and they also require considerably more time and resources.
Rapid HIV tests intended for diagnostic use are regulated as Class III devices. Responsibility for assuring the safety and effectiveness of these tests lies within the Center for Biologics Evaluation and Research’s Office of Blood Research and Review, with oversight by the Blood Products Advisory Committee. Approved rapid HIV tests must meet the regulations in the 21 CFR 800 series subparts, under the investigational device exemption, or IDE and PMA pathways.
Premarket Approval Pathway
We manufacture, market and distribute three rapid HIV tests in the United States. Our HIV 1/2 STAT-PAK Assay, SURE CHECK HIV 1/2 Assay, and DPP HIV 1/2 Assay all have received FDA PMA approval. A PMA application must be supported by extensive data including, but not limited to, analytical, preclinical, clinical trials, manufacturing, statutory preapproval inspections, and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. Before a PMA is submitted, a manufacturer must apply for an IDE. If the device presents a “significant risk,” as defined by the FDA, to human health, the FDA requires the device sponsor to file an IDE application with the FDA and obtain IDE approval prior to initiation of enrollment of human subjects for clinical trials. The IDE provides the manufacturer with a pre-market notificationlegal pathway to perform clinical trials on human subjects where without the IDE, only approved medical devices may be used on human subjects.
The IDE application must be supported by appropriate data, such as analytical, animal and laboratory testing results, manufacturing information, and an Investigational Review Board (IRB) approved protocol showing that it intendsis safe to begin marketingtest the device in humans and that the testing protocol is scientifically sound. If the clinical trial design is deemed to have “non-significant risk,” the clinical trial may be eligible for “abbreviated” IDE requirements. In some instances, clinical trials for in vitro diagnostic medical devices may be exempt from the more burdensome IDE requirements if certain labeling requirements are met.
A clinical trial may be suspended by either the FDA or the Investigational Review Board at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the study. Even if a study is completed, clinical testing results may not demonstrate the safety and efficacy of the device, or they may be equivocal or otherwise insufficient to obtain approval of the product being tested. After the clinical trials have been completed, if at all, and showsthe clinical trial data and results are collected and organized, a manufacturer may complete a PMA application.
After a PMA application is sufficiently complete, the FDA will accept the application and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the “accepted application,” although, generally, review of the application can take between one and three years, but it may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The preapproval inspections conducted by the FDA include an evaluation of the manufacturing facility to ensure compliance with the FDA's quality systems regulations or QSR, as well as inspections of the clinical trial sites by the Bioresearch Monitoring group to evaluate compliance with good clinical practice and human subject protections. New PMA applications or PMA supplements are required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s indication for use, manufacturing process, labeling and design. Significant changes to an approved PMA require a 180-day supplement, whereas less substantive changes may utilize a 30-day notice, or a 135-day supplement. Premarket approval supplements often require submission of the same type of information as a premarket approval application, except that the supplement is limited to information needed to support any changes from the device covered by the original premarket approval application, and it may not require as extensive clinical data or the convening of an advisory panel.
Our HIV 1/2 STAT-PAK Assay PMA application number BP050009/0 and our SURE CHECK 1/2 HIV Assay PMA application number BP050010/0 were approved by the FDA in May 2006. Our DPP HIV 1/2 Assay PMA application number BP120032/0 was approved by the FDA in December 2012.
510(k) Clearance Pathway
We are currently developing products that either will or are likely to require an FDA 510(k) clearance, and we anticipate submitting a 510(k) for each such product to demonstrate that such proposed device is substantially equivalent to another legally marketed product (i.e.,a respective previously cleared 510(k) device or a device that itwas in commercial distribution before May 28, 1976, for which the FDA has not yet called for the same intended use and is as safe and effective as a legally marketed device and does not raise different questionssubmission of safety and effectiveness)510(k). FDA's 510(k) clearance pathway usually takes from three to twelve months but could take longer. In some cases the FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence.
If a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, a PMA. The FDA requires each device manufacturer to determine whether the proposed change requires submission must include data from human clinical studies. Marketing may commence whenof a new 510(k) or a PMA, but the FDA issuescan review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance letter finding such substantial equivalence. FDA clearanceor PMA of our DPP® Syphilis Screen & Confirm test will be by means of a 510(k) submission.the modified device is obtained.
If the medical device does not qualifyFDA requires us to submit a new 510(k) or PMA for the 510(k) procedure (either because it is not substantially equivalentany modifications to a legally marketedpreviously cleared product, or if we obtain 510(k) clearance for a device or because it isin the future, we may be required by statute and the FDA's implementing regulations have an approved application), the FDA must approveto submit a Pre-Marketing Application ("PMA") before marketing can begin. PMA's must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness. Aseparate new 510(k) or PMA application is typically a complex submission, including the results of non-clinical and clinical studies. Preparing a PMA application is a much more expensive, detailed and time-consuming process as compared with a 510(K) pre-market notification. The Company has approved PMAs for the two rapid HIV tests now marketed in the U.S.: both our HIV 1/2 STAT-PAK® and also our test that currently is marketed in the U.S. by Alere Medical as Clearview® Complete HIV 1/2 and Clearview® HIV 1/2 STAT PAK®.such modifications.
FDA approval of our DPP® HIV screening assay for use with oral fluid or blood samples also was achieved by means of a PMA application. The Clinical Laboratory Improvement ActAmendments of 1988 ("
A manufacturer of a test categorized as moderately complex may request that categorization of the test be waived through a CLIA") prohibits Waiver by Application, or CW, submission to the FDA. When a test is categorized as waived, it may be performed by laboratories with a Certificate of Waiver, such as a physician’s office outreach setting. In a CW submission, the manufacturer provides evidence to the FDA that a test meets the CLIA statutory criteria for waiver CLIA, a walk-in clinic or an emergency room provides CMS authority over all laboratory testing, except research that is performed on humans in the United States. The Division of Laboratory Services, within the Survey and Certification Group under the CMS, has the responsibility for implementing the CLIA program.
The CLIA program is designed to establish quality laboratory testing by ensuring the accuracy, reliability and timeliness of patient test results. Under CLIA, a laboratory is a facility that does laboratory testing on specimens derived from performing in-vitro tests for the purpose of providinghumans and used to provide information for the diagnosis, prevention or treatment of any disease, or impairment of, or the assessment of health. Under the health of human beingsCLIA program, unless there is in effect for suchwaived, laboratories a certificate issuedmust be certified by the United States Department of Healthgovernment, satisfy governmental quality and Human Services (via the FDA) applicablepersonnel standards, undergo proficiency testing, be subject to the category of examination or procedure performed. Although a certificate is not required for the Company, it considers the applicability of the requirements of CLIA in the designinspections and development of its products. The statutory definition of "laboratory" is very broad, and many of our customers are considered labs. A CLIA waiver will remove certain quality control and other requirements that must be met for certain customers to use the Company's products and this is critical to the marketability of a product into the point-of-care diagnostics market. The Company haspay fees. We have received a CLIA waiver for eachall of the twoour lateral flow rapid HIV tests now marketedthat we market in the U.S. TheUnited States. Specifically, the CLIA waiver was granted by the FDA for HIV 1/2 STAT-PAK® onSTAT-PAK in November 20, 2006,for SURE CHECK HIV 1/2 in October 2007, and for the Clearview® CompleteDPP HIV 1/2 onin October 22, 2007. In 20082014.
Pervasive and Continuing FDA Regulation
A host of regulatory requirements apply to our approved devices, including: the quality system regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures; the Medical Reporting Regulations, which require manufacturers to report to the FDA revised its CLIA waiverspecified types of adverse events involving their products; labeling regulations; and the FDA’s general prohibition against promoting products for unapproved or “off-label” uses. Some Class II devices are subject to special controls-such as performance standards, post-market surveillance, patient registries, and FDA guidelines-that do not apply to Class I devices.
The regulatory requirements so that an additional prospective trial need be conducted in orderapply to demonstrate clinical utility by showing that the device is capable of identifying new infections when used by untrained users. Our DPP® HIV 1/2 test received CLIA waiver in October of 2014.our approved products classified as medical devices include:
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| product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action; |
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| QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the development and manufacturing process; |
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| labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication; |
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| clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices; |
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| approval of product modifications that affect the safety or effectiveness of one of our cleared devices; |
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| medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur; |
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| post-approval restrictions or conditions, including post-approval study commitments; |
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| post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; |
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| the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations; |
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| regulations pertaining to voluntary recalls; and, |
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| notices of corrections or removals. |
In addition,Our Medford, New York facility is currently registered as an establishment with the FDA. We and any third-party manufacturers are subject to announced and unannounced inspections by the FDA regulatesto determine our compliance with QSR and other regulations.
21st Century Cures Act
The 21st Century Cures Act, enacted in December 2016, contains several sections specific to medical device innovations. We believe that implementation of the export21st Century Cures Act may have a positive impact on its businesses by facilitating innovation and/or reducing the regulatory burden imposed on medical device manufacturers.
Government Regulation of medicalMedical Devices for Animal Subjects
We currently sell, market or distribute two veterinary devices that have not been approved for marketing in the United States. The Federal Food, DrugStates: DPP VetTB Assay for Cervids and CosmeticDPP VetTB Assay for Elephants. Diagnostic tests for animal health infectious diseases, including our veterinary devices for the prevention and/or treatment of animal disease, are regulated in the U.S. by the Center for Veterinary Biologics within the U.S. Department of Agriculture Animal and Plant Health Inspection Service, or APHIS, under the Virus, Serum, and Toxin Act contains general requirements for any medical device that may notof 1913. As a requirement, our veterinary devices were approved by APHIS before they could be sold in the United StatesU.S.
The APHIS regulatory approval process involves the submission of product performance data and is intendedmanufacturing documentation. Following regulatory approval to market a product, APHIS requires that each lot of product be submitted for export. Specifically, a medical device intendedreview before release to customers. In addition, APHIS requires special approval to market products where test results are used in part for export is not deemed to be adulterated or misbranded if the product: (1) complies with the specifications of the foreign purchaser; (2) is not in conflict with the laws of the country to which it is intended for export; (3) is prominently labeled on the outside of the shipping package that it is intended for export; and (4) is not sold or offered for sale in the United States. However, the Federal Food, Drug and Cosmetic Act does permit the export of devices to any country in the world, if the device complies with the laws of the importing country and has valid marketing authorization in one of several "listed" countries under the theory that these listed countries have sophisticated mechanisms for the review of medical devices for safety and effectiveness.government-mandated disease management programs.
The Company is also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval or evaluations by international public health agencies, such as the World Health Organization, in order to sell diagnostic products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for United States governmental approvals. On the other hand, the fact that our HIV diagnostic tests are of value in the AIDS epidemic may lead to some government process being expedited. The extent of potentially adverse governmental regulation affecting Chembio that might arise from future legislative or administrative action cannot be predicted.
Environmental Laws
To date,We believe that we have not encountered any costs relating toare in compliance with anyall foreign, federal, state, and local environmental laws.regulations with respect to our manufacturing facilities. The cost of ongoing compliance with such regulations does not have a material effect on our operations.
Intellectual Property
Intellectual Property Strategy
Our intellectual property strategy is to: (1) build our own intellectual property portfolio around our DPP® technology;DPP technology and optical analyzers; (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.
DPP® Intellectual Property
The Company has
We have obtained patent coverage on the DPP®our DPP technology, including four U.S.numerous patents and patents in the United States, China, Malaysia, Eurasia, Mexico, Singapore, Japan, Australia, Indonesia, Korea and the U.K. Additional patent applications on the DPP®our DPP technology are pending in the U.S.,United States, as well as in many foreign countries such as Brazil, Canada, the European Union, India, Israel, and South Africa. Patents
DPP technology provides us with freedom to operate, which enables us to develop tests with better performance and capabilities compared with tests built on traditional lateral flow platforms. These advantages have also beenallowed us to enter into multiple technology collaborations based upon DPP technology, which we believe will provide new manufacturing and marketing opportunities. We have filed on extensions toadditional patent applications that we believe will strengthen the DPP® product line concept, such as 4th generation assays. The four U.S. patents are as follows:
U.S. Patent No. | Issued | Expires | Nature | Type | Description |
7,189,522 | 3/13/2007 | 3/11/2025 | test device | utility | a test device for determining the presence of a ligand in a sample |
7,682,801 | 3/23/2010 | 3/11/2025 | test device
and method
| utility | a test device and a method for determining
the presence of a ligand in a sample
|
7,879,597 | 2/1/2011 | 3/11/2025 | test device | utility | a test device for determining multiple
ligands in a sample
|
8,507,259 | 8/13/2013 | 3/11/2025 | test device | utility | a test device for determining the
presence of a ligand in a sample
|
The Company hasDPP intellectual property and have also filed for patents andpatent protection for certain other point-of-care technologies or applications thereof.
We have also obtained some patentspatent coverage on our optical-based analyzer technology in the U.S. for other inventions, such as its multiple host species veterinary TB test, and patent applications for the other inventions areUnited States, with patents pending in various stages from being recently filed and not yet examined, to already examined and allowed but not yet issued. The Company selectively and strategicallyseveral foreign files its patent applications based on a number of economic and strategic factors related to the invention.countries.
Trademarks
The Company hasWe have filed and obtained trademarks for itsour products, including DPP®,DPP, SURE CHECK®CHECK, STAT-VIEW, and STAT-PAK®,STAT-PAK, and alsoNEXT GENERATION DPP, as well as for the SampleTainer®SampleTainer and DPP Micro Reader, which are used with certain DPP products. Our trademarks have been obtained in the United States and certain DPP® products. The DPP® trademark is also registered underother countries around the European convention (ECT). The Company recently filed a trademark for STAT-VIEW®, to market the barrel product in Europe.world.
Trade Secrets and Know-How
We believe that we have developed a substantial body of trade secrets and know-how relating to the development and manufacture of lateral flow and DPP®-basedDPP-based diagnostic tests, including but not limited to the sourcing and optimization of materials for such tests, and howmethods to maximize sensitivity, speed-to-result, specificity, stability and reproducibility. The Company possessesreproducibility of our tests. We possess proprietary know-how to develop tests for multiple conditions using colored latex.particles. Our buffer formulations enable extremely long shelf lives of our rapid HIV and other tests, and we believe that this providesproviding us with an important competitive advantage.
Lateral Flow Technology and Reagent Licenses
As part of the agreements executed in 2006 with Alere for the marketing of our HIV tests, we were granted non-exclusive licenses to certain lateral flow patents for certain products manufactured and marketed by Chembio including but not limited to our lateral flow HIV tests. This license allows us to produce, market and sell assays using lateral flow technologies specifically including our STAT-PAK®, SURE CHECK®, DIPSTICK®, and veterinary product lines. Under this license agreement, prior to February 3, 2015, we paid royalties to Alere ranging from 5% to 8½%, depending upon the country in which the products are sold. Even though the relevant patent has expired in most other jurisdictions, or were never issued in markets where we have sold these products, our manufacture of the products in the United States has required that we pay royalties under this license, which has been a substantial expense. In 2015 our lateral flow royalty expense to Alere was $30,000, and since 2007 we have incurred a total of $2.87 million in lateral flow royalty expenses. As of February 3, 2015 this royalty expense was no longer payable as the applicable patent expired at that time.
Although we believe our DPP® is outside of the scope of all lateral flow patents of which we are aware, we consult with patent counsel, andWe seek licenses and/or redesigns of products that we believe to be in theour best interests of the Company and our stockholders.interests. Because of the costs and other negative consequences of time-consuming patent litigation, we often attempt to obtain a license on reasonable terms. Nevertheless there is no assurance that the Alere lateral flow patents we have licensed will not be challenged or that other patents containing claims relevant to the Company's lateral flow or DPP® products will not be granted to third parties and that licenses to such patents, will be available on reasonable terms, if any. In the past Alere has aggressively enforced its lateral flow intellectual property, although some of the main patents have expired and we are not aware of any patent enforcement litigation that is ongoing with respect to the Alere lateral flow intellectual property.
Regardless, the DPP® technology provides us with our own intellectual property. We believe it provides us with a freedom to operate, and that it also enables tests to be developed with improved sensitivity as compared with comparable tests on lateral flow platforms. The Company has signed and anticipates signing new development projects based upon the DPP® technology that will provide new manufacturing and marketing opportunities. We have filed other patent applications that we believe will strengthen the DPP® intellectual property and have also filed for patent protection for certain other point-of-care technologies or applications thereof.
The peptides used in our rapid HIV tests were patented by Adaltis Inc. and were licensed to us under a 10-year non-exclusive license agreement dated August 30, 2002. However, in connection with Adaltis' bankruptcy, during theby one or more third quarter of 2009 we bought out all of our remaining obligations under that agreement.parties. We also have licensed the antigens used in other tests including our Syphilis, Tuberculosis, Leptospirosis, Leishmaniasis and Chagas tests, and we may enter into other license agreements. In prior years, we concluded license agreements related to intellectual property rights owned by the United States associated with HIV- 1,HIV-1 and during the first quarter of 2008 we entered into a sub-license agreement for HIV-2 with Bio-Rad Laboratories N.A., the exclusive licensee of the Pasteur Institute's HIV-2 intellectual property estate.
10Available Information
We are required to file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.Corporate History
On May 5, 2004, we completed a merger with Trading Solutions, Inc. through which Chembio Diagnostic Systems Inc. became our wholly-owned subsidiary,Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and through which the management and businessamendments to those documents filed or furnished pursuant to Section 13(a) or 15(d) of Chembio Diagnostic Systems Inc. became our management and business. As part of this transaction, we changed our name to Chembio Diagnostics, Inc. In 2003, we had sold our prior business, and as a result, we had no specific business immediately prior to the merger.
Since the formation of Chembio Diagnostic Systems Inc. in 1985, it has been involved in developing, manufacturing, selling and distributing in-vitro diagnostic tests, including rapid tests beginning in 1995, for a number of conditions in humans and animals.
On March 12, 2004, we implemented a 1-for-17 reverse split of our common stock. All references herein to shares of our common stock have been adjusted to reflect this reverse split.
On May 30, 2012, the Company effected a 1-for-8 reverse split of its common stock. This was done to allow the Company to move to the NASDAQ trading market from the OTCQB market, which occurred on June 7, 2012. As a result of the stock split, the outstanding 63,967,263 common shares were reduced to 7,995,918 outstanding common shares on May 30, 2012. The effect of this reverse stock split also has been retroactively reflected for all periods in these financial statements.
Stockholder Rights Agreement
On March 8, 2016, the Company entered into a Rights Agreement (the "Rights Agreement") between the Company and Action Stock Transfer Corp., as Rights Agent. Pursuant to the Rights Agreement, the Company declared a dividend distribution of one Preferred Share Purchase Right (a "Right") for each outstanding share of common stock, 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's shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable. The Rights are not exercisable until a Distribution Date. Until a Right is exercised, the holder thereof, as such, has no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights. The Rights are to be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) has acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding 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, are also available free of charge on our website at www.chembio.com as amended,soon as reasonably practicable after such reports are electronically filed with or furnished to the consummationSEC.
Investors should note that we currently announce material information to our investors and others using filings with the SEC, press releases, public conference calls, webcasts or our website (www.chembio.com), including news and announcements regarding our financial performance, key personnel, our brands and our business strategy. Information that we post on our corporate website could be deemed material to investors. We encourage investors to review the information we post on these channels. We may from time to time update the list 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 maychannels we will use to communicate information that could 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)deemed material and (ii), which date may includewill post information about any such date thatchange on www.chembio.com. The information on our website is afternot, and shall not be deemed to be, a part hereof or incorporated into this or any of our other filings with the dateSEC.
Corporate Information
Our principal executive offices are located at 3661 Horseblock Road, Medford, New York 11763. Our telephone number is (631) 924-1135. Our website address is www.chembio.com. The information contained in, or accessible through, our corporate website does not constitute part of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date").
Glossary
AIDS | Acquired Immunodeficiency Syndrome. AIDS is caused by the Human Immunodeficiency Virus, HIV. |
ALGORITHM (parallel or serial) | For rapid HIV testing this refers both to method or protocol (in developing countries to date) for using rapid tests from different manufacturers in combination to screen and confirm patients at the point-of-care, and may also refer to the specific tests that have been selected by an agency or ministry of health to be used in this way. A parallel algorithm uses two screening tests from different manufacturers and a tie-breaker test only if there is a discrepancy between the screening tests results. A serial algorithm only uses a second confirmatory test if there is a positive result from the screening test, meaning that the number of confirmatory tests used is equal to the positivity rate in the testing venue. A tie-breaker test resolves discrepancies between the screen and the confirmatory test. |
ANTIBODY | A protein which is a natural part of the human immune system produced by specialized cells to neutralize antigens, including viruses and bacteria that invade the body. Each antibody producing cell manufactures a unique antibody that is directed against, binds to and eliminates one, and only one, specific type of antigen. |
ANTIGEN | Any substance which, upon entering the body, stimulates the immune system leading to the formation of antibodies. Among the more common antigens are bacteria, pollens, toxins, and viruses. |
ANVISA | The National Health Surveillance Agency of Brazil |
ARVs | Anti-retroviral medications developed to fight AIDS |
CDC | United States Centers for Disease Control and Prevention |
CLIA waiver | Clinical Laboratory Improvement Act designation that allows simple tests to be performed in point-of-care settings such as doctor's offices, walk-in clinics and emergency rooms. |
DIAGNOSTIC | Pertaining to the determination of the nature or cause of a disease or condition. Also refers to reagents or procedures used in diagnosis to measure proteins in a clinical sample. |
FIOCRUZ | The Oswaldo Cruz Foundation of Brazil |
FDA | United States Food and Drug Administration |
IgG | IgG or Immunoglobulin are proteins found in human blood. This protein is called an "antibody" and is an important part of the body's defense against disease. When the body is attacked by harmful bacteria or viruses, antibodies help fight these invaders. |
NGO | Non-Governmental Organization |
OTC | Over-the-Counter |
PEPFAR | The President's Emergency Plan for AIDS Relief |
PMA | Pre-Marketing Approval –FDA approval classification for a medical device that is not substantially equivalent to a legally marketed device or is otherwise required by statute to have an approved application. Rapid HIV tests must have an approved PMA application before marketing of such a product can begin. |
PROTOCOL | A procedure pursuant to which an immunodiagnostic test is performed on a particular specimen in order to obtain the desired reaction. |
REAGENT | A chemical added to a sample under investigation in order to cause a chemical or biological reaction which will enable measurement or identification of a target substance. |
RETROVIRAL | A type of virus which contains the enzyme Reverse Transcriptase and is capable of transforming infected cells to produce diseases in the host such as AIDS. |
SENSITIVITY | Refers to the ability of an assay to detect and measure small quantities of a substance of interest. The greater the sensitivity, the smaller the quantity of the substance of interest the assay can detect. Also refers to the likelihood of detecting the antigen when present. |
SPECIFICITY | The ability of an assay to distinguish between similar materials. The greater the specificity, the better an assay is at identifying a substance in the presence of substances of similar makeup. |
USDA | U.S Department of Agriculture |
WHO | World Health Organization |
this report.
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. Although we believe that these risks are the most important for you to consider, you should read this section in conjunction with our financial statements, the notes to those financial statements and our management's discussion and analysis of financial condition and results of operations included in our periodic reports and incorporated into this Form 10-K by reference.
Risks Related to Our Business
Important competitive factors for our products include price, quality, performance, ease of use, and customer service. A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented.
Risks
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 DPP patents, 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 our having a patented rapid test platform technology that differentiates DPP from lateral flow as well as from other diagnostic platform technologies.
There can be no assurance that our DPP patents or our products incorporating those patents will not be challenged at some time in the future.
Our Competitors may Develop and Commercialize More Effective or Successful Products, and Our Research, Development and Commercialization Efforts may not Succeed.
We regularly commit substantial resources to research and development and the commercialization of our new or enhanced products. The research and development process usually takes a long time from inception to commercial launch. During each stage of this process there is a substantial risk that we will not achieve our goals in a timely fashion, or at all, and we may have to abandon a new or enhanced product in which 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 other benefits. We must obtain regulatory approval before most products may be sold and additional development efforts on these products may be required before the products will be reviewed. However, regulatory authorities may not approve these products for commercial sale or may substantially delay or condition such approval. There may be little or no market for the product and 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 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. Important competitive factors for our products include price, quality, performance, ease of use, and customer service.
A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented.
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 Abbott (Alere), OraSure Technologies and Trinity Biotech. Some competitors offer broader product lines and may have greater name recognition than we have. These and other companies have or may have products incorporating molecular or other advanced technologies that over time could directly compete with our testing product line. 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.
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. 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, our 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.
Our Future Revenues and Operating Results may be Negatively Affected by 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 depends 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 due to the intense competition for qualified personnel among medical products businesses and academic and other research institutions, as well as to geographic considerations, our ability to offer competitive compensation, and benefits, and other reasons.
If we are not able to attract and retain the necessary qualified 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.
We have entered into employment contracts with our Chief Executive Officer, John Sperzel; our Chief Financial Officer, Neil Goldman; and our Chief Science & Technology Officer, Javan Esfandiari. Due to the specific knowledge and experience of these executives regarding the industry, technology and market generally and to our company specifically, the loss of the services of any one of these executives could have a material adverse effect on us. We have not obtained a key man insurance policy on any officer other than Mr. Esfandiari.
We may not Generate the Expected Benefits of Our Acquisition of opTricon GmbH, and the integration of the Acquisition could Disrupt Our Ongoing Business, Distract Our Management and Increase Our Expenses.
We acquired opTricon GmbH, or opTricon, in November 2018 with the expectation that the acquisition will result in various benefits, including securing global commercial rights and reducing cost of goods. Achieving the anticipated benefits of the opTricon acquisition is subject to a number of uncertainties, including whether our business and strategythe business of opTricon can be integrated in an efficient and effective manner. We cannot assure you that we will be able to accurately forecast the performance or ultimate impact of the opTricon acquisition.
It is possible that the integration process could take longer than anticipated and could result in the loss of valuable employees, additional and unforeseen expenses, the disruption of our ongoing business, processes and systems, or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the opTricon acquisition. There may be increased risk due to integrating financial reporting and internal control systems. The integration process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits, expense savings and synergies will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could adversely affect our future business, financial condition, operating results and prospects.
BecauseWe have incurred and will continue to incur non-recurring expenses in connection with the opTricon acquisition, including legal, accounting and other expenses. Additional unanticipated costs may be incurred following consummation of the opTricon acquisition in the course of the integration of the business of opTricon into our business. We cannot be certain that the realization of efficiencies related to the integration of the two businesses will offset the transaction and integration costs in the near term or any losses from undiscovered liabilities not covered by an indemnification from the sellers of opTricon.
We may not Generate the Expected Benefits of Future 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 products 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.
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 or the Affordable Care Act, the Federal healthcare reform law enacted in 2010.
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.
In April 2017, the European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals and replaces the European Union Medical Devices Directive and the Active Implantable Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the European Economic Area, which we refer to as the EEA, member States, the regulations would be directly applicable, i.e., without the need for adoption of EEA member State laws implementing them, in all EEA member States and are intended to eliminate current differences in the regulation of medical devices among EEA member States. The Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and ensure a high level of safety and health while supporting innovation. The Medical Devices Regulation will, however, only become fully applicable three years after publication (in May 2020). Once applicable, the Medical Devices Regulation will, among other things:
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| strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
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| establish explicit provisions on manufacturers' responsibilities for the follow-up of the quality, performance and safety of devices placed on the market;
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| improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
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| set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and
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| strengthen rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by experts before they are placed on the market. |
Once applicable, the Medical Devices Regulation may impose increased compliance obligations for us to access the EU market.
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, the Funding of which may be Reduced or Discontinued or Otherwise be Unavailable to Us.
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, the 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 did not authorize a specific dollar amount for funding.
Developing Testing Guidelines could Negatively Affect 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 regulatory 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 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 significant 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 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, which 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 recognized 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 manage our business, coordinate the production, distribution and sale 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 negatively affect our earnings in the short term. In addition, new manufacturing equipment or facilities may require FDA, WHO, and other regulatory approvals 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 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.
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 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 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 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 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.
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 products. For example, the development of a safe and effective vaccine to HIV or treatments for other diseases or conditions that our products are designed to detect, could reduce or eventually eliminate the demand for our HIV or other diagnostic products and result in a loss of revenues.
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 political conditions and the availability of grants or funding 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 complete transactions at all or on a schedule and in an amount consistent with our objectives.
We May Face Product Liability Claims for Injuries.
The testing, manufacturing and marketing of medical diagnostic products involves an inherent risk of product liability claims. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or cease sales of our products. We cannot be sure that we will not incur liabilities in excess of the policy limits of our existing product liability insurance coverage or that we will be able to continue to obtain adequate product liability insurance coverage in the future at an acceptable cost, or at all. In addition, a defect in the design or manufacture of our products could have a material adverse effect on our reputation in the industry and subject us to claims of liability for injury and otherwise. Any substantial underinsured loss resulting from such a claim could have a material adverse effect on our profitability, and the damage to our reputation in the industry could 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.
Customer Concentration Creates Risks for Our Business.
A significant portion of our revenues each year comes from a few large customers. To the extent that such a large customer fails to meet its purchase commitments, changes its ordering patterns or business strategy, or otherwise reduces its purchases or stops purchasing our products, or if we experience difficulty in meeting the demand by these customers for our products, our revenues and results of operations could be adversely affected.
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 the necessary 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
We incurred an operating loss each year from 2014 through 2018. Under our operating plan, we have made, and plan to continue to make, significant investments in our production capacity, including in expanding facilities and automating manufacturing, and in our sales and marketing, regulatory approval, and research and development activities. Our ability to achieve profitability and generate cash flow in the future will depend on our ability to increase sales of our existing products and to successfully introduce new and enhanced products into the marketplace, all while controlling and managing our expenses consistent with our operating plan.
If we are unable to increase our revenues and manage our expenses in accordance with our operating plan, our operating results would be harmed and we may not be able to generate the cash flow needed to fund the investments in our production capacity and other activities, we will be required to implement one or both of the following:
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| We could reduce the level, or otherwise delay the timing, of the anticipated investments in our production capacity and other activities, which would likely curtail or delay the growth in our business contemplated by our operating plan and could impair or defer our ability to achieve profitability and generate cash flow. |
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| We could raise additional funds through public or private financings, strategic relationships, or other arrangements, to the extent funding would be available to us on acceptable terms or at all. If we succeed in raising additional funds through the issuance of equity or convertible securities, then the issuance could result in substantial dilution to existing stockholders. Furthermore, the holders of these new securities or debt may have rights, preferences and privileges senior to those of the holders of our Common Stock. |
In such circumstances, we also would need to forego acquisition opportunities, which could impede our ability to grow our business.
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) inventory reserves and obsolescence; (v) customer sales returns and allowances; (vi) contingencies; and (vii) 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.
Our Financial Results may Fluctuate.
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. 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 report. 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. The revenues and expenses of opTricon are recorded in Euros. 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 and opTricon businesses will continue to grow and, consequently, our exposure to foreign currency exchange rates may grow as well.
Our foreign subsidiaries' revenues and expenses and the translation of their 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.
Changes in Interpretation or Application of U.S. Generally Accepted Accounting Principles may Adversely Affect Our Operating Results.
We prepare our financial statements to conform to U.S. generally accepted accounting principles. These principles are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the Securities and Exchange Commission and various other regulatory or accounting bodies. A change in interpretations of, or our application of, these principles can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. Additionally, as we are required to adopt new accounting standards, our methods of accounting for certain items may change, which could cause our results of operations to fluctuate from period to period. For example, upon adoption of Accounting Standards Codification (“ASC”) 606 Revenue from Contracts with Customers of the Financial Accounting Standards Board (“FASB”), we now recognize revenue upon transfer of control, which is generally at time of delivery. Under the previous accounting guidance, we recognized revenue upon acceptance when and if we had production responsibilities. If circumstances change over time or interpretation of the revenue recognition rules change, we could be required to adjust the timing of recognizing revenue and our financial results could suffer.
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.
We Operate in Countries where there is or may be Widespread Corruption.
We have a policy in place prohibiting our employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the U.S. Foreign Corrupt Practices Act. Nevertheless, because we work through independent sales agents and distributors 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 numerous 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.
Our subsidiary Chembio Diagnostics Malaysia Sdn. Bhd. is located in Malaysia. There have been numerous high-profile corruption cases, and corruption is one of the most problematic factors for doing business in Malaysia. While the Malaysian government has acknowledged the problem, it appears that endemic corruption is continuing and that market-based principles are not applied in cases involving individuals with high-level political access. To the extent bribery and similar practices continue to exist in Malaysia, U.S. companies such as ours, which are subject to U.S. laws making it illegal to pay bribes to foreign officials, may make us less competitive in winning business in Malaysia when competing with non-U.S. companies.
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 will 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, 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 and optical 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.
Any Future Intellectual Property Disputes could Require Significant 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 (1) it could consume a substantial portion of managerial and financial resources; (2) 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; (3) the pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products; (4) a court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products; and (5) 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 and Materials Presents Risks that Could Have Negative Consequences for Our Business.
We purchase certain HIV antigens, a syphilis antigen, the nitrocellulose, and certain other critical components used in our STAT-PAK, STAT-VIEW, SURE CHECK and DPP product lines from a sole or limited number of sources. If for any reason these suppliers become unwilling or unable to supply our antigen, nitrocellulose, or other critical component needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, nitrocellulose or other critical components used in our products would require additional development work and approval by the FDA and other regulatory agencies. In addition, it may be difficult to find such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. As a result, the termination or limitation of our relationship with one or more of these suppliers could require significant time to complete, increase our costs, and disrupt or discontinue our ability to manufacture and sell the affected products.
With some of these suppliers, we do not have long-term agreements and instead purchase components and materials through a purchase order process. As a result, these suppliers may stop supplying us components and materials, limit the allocation of supply and equipment to us due to increased industry demand, or significantly increase their prices at any time with little or no advance notice. Our reliance on a limited number of suppliers could also result in delivery problems, reduced control over product pricing and quality, and our inability to identify and qualify another supplier in a timely manner.
Moreover, some of these suppliers may experience financial difficulties that could prevent them from supplying us with components or subassemblies used in the design and manufacture of our products. In addition, these suppliers may experience manufacturing delays or shut downs due to circumstances beyond their control, such as labor issues, political unrest or natural disasters.
Any supply deficiencies could materially and adversely affect our ability to fulfill customer orders and our results of operations. The availability of critical components and materials from sole- or limited source suppliers could reduce our control over pricing, quality and timely delivery, increase our costs, could disrupt our ability to manufacture and sell, and preclude us from manufacturing and selling, certain of our products into one or more markets. Any such event could have a material adverse effect on our results of operations, cash flow and business.
We May Work with Strategic Collaborators to Assist in Developing and Commercializing Our Products, which could Limit Rights We Receive from the Collaborations and Exposes Us to Other Risks Outside Our Control.
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 generate revenues in the amounts we expect, or in the amountsobtain regulatory approvals necessary to continue the collaborations in a timely manner; (iii) our business.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.
Our Ability to Grow Our Business will be Limited if We Fail to Maintain Existing Distribution Channels or Develop New Distribution Channels.
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 productsdistributor 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.
Our U.S. Government Contracts Require Compliance with Numerous Laws and Increases Our Risk and Liability.
We are currently receiving funding from the U.S. government related to DPP Zika, and our growth strategy targets sales to U.S. government entities. As a result of our U.S. government funding and potential product sales to the U.S. government, we must comply with laws and regulations relating to the award, administration and performance of U.S. government contracts. U.S. government contracts typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and additional risks to us as compared to competitors that do not rely on government contracts. As a U.S. government contractor, we are subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which purely private sector companies are not. The results of any such actions could adversely impact our business and have an adverse effect on our consolidated financial performance.
A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts, as well as suspension or debarment. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could be applied to our manufacturing facility must meet quality standardsentire enterprise in certain severe circumstances. Even a narrow scope suspension or debarment could result in negative publicity that could adversely affect our ability to renew contracts and to secure new contracts, both with the U.S. government and private customers, which could materially and adversely affect our business and results of operations. Fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow rules relating to billing on cost-plus contracts, receiving or paying kickbacks, or filing false claims, among other potential violations. In addition, we could suffer serious reputational harm and the value of our Common Stock could be negatively affected if allegations of impropriety related to such contracts are made against us.
Our U.S. Government Contracts are Subject to Future Funding and the Government’s Choice to Exercise Options, and may be Terminated at the Government’s Convenience.
Our contracts with the U.S. government are subject to future funding and are subject to inspectionthe right of the government to terminate the contracts in whole or in part for its convenience. There is pressure for the U.S. government to reduce spending. The non-appropriation of funds or the termination for the government’s convenience of our contracts could negatively affect our financial results. If levels of U.S. government expenditures and authorizations for emerging diseases decrease or shift to programs in areas where we do not offer products or are not developing product candidates, or if the U.S. government otherwise declines to exercise its options under its contracts with us, our business, revenues and other operating results would suffer.
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 numberNumber of domestic regulatoryDomestic Regulatory and other governmentalOther Governmental and non-governmental agencies.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 USDAU.S. Department of Agriculture 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")QSRs and that also require meeting certain documentary requirements regarding the approval of the product in export markets. Although we believe that we meet
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.
Regulations of the FDA and other federal, state and foreign regulatory standards required for the exportagencies have significant effects on many aspects 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 onoperations, and the testing of biological specimens in a laboratory or at the point-of-care and is highly competitive and rapidly changing. Someoperations of our principal competitors may have considerably greater financial, technicalsuppliers and marketing resources than we do. Several companies produce diagnostic tests that compete directlydistributors, 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 our testing product line,QSRs and FDA regulatory requirements in the United States and other applicable regulations worldwide, 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 the 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.
ISO standards. We believe that our DPP®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 outsidebelieved 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 scopeproduct from the market.
Our inability to comply with the applicable requirements of currently issued patentsthe FDA can result in, the fieldamong other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, recall or seizure of lateral flow technology, thereby offering the possibilityproducts, civil penalties, withdrawal of greater freedomproduct registrations, total or partial suspension of production, refusal to operate. However there can be no assurance thatgrant premarket clearance or PMA approval for devices, marketing clearances or approvals, or criminal prosecution. The ability of our patentssuppliers to supply critical components or materials and of our distributors to sell our products incorporatingcould also be adversely affected if their operations are determined to be out of compliance. Such actions by the patent claims will notFDA 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 challenged at some time insubjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the future.
Our use of third-party suppliers, some of which may constitute our sole supply source, for certain important product components presents a risk that could have negative consequences for other business.
A numbersale of our componentsproducts. Our reputation could be substantially impaired if we are assessed any civil and critical raw materials are provided by third-party suppliers, some of which may be sole-source suppliers, which impactscriminal penalties and limit our ability to manufacture or sell product if our suppliers cannot or will not deliver those materials in a timely fashion, or at all, due to an interruption in their supply, quality or technical issues, or any other reason. If this occurs, we could incur substantial expense and time to be able to reestablish the appropriate quality, cost, regulatory and market-acceptance circumstances needed for commercial success. Even with the needed expense and time, we may not be able to reestablish any or all of these factors. The absence of any one or more of these factors could prevent us from being able to commercially produce and market the affected product or products.
New developments in health treatments or new non-diagnostic products may reduce or eliminate the demand for our products.
The development and commercialization of products outside of the diagnostics industry could adversely affect sales of our products. For example, the development of a safe and effective vaccine to HIV or treatments for other diseases or conditions that our products are designed to detect, could reduce or eventually eliminate the demand for our HIV or other diagnostic products and result in a loss of revenues.
We may not have sufficient resources to effectively introduce and market our products which could materially harmhave a material adverse effect on our operating results.business.
Introducing and achieving market acceptance for our rapid HIV tests and other new products will require substantial marketing efforts and will require us and/or our contract partners, sales agents, and/or distributors to make significant expenditures of time and money. In some instances we will be significantly or totally reliant on the marketing efforts and expenditures of our contract partners, sales agents, and/or distributors. If they do not have or commit the expertise and resources to effectively market the products that we manufacture, our operating results will be materially harmed.
The success of our business depends on, in addition to the market success of our products, our ability to raise additional capital through the sale of debt or equity or through borrowing, and we may not be able to raise capital or borrow funds on attractive terms and/or in amounts necessary to continue our business, or at all.
We were profitable for five consecutive years through 2013. Nevertheless, prior to 2009 we sustained significant operating losses since 2004, and we incurred an operating loss for 2014 and 2015. We estimate that our resources are sufficient to fund our needs through the end of 2016 and beyond. Nevertheless we 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 (1) the level of revenues; (2) the extentInability to which, if any, that revenue level improves operating cash flows; (3) our investmentsRespond to Changes 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 2016 or, in the alternative, be successful in raising sufficient capital to fund our needs after 2016.Regulatory Requirements could Adversely Affect Our Business.
Our U.S. market sales are difficult to predict in 2016 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 demandour products and procedures are in material compliance with all applicable FDA regulations, ISO requirements, and other applicable regulatory requirements, but the regulations regarding the manufacture and sale of our products, the QSR and ISO requirements, and other requirements may be unclear and are subject to change. Newly promulgated regulations could require changes to our products, necessitate additional clinical trials or procedures, or make it impractical or impossible for HIV rapid testingus to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory authorities also have the United States remains strong, and thatability to change the restoration of somerequirements for obtaining product approval and/or impose new or additional requirements as part of the funding cutbacks from sequestrationapproval process. These changes or new or additional requirements may occur after the completion of substantial clinical work and theother costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain approvals and sell our products. In addition, 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. Further,FDA may revoke an Emergency Use Authorization under which our products are well establishedsold, where it is determined that the underlying health emergency no longer exists or warrants such authorization. Such revocation would preclude the sale of our affected products unless and relied uponuntil a further regulatory approval or authorization is obtained. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations.
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 large installed base of customers over many years of use inlaboratory. These laboratories are subject to CLIA regulation but such laboratories have previously not been subject to regulation by FDA under the U.S. global market,agency’s medical device requirements.
However, the FDA has announced that it would begin regulating LDTs, 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 the FDA issued proposed guidance on the regulation of LDTs for usepublic 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 oral fluidrespect 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 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 ofmolecular testing. This, in turn, could reduce demand for our products and we have investedadversely impact our revenues.
In Addition to FDA Requirements, We Are Subject to Several Government Regulations, Compliance with which could Increase Our Costs and Affect Our Operations.
In addition to the FDA regulations previously described, laws and regulations in additional resourcessome states may restrict our ability to sell products in connectionthose states.
We must comply with this effort; but as we have experienced,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 naturenumber of international business is such that it can be volatile from period to period, depending on ordering patternslaws and regulations governing our industry, and the actions 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 have an ethics and anti-corruption policy in place, and have no knowledge or reason to know of any practices by our employees, agents or distributorsgovernment agencies that could be construed as in violationaffect our operations, it is impossible to reliably predict the full nature and impact of such policies, our business includes sales of products to countries where therethese laws and regulations. To the extent the costs and procedures associated with complying with these laws and requirements are substantial or it is or may be widespread corruption.
Chembio has a policy in place prohibiting its 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,determined that we do not have control over the day-to-day activitiescomply, our business and results of such independent agentsoperations could be adversely affected.
We may Incur Additional Costs if We do not Comply with Privacy, Security and distributors. In addition, in the donor-funded markets in Africa whereBreach Notification Regulations.
We believe that 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 isare not a process that includes an overall assessmentcovered entity nor a business associate of a productcovered entity and are not responsible for complying with the Health Insurance Portability and Accountability Act of 1996, or HIPAA. Even though we likely are not a covered entity under HIPAA, we do have in place administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information.] We are 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.
Failure to Comply With Recent European Data Protection Requirements could Increase Our Costs.
The EU has adopted a comprehensive overhaul of its data protection regime from the prior national legislative approach to a single European Economic Area Privacy Regulation called the General Data Protection Regulation, or GDPR, which came into effect on May 25, 2018. The new EU data protection regime extends the scope of the EU data protection law to all foreign companies processing data of EU residents. It imposes a strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide turnover and €20 million and includes extensive product performance evaluations including five active collaborationsnew rights such as the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation, as had been the case under the prior data protection regime, local data protection authorities will still have the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country basis. We are evaluating these new requirements and manufacturer's quality systems,implementing a plan to ensure compliance. Complying with the enhanced obligations imposed by the GDPR may result in significant costs to our business and require us to amend certain of our business practices. Further, we have no assurances that violations will not occur, particularly given the complexity of the GDPR, as well as pricethe uncertainties that accompany new, comprehensive legislation.
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 delivery. In Brazil, where we have hadquality requirements. As 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 inresult, 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)materials used in several of our productstheir manufacture or assembly undergo regular inspections 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,quality testing. Factors such as entering into confidentiality agreementsdefective materials or processes, mechanical failures, human errors, environmental conditions, changes in connection with new business opportunities, unauthorized parties may attempt to copy aspects ofmaterials or production methods, and other events or conditions could cause our products or the materials used to obtain information that we regard as proprietary. We may be requiredproduce or assemble our products to expend substantial resourcesfail inspections and quality testing or otherwise not perform in assertingaccordance with our label claims 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 somethe expectations 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.customers.
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 retainmeet the necessary personnel to accomplish our business objectives, we may experience constraints that willapplicable specifications, performance standards, quality requirements or customer expectations could adversely affect our ability to effectively manufacture sell and marketsell 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 to meetwhich we are subject, including anti-kickback laws, laws constraining the demandssales, false claims laws, marketing and promotion 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 scientistsmedical devices by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other personnelpotential purchasers of medical devices. There are other laws we are subject to that require us 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 numerous companiesparticipation in government healthcare programs. Many of the existing requirements are new and academichave not been definitively interpreted by state authorities or courts, and available guidance is limited. We could face enforcement action and fines and other research institutions may limit our ability to do so on acceptable terms.
We have entered into employment contractspenalties, and could receive adverse publicity, unless and until we are in full compliance 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 experiencethese laws, all of which could materially harm us. Furthermore, changes in or evolving interpretations of these executives regarding the industry, technology and market, the loss of the services of any one of themlaws, 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 Company.scope, complexity and cost of corporate governance, reporting and disclosure practices. For example, we are subject to the Sarbanes-Oxley Act of 2002, The contractDodd-Frank Wall Street Reform and Consumer Protection Act and the requirements of The NASDAQ Global Market. 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 Mr. Sperzel has a termrespect to new and proposed rules and cannot predict or estimate the amount of three years ending March 2017. The contract with Ms. Klugewicz has a termadditional costs, and the timing of two years ending May 2017. The contract with Mr. Esfandiari has a termsuch costs, we may incur. There are several interpretations of three years ending March 2016. The Companythese laws and Mr. Esfandiari currently are discussing terms for renewalregulations, in many cases due to their lack 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 Officerspecificity, and as a Directorresult, 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 the Company through March 13, 2017.
We believe our success depends in part on the continued funding ofcorporate governance and our abilitypublic disclosure, but if we fail to participate in large testing programs in the U.S. and worldwide. Fundingcomply with any of these and or similar programsrequirements, legal proceedings may be reduced, discontinued and/or weinitiated against us, which may not be able to participate for other reasons.adversely affect our business.
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 investorshas Limited Liquidity, and Investors may not be ableAble to sellSell as much stockMuch Stock as they wantThey Want at prevailing market prices.Prevailing Market Prices or at all.
The average daily trading volume of our Common Stock on the NASDAQ market was approximately 21,600 shares per day over the three months ended December 31, 2015 as compared with approximately 109,000 shares per day over the three months ended December 31, 2014. The liquidity of our stockCommon Stock depends on several factors, including but not limited to theour 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 our 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 Company.future. The following factors, among others, could have a significant impact on the market for our Common Stock: (1) the performance of our business; (2) clinical results with respect to our products or those of our competitors; (3) the gain or loss of significant contracts and availability of funding for the purchase of our products; (4) actions undertaken by the Congress or the Presidential Administration; (5) changes in our relations with our key customers, distributors or suppliers; (6) developments in patent or other proprietary rights; (7) litigation or threatened litigation; (8) general market and economic conditions; (9) the relatively low trading volume for our Common Stock; (10) changes in competition; (11) 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; (12) failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; (13) announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or our customers; (14) changes in our operating results; and (15) 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.
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 or Our Independent Registered Public Accounting Firm Concludes 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 and larger stockholders exercise significantof the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must report on the Company.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 Management and Larger Stockholders Exercise Significant Control Over Us.
As of December 31, 2015,2018, our named executive officers, directors and 5% stockholders beneficially owned approximately 24.0%14.21% of our voting power, which includes two1 large investorsinvestor that beneficially owns approximately 11.4% and 9.2%8.73%, 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. |
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, pursuant to a lease covering approximately 39,650 square feet and expiring on April 30, 2019. We also lease nearby warehouse space as well as someand additional administrative offices located in Holbrook, New York. WeYork, pursuant to a lease covering approximately 39,66021,700 square feet and expiring on April 30, 2020.
On February 5, 2019, we entered into a commercial real estate lease for new corporate headquarters comprised of 70,000 square feet of industrial space in Medford for $27,988 per month. The space is utilized foroffice, research and development, activities (approximately 5,440 square feet), offices (approximately 2,640 square feet) and production (approximately 31,580 square feet).warehouse space located at 555 Wireless Boulevard, Hauppauge, New York. The lease has an initial term expires on April 30, 2017. Theof eleven years that can be extended, at our option, for two additional terms of five years each. Rent under the lease, provideswhich is payable in monthly installments, totals approximately $900,000 for annualthe initial year and then increases of two and one-half percent each year starting May 1, 2015. We leaseby 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 succeeding year.
On February 5, 2019, we also entered into an agreement to sublet the space at Holbrook, New York. The sublease has a term that will (a) commence on the date we vacate the premises and (b) terminate on April 29, 2020. The sublessee will pay us 50% of our rent and additional rent payments, which will total approximately $100,000 per year starting March 1, 2015. The Company believes thisduring the term of the sublease.
Our European headquarters and Center of Excellence for Optical Technology is located in leased office and manufacturing space should be sufficient for itsin Berlin, Germany. Our Southeast Asia manufacturing, warehouse, and commercial facilities are located in leased space in Kuala Lumpur, Malaysia. We regularly review our real estate portfolio and develop footprint strategies to support our customers’ global plans, while at the same time supporting our technical needs in the foreseeable future.
and controlling operating expenses.
From time to time we may bebecome involved in litigation relatinglegal proceedings or may be subject to claims arising outin the ordinary course of our operations inbusiness. Although the normalresults of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless 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, isthe outcome, litigation can have an adverse party or has a material interest that is adverse to our interest.impact on us because of defense and settlement costs, diversion of management resources and other factors.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
MarketListing Information
Our stock is quotedlisted on the NASDAQ Global Select Market of the NASDAQ Stock Market LLC under the symbol "CEMI." The table below sets forth the high and low bid prices per share of our common stock for each quarter of our two most recently completed fiscal years. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.“CEMI.”
| Fiscal Year 2015 | High Bid | | Low Bid | |
| First Quarter | | | $ | 4.18 | | | | $ | 3.41 | |
| Second Quarter | | | $ | 5.21 | | | | $ | 3.90 | |
| Third Quarter | | | $ | 5.19 | | | | $ | 2.85 | |
| Fourth Quarter | | | $ | 5.48 | | | | $ | 3.48 | |
| | | | | | | | | | | |
| Fiscal Year 2014 | High Bid | | Low Bid | |
| First Quarter | | | $ | 3.88 | | | | $ | 2.81 | |
| Second Quarter | | | $ | 3.56 | | | | $ | 2.81 | |
| Third Quarter | | | $ | 3.85 | | | | $ | 3.02 | |
| Fourth Quarter | | | $ | 5.19 | | | | $ | 3.40 | |
Holders
As of March 1, 2016,2019, there were approximately 139132 record owners of our common stock.
Dividends
The Company has never paid cash dividends on its common stockCommon Stock (including nominee holders such as banks and has no plans to do so in the foreseeable future.brokerage firms who hold shares for beneficial owners).
Recent Sales of Unregistered Securities
Not applicable.
ITEM 6. | SELECTED FINANCIAL DATA |
Presented in this table are selected financial data forThere were no sales of unregistered securities during the past five yearsquarter ended December 31, 2015.
2018.
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
|
SELECTED HISTORICAL FINANCIAL DATA
|
As of and For the Years Ended
|
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2015 | | | | | | December 31, 2014 | | | | | | December 31, 2013 | | | | | | December 31, 2012 | | | | | | December 31, 2011 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the quarter ended December 31, 2018.
| ITEM 7. | MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
ThisThe following discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements and related notes. Our discussion and analysis of our financial condition and results of operations are based upon ouraudited consolidated financial statements which have been preparedand related notes included in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we review our estimates and assumptions. Our estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined below in ''Critical Accounting Policies,'' and have not changed significantly.
this report. In addition certain statements made in this report may constitute "forward-looking statements". Theseto historical information, the following discussion contains forward-looking statements involve known or unknownthat involves risks, uncertainties and otherassumptions. See “Special Note Regarding Forward-Looking Statements” at page [2] of this report. Please read “Item1A. Risk Factors” for a discussion of factors that maycould cause theour actual results performance or achievements of the Company to bediffer 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, whichexpectations.
The following discussion 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 reflectedpresented in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.six sections:
•
| Consolidated Results of Operations
|
•
| Liquidity and Capital Resources
|
•
| Significant Accounting Policies and Critical Accounting Estimates
|
•
| Recently Issued Accounting Pronouncements |
Executive Overview
Except as may be required by applicable law,Through our wholly owned subsidiaries, Chembio Diagnostic Systems Inc., Chembio Diagnostics Malaysia Sdn Bhd and opTricon, we do not undertakedevelop, manufacture and commercialize point-of-care diagnostic tests that are used to detect 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.
diagnose diseases. All of the Company's future products that are currently being developed are based on itsour patented Dual Path Platform (DPP®), which isDPP technology, a uniquenovel point-of-care diagnostic point-of-care platform that hasoffers certain customer advantages overas compared to traditional 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 AssayChembio was formed in 1985.
Recent operational accomplishments 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.highlights include:
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 testAchieved total revenue of $33.4 million for the simultaneous detectionfull year 2018, an increase 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.39% over prior year
|
·
•
| DPP® Fever Panel Assay: The DPP® Fever Panel Assay is a rapid, POC, multiplex testAchieved product sales of $26.7 million for the simultaneous detectionfull year 2018, also an increase 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 2016.38% over prior year
|
·
•
| DPP® Ebola AssayAcquired opTricon, a developer and DPP®Malaria-Ebola Assay: The DPP® Ebola Assay is a rapid POC test for the detectionmanufacturer 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 POChand-held analyzers that when used in combination with our 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. tests, provide quantitative results
|
•
| ·Advanced technology collaborations with AstraZeneca, Lumira Dx, FIND and others
| 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. |
•
| ·Purchased a fully-automated DPP test manufacturing line
| 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 readyHosted analyst and investor day and introducing five-year targets for field testing$100 million of revenue in 2016.2023 and 50% gross margins for year end 2023
|
We strengthened our balance sheet from underwritten public offerings that generated net proceeds of $10.9 million in February 2018 and $16.5 million in November 2018. See “—Recent Developments.”
Our product commercialization and product development efforts are focused in two areas: infectious diseases (which includes both sexually transmitted disease and tropical/fever disease) and technology collaborations. In infectious disease, we are commercializing tests for HIV and Syphilis. In tropical and fever disease, we are commercializing tests for dengue virus, Zika virus, chikungunya virus, and ebola virus, individually or as part of an advanced multiplex test. We are also developing tests for lassa, Marburg, malaria, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi, individually or as part of a fever panel test, and hepatitis C. Through technology collaborations, we are developing tests for a specific form of cancer, concussion, bovine tuberculosis, and for eosinophilic respiratory disease, 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 point-of-care 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 marketing partners.
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. |
Regulatory ActivitiesConsolidated Results of Operations
DPP® HIV 1/2 Assay: In May 2015 we received approval for a CE MarkThe results of operations 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 yearyears 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)2018 and 2017 were 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 decreasedfollows:
| | | Year Ended December 31, | |
| | | 2018 | | | 2017 | |
| | | | | | | | | | | | | |
| TOTAL REVENUES | | $ | 33,409,251 | | | | 100 | % | | $ | 24,015,427 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
| Cost of product sales | | | 21,427,243 | | | | 64 | % | | | 12,921,157 | | | | 54 | % |
| Research and development expenses | | | 8,526,256 | | | | 26 | % | | | 8,555,381 | | | | 36 | % |
| Selling, general and administrative expenses | | | 11,100,775 | | | | 33 | % | | | 8,963,363 | | | | 37 | % |
| Acquisition costs | | | 337,645 | | | | 1 | % | | | 58,076 | | | | 0 | % |
| | | | 41,391,919 | | | | 124 | % | | | 30,497,977 | | | | 127 | % |
| LOSS FROM OPERATIONS | | | (7,982,668 | ) | | | (24 | )% | | | (6,482,550 | ) | | | (27 | )% |
| | | | | | | | | | | | | | | | | |
| OTHER INCOME | | | 49,498 | | | | 0 | % | | | 22,485 | | | | 0 | % |
| | | | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (7,933,170 | ) | | | (24 | )% | | | (6,460,065 | ) | | | (27 | )% |
| | | | | | | | | | | | | | | | | |
| Income tax (benefit) provision | | | (67,521 | ) | | | 0 | % | | | (88,305 | ) | | | 0 | % |
| NET LOSS | | $ | (7,865,649 | ) | | | (24 | )% | | $ | (6,371,760 | ) | | | (27 | )% |
Percentages in the year ended December 31, 2015 as compared withtable reflect the year ended December 31, 2014, by $327,000, or 3.0%. The increased operating expenses, the most significantpercent of which were an increase in wages and related expensestotal revenues.
Total Net Loss.Revenues
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 componentsTotal net revenues during the year ended December 31, 2015 increased by approximately $440,000 from the same period in 2014. This was primarily attributable2018 were $33.4 million, an increase of $9.4 million, or 39% compared 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 $1,011,000.2017. The increase in total net revenues was comprised of the following:
•
| $7.4 million, or 38% increase in net product sales, reflecting gains in Africa, Latin America, and Europe. Africa benefited from or winning the single largest tender in our history for the supply of HIV tests to Ethiopia, together with meaningful commercial successes in other countries. Latin America gains reflect continued growth in Brazil, and Europe reflects the increasing trend of HIV self-testing. As part of these regional successes and as highlighted above, during November 2018, we completed the acquisition of opTricon. Refer to Note 2 – Acquisition to the audited consolidated financial statements included herein for further information regarding the acquisition.
|
•
| $2.0 million, or 42% increase in R&D and grant, and license and royalty revenues compared to 2017, reflecting our continued success in securing governmental, non-governmental, and commercial partnerships, in particular associated with our DPP technology platform. |
Gross Product Margin
Cost of product sales is primarily comprised of material, labor, manufacturing overhead, depreciation and in milestoneamortization, and grant revenue, was primarily dueother 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 decreased by $1.1 million, or 17% compared 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. 2017. The following schedule calculates gross product margin:
Gross Margin:| | | For the years ended
| | | | | | | |
| | | December 31, 2018 | | | December 31, 2017 | | | | | | % Change | |
| | | (in thousands)
| | | | | | | |
| Net product sales | | $ | 26,741
| | | $ | 19,322 | | | $ | 7,419
| | | | 38.4
| % |
| Less: Cost of product sales | | | (21,427 | ) | | | (12,921 | ) | | | (8,506 | ) | | | 65.8
| % |
| Gross product margin | | $ | 5,314
| | | $ | 6,401 | | | $ | (1,087
| )
| | | (17.0
| )% |
| Gross product margin % | | | 19.9
| % | | | 33.1 | % | | | | | | | | |
| 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$1.1 million decrease in gross product 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 iswas 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.following:
•
| $2.4 million from favorable product sales volume as described above, and
|
•
| $3.5 million from unfavorable product margins, related to increased labor (including contract labor) to manually assemble our products and the impact of geographic mix on average selling prices. |
Research and Development:Development
This category includes costs incurred for clinical and regulatory affairs and for productother research and development.development, as follows:
| 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 | % |
| | | | | | | | | | | | | | | | | |
| | | For the years ended
| | | | | | | |
| | | December 31, 2018 | | | December 31, 2017 | | | | | | % Change | |
| | | (in thousands)
| | | | | | | |
| Clinical and regulatory affairs | | $ | 1,307
| | | $ | 2,298 | | | $ | 991 |
| | | 43.1 | % |
| Other research and development | | | 7,219
| | | | 6,257 | | | | (962 | )
| | | (15.4 | )% |
| Total research and development | | $ | 8,526
| | | $ | 8,555 | | | $ | 29 |
| | | 0.3 | % |
ExpensesThe decrease in clinical & regulatory affairs costs for Clinical and Regulatory Affairs for the year ended December 31, 2015 increased by $201,0002018 as compared to the same period in 2014. This was2017 is primarily due to an increase of $161,000 inassociated with our U.S. clinical trial expensesevaluating our DPP HIV-Syphilis System, which we completed in December 2017. The increase in other research and increased wagesdevelopment costs is primarily associated with spending associated with the 45% increase in revenue from externally-funded research and related costs of $42,000.development projects.
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: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 expense includes administrative expenses, sales and marketing costs including commissions, and other corporate items. The $2.1 million, or 23.8%, increase in selling, general and administrative expenses for the year ended December 31, 2015, increased by $131,0002018 as compared to 2017 is associated with the same period in 2014, a 1.7% increase. This increase resulted primarily from increases in wagesincreased personnel, sales commissions, and non-cash equity compensation expenses.
Acquisition Costs
Acquisition costs include legal, due diligence, audit, and related costs and travel expenses, which for 2015 included the continued development of a sales and marketing team over 2014, professional fees andassociated with acquisitions. The $0.3 million, or 481.4% increase 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)acquisition costs for the year ended December 31, 2015 decreased approximately $3,400, primarily due2018 as compared to decreased2017 is associated with spending related to the acquisition of opTricon in November 2018. The 2017 costs relate to completion of the acquisition of RVR Diagnostics in January 2017.
Other Income and Expense
Other income and expenses are principally interest income earned on our deposits, net of interest expense, which increased by approximately $27,000 for 2018 as compared to the same period in 2014.2017.
Income tax provision (benefit):Tax Provision
For 2018 we recognized a tax benefit of $67,521 primarily attributable to the loss generated by Chembio Diagnostics Malaysia. As of December 31, 2018 and 2017, our deferred tax assets include a full valuation allowance against our deferred tax assets.
Liquidity and Capital Resources
During the year ended December 31, 2018, we funded our business operations, including capital expenditures and working capital requirements, principally from $27.5 million of net proceeds from two underwritten public offerings and $3.0 million of non-exchange transaction awards from research and development programs. Our operations used cash flow of $11.8 million. As of December 31, 2018, we had no outstanding debt other than a $0.4 million seller-financed note payable incurred in connection with our purchase of automated manufacturing equipment.
We believe our existing cash and cash equivalents and our cash flow from operating activities will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future working capital needs will depend on many factors, including the rate of our business and revenue growth, the timing of our automation of U.S. manufacturing, and the timing of investment in our research and development as well as sales and marketing.
If we are unable to increase our revenues and manage our expenses in accordance with our operating plan, we may not be able to generate the cash flow needed to fund our automation of U.S. manufacturing and our investment in research and development and sales and marketing at the time contemplated by our operating plan. In such an event, we may elect to reduce the level, or otherwise delay the timing, of such funding and/or such investments, which would likely curtail or delay the growth in our business contemplated by our operating plan and could impair or defer our ability to achieve profitability and generate cash flow.
If we do not elect to reduce or delay such funding and/or investments, or if we determine to effect one or more acquisitions of businesses, technologies or products, we may be required to seek to raise additional funds through public or private financings, strategic relationships, or other arrangements, to the extent funding would be available to us on acceptable terms or at all. If we were to raise additional funds through the issuance of equity or convertible securities, the issuance could result in substantial dilution to existing stockholders, and the holders of these new securities or debt may have rights, preferences and privileges senior to those of the holders of our Common Stock.
Sources of Funds
Equity and Equity-Related Securities. We received net proceeds of $10.9 million from an underwritten public offering of Common Stock in February 2018 and $16.5 million from an underwritten public offering of Common Stock in November 2018. We do not expect to raise additional capital from a public offering of Common Stock in 2019.
Research and Development Awards. We frequently seek research and development programs that may be awarded by government, non-governmental organizations, and non-profit entities, including private foundations.
Since 2015 we have earned over $10.8 million of funding from some of the Company recognized a $(1,160,000) income tax benefitworld’s leading health organizations, which has helped us accelerate the expansion of our pipeline of infectious disease tests. Our collaborators have included Bill & Melinda Gates Foundation, The Paul G. Allen Family Foundation, FIOCRUZ and increased its deferred tax assets by $(1,160,000). ForFIND, as well as U.S. government agencies such as CDC, BARDA and the U.S. Department of Agriculture. See “Item 1. Business—Products” above. During the year ended December 31, 2014,2018, we recognized grant revenue totaling $3.0 from government, non-governmental organizations, and non-profit entities.
Working Capital. The following table sets forth selected working capital information:
| | | December 31, 2018 | |
| | | (in thousands) | |
| Cash and cash equivalents | | $ | 12,525 | |
| Accounts receivable, net of allowance for doubtful amounts | | | 7,374 | |
| Inventories, net | | | 7,851 | |
| Prepaid expenses and other current assets | | | | |
| Total current assets | | | 28,452 | |
| Less: Total current liabilities | | | | )
|
| Working capital | | | | |
Our cash and cash equivalents at December 31, 2018 were unrestricted and held for working capital purposes. We currently intend to retain all available funds and any future earnings for use in the Company recognized a $(413,000) income tax benefitoperation of our business and increased its deferred tax assets by $(403,000). The effective tax rate useddo not anticipate paying any cash dividends. We have not entered into, and do not expect to recognizeenter into, investments for trading or speculative purposes. Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, and the benefit in 2015 was 32.0% compared to a 26.6% rate used in 2014 to recordtiming of shipment of our products and the amount charged. In both years non-deductible expenses for tax purposes accounted for mostinvoicing of the difference from the standard 34% U.S. tax rate. The Company maintains a full valuation allowance onour research and development tax creditsactivities.
Uses of Funds
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 fromFlow Used in Operating Activities. Our operations used $11.8 million of cash during the year ended December 31,2014,31, 2018, primarily due to the net cash provided by operating activitiesloss adjusted for the yearnon-cash items of 2015. In addition there were decreases$6.4 million, a $5.2 million increase in accounts receivable net of allowance, of $5,916,000, fixed assets of $424,000 after depreciation, license agreements of $157,000,related to the 39% increase in total revenue, and a $3.1 million increase in inventory, offset by a $2.6 million increase in accounts payable and accrued liabilitiesliabilities.
Acquisition. In November 2018, we acquired all of $2,145,000,the equity interests of opTricon for a purchase price of $5.5 million in cash, of which (a) $100,000 was deposited in escrow for a potential purchase price adjustment based on the working capital of opTricon and increases(b) $750,000 was deposited in non-current deferred tax assetescrow to satisfy certain claims that we may make against the sellers in accordance with the terms of $1,436,000 andthe related purchase agreement. See “—Recent Developments” below.
Capital Expenditures. During the year ended December 31, 2018, we continued to invest 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 prepaidmanufacturing equipment and other current assets is due tofixed assets. Our capital expenditures totaled $1.5 million in 2018.
Effects of Inflation
Inflation and changing prices have not had a material effect on our business, and we do not expect that they will materially affect our business in the current portionforeseeable future. Any impact of additional licenses. Deferred tax asset decrease is related to recordinginflation on cost of a valuation allowance.revenue and operating expenses, especially employee compensation costs, may not be readily recoverable in the price of our product offerings.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934.
Recent Developments
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 | % |
| | | | | | | | | | | | | | | | | |
On November 5, 2018, we consummated an underwritten registered public offering of 2,726,000 shares of our Common Stock, including the underwriter's entire overallotment option of 355,565 shares, at a public offering price of $6.75 per share, for gross proceeds of approximately $18.4 million. 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 activitiesproceeds, after underwriting discounts 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 $60,000commissions, 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. estimated expenses, were approximately $16.5 million.
Fixed Asset CommitmentsOn November 6, 2018, we acquired opTricon pursuant to a share purchase agreement dated October 17, 2018. Under the terms of the purchase agreement, we acquired all of the outstanding equity shares of opTricon for a purchase price of $5.5 million in cash, of which (a) $100,000 was deposited in escrow for a potential purchase price adjustment based on the working capital of opTricon and (b) $750,000 was deposited in escrow to satisfy certain claims that we may make against the sellers in accordance with the terms of the purchase agreement.
In accordance with the purchase agreement, each of Lutz Melchior and Volker Plickert, the founders of opTricon, entered into a managing director services agreement pursuant to which they agreed, among other things, to serve as employees of opTricon through November 5, 2021.
As of December 31, 2015, the Company had paid deposits on various pieces of equipment aggregating $30,918 opTricon, which is reflectedbased in Other Assets on the balance sheet. The CompanyBerlin, Germany, is further committeda developer and manufacturer of handheld analyzers for rapid diagnostic tests. Since 2015 we and opTricon have been parties to additional equipment-purchase obligationan agreement under which we have collaborated in developing our DPP Micro Reader, a handheld, battery-operated analyzer that uses an innovative image sensor to provide, when combined with our DPP tests, a quantitative interpretation of $31,000diagnostic results. opTricon will become a Chembio Center-of-Excellence for optical technology and will serve 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 strengthenEuropean headquarters. As part of its sexually transmitted diseaseongoing business, we are also building robust product pipelines in two new areas: fever disease and technology collaborations. As sexually transmitted disease productsopTricon will continue to make important contributions to our business, we believedevelop and manufacture handheld analyzers for original equipment manufacturers that do not compete with us. The DPP Micro Reader is included in most of our new fever disease portfolioproduct development initiatives 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 $440,000regulatory approvals and an increase of DPP® sales of more than $1.0 million (primarily assubmissions. As a result of salesthe acquisition, we secured global commercial rights to opTricon’s offerings and technology and will be able to produce DPP Micro Readers at a reduced cost, which we believe will enable us to promote DPP tests and DPP Micro Readers more actively across global markets. We cannot assure you that we will achieve the intended benefits from the opTricon acquisition.
Significant Accounting Policies and Critical Accounting Estimates
Our significant accounting policies are described in Note 3 – Significant Accounting Policies to the CDCaudited consolidated financial statements included herein. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for DPP® Malaria-Ebola and DPP® Ebola Assays), as comparedcalculating financial estimates. By their nature, these judgments are subject to the respective U.S. sales in 2014. Wean inherent degree of uncertainty. These judgments are optimistic about the increasing demand forbased on our productshistorical experience, terms of existing contracts, our evaluation of trends in the U.S.industry, information provided by our customers and information available from other outside sources, as appropriate. 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 continueconsider an accounting estimate to be a strong market for Chembio.critical if:
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:
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| The DPP® Fever Panel Assay which is funded byIt requires us to make assumptions about matters that were uncertain at the Paul G. Allen Ebola Program, is a point-of-care (POC) test fortime we were making the simultaneous detection of Malaria, Dengue Fever, Chikungunya, Zika, Ebola, Lassaestimate, and Marburg;
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·
•
| The DPP® Malaria-Ebola and DPP® Ebola Assays which were developed throughChanges in the estimate or different estimates that we could have selected would have had a research collaboration agreement with the Centers for Disease Control and Prevention (CDC), are currently being field tested in West Africa;
material impact on our financial condition or results of operations. |
· | The DPP® Dengue Fever Assays which have been funded by an undisclosed entity, are currently being field tested in Asia;
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| The DPP® Malaria Assay which has been funded by The Bill and Melinda Gates Foundation, is 10-times more sensitive than the current world-leading POC malaria test; and,
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· | The recently-announced DPP® Zika Assay, which has received initial funding from the Paul G. Allen Family Foundation.
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· | The recently-announced plans to collaborate with Bio-Manguinhos/Fiocruz to undertake development of POC Zika tests for the Ministry of Health in Brazil. |
As we are excited by eachThe following listing is not intended to be a comprehensive list of these programs, the DPP® Fever Panel Assay and the DPP® Zika Assay in particular highlight the power, versatility and broad applicabilityall of our DPP® technology, and we believe both of these products to be truly groundbreaking. Our DPP® Fever Panel Assay will beaccounting policies. In many cases, 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 feasibilityaccounting treatment 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 programparticular transaction 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 fundedspecifically dictated 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 reportedwith no need for management’s judgment in the financial statements and accompanying notes. Actual results could differtheir application. There are also areas in which management’s judgment in selecting any viable alternative would not produce a materially from those estimates.different result.
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 FASB ASC 605, 606, Revenue isfrom Contracts with Customers. Revenues from product sales are recognized when therethe customer obtains control of our product, which occurs at a point in time, typically upon tendering to the customer. We expense incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that it would have recognized is persuasive evidenceone year or less or the amount is immaterial. Freight and distribution activities on products are performed after the customer obtains control of the goods. We have made an arrangement, delivery has occurredaccounting policy election to account for shipping and handling activities that occur either when or services have been rendered,after goods are tendered to the sales price is determinable,customer as a fulfillment activity, and collectability is reasonably assured. Revenue typically is recognized at timetherefore recognizes freight and distribution expenses in Cost of shipment. Sales are recorded net of discounts, rebates and returns.Product Sales.
For certain contracts, we recognize revenue from R&D,research and development, 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 ofjudgement and estimates in recognizing 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 restricted stock and restricted stock unit awards are their fair value on the date of grant. 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,equity-based awards, 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 &and 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,and net realizable value, using the first-in, first-out method, (FIFO)or 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.$78,000.
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%0.6% 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.$74,000.
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. 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. We perform 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, macroeconomic conditions, industry and market conditions, our financial performance, reporting unit specific events and changes in our 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. Income Taxes –
Income taxes are accounted for under FASB ASC 740, Income Taxes, authoritative guidance, ("Guidance")which we refer to as the Guidance and 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 will be able to utilize its net operating loss carryforwards and has recorded a deferred tax asset. 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.
27
The above listing is not intended
Recently Issued Accounting Pronouncements
Refer to be a comprehensive list of all of our accounting policies. In many cases,Note 3 – Significant Accounting Policies to the accounting treatment of a particular transaction is specifically dictated by accounting principles, generally accepted in the United States of America, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any viable alternative would not produce a materially different result. See our audited consolidated financial statements and notes theretoincluded herein for a complete description of recent accounting standards which containwe have not yet been required to implement which may be applicable to our operations. Additionally, the significant accounting policies and other disclosures required by accounting principles generally accepted instandards that have been adopted during the United States of America.year ended December 31, 2018 are described.
| 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.report. An index to thesethe Consolidated Financial Statements and schedules is also included on page F-1 of this Annual Report on Form 10-K.report.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not Applicable.
| ITEM 9A. | CONTROLS AND PROCEDURESControls and Procedures |
(a)Evaluation of Disclosure Controls and Procedures. Under the supervision andProcedures
Our management, with the participation of our senior management, consisting of our chief executive officerChief Executive Officer and our chief financial officer, we conducted an evaluation ofChief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, (asas defined by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2018. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018 at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(e)13a-15(f) and 15d-15(e)15d-15(f) promulgated under the Securities Exchange Act of 1934 as amended (the "Exchange Act"), as of the end of the period covereda process designed by, this report (the "Evaluation Date"). Based on that evaluation, the Company's management, including our chief executive officer and chief financial officer, concluded that as of the Evaluation Date our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our Exchange Act reports is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Our internal control over financial reporting is a process,or under the supervision of, our chiefprincipal executive officer and chiefprincipal financial officer, designedofficers and effected by the board of directors, management and other personnel 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 includeand includes those policies and procedures that:
•
| a. | Pertainpertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;company; |
•
| b. | Provideprovide 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 Companycompany are being made only in accordance with authorizations of management and directors of the Company;company; and |
•
| c. | Provideprovide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company'scompany'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. As a result, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on its assessment, our management believes that, as of December 31, 2018, our internal control over financial reporting was effective based on those criteria.
Previously Identified Material Weaknesses in Internal Control Over Financial Reporting
None.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934 during the period covered by this Annual Report on Form 10-K that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Chembio Diagnostics, Inc.
Medford, New York
Opinion 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, 2018, 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, 2018, 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, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years then ended, and the related notes and our report dated March 18, 2019 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 express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered 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 we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, 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 in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determinedAlso, projections of any evaluation of effectiveness to be effective can provide only reasonable assurancefuture periods are subject to the risk that controls may become inadequate because of achieving their control objectives.changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework 2013. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 2015.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the Company's last fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
Not applicable.Melville, NY
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive OfficersThe information required in response to this Item 10 is incorporated herein by reference to our Definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
John J. Sperzel (52), President, Chief Executive Officer and Director. Mr. Sperzel was appointed Chief Executive Officer and President of Chembio Diagnostics, Inc. and a member of our Board in March 2014. Prior to joining the Company, Mr. Sperzel, was the President and CEO of International Technidyne Corporation (ITC) from September 2011 to December 2013. Mr. Sperzel served as President at Axis-Shield from September 2004 to September 2011. He also has held senior leadership positions at Bayer Diagnostics (Siemens Dx), Instrumentation Laboratory, and Boehringer Mannheim Diagnostics (Roche Dx). Mr. Sperzel graduated from Plymouth State College in New Hampshire, with a B.S. in Business Administration/Management. He currently serves on the board of directors of Diadexus, Inc., a company which the common stock is registered under the Securities Exchange Act of 1934, and as an advisor to the board of the Diagnostic Marketing Association, and was the president of the board of that Association in 2007. Mr. Sperzel's knowledge of, and experience in, the Company's specific business and its industry sector, together with the continuing current knowledge that he is accumulating about the Company in his position as CEO of the Company, made him an excellent candidate for serving on the Board.
Richard J. Larkin (59), Chief Financial Officer. Mr. Larkin was appointed as Chief Financial Officer of Chembio Diagnostics, Inc. upon consummation of the merger in 2004. Mr. Larkin oversees our financial activities and information systems. Mr. Larkin has been the Chief Financial Officer of Chembio Diagnostic Systems Inc. since September 2003. Prior to joining Chembio Diagnostic Systems Inc., Mr. Larkin served as CFO at Visual Technology Group ("VTG") from May 2000 to September 2003, and also led VTG's consultancy program that provided hands-on expertise in all aspects of financial service, including the initial assessment of client financial reporting requirements within an Enterprise Resource Planning (Manufacturing) environment through training and implementation. Prior to joining VTG, he served as CFO at Protex International Corporation from May 1987 to January 2000. Mr. Larkin holds a BBA in Accounting from Dowling College and is a member of the American Institute of Certified Public Accountants.
Javan Esfandiari (49), Chief Science and Technology Officer. Mr. Esfandiari joined Chembio Diagnostic Systems, Inc, in 2000. Mr. Esfandiari co-founded, and became a co-owner of Sinovus Biotech AB where he served as Director of Research and Development concerning lateral flow technology until Chembio Diagnostic Systems Inc. acquired Sinovus Biotech AB in 2000. From 1993 to 1997, Mr. Esfandiari was Director of Research and Development with On-Site Biotech/National Veterinary Institute, Uppsala, Sweden, which was working in collaboration with Sinovus Biotech AB on development of veterinary lateral flow technology. Mr. Esfandiari received his B.Sc. in Clinical Chemistry and his M. Sc. in Molecular Biology from Lund University, Sweden. He has published articles in various veterinary journals and has co-authored articles on tuberculosis serology with Dr. Lyashchenko.
Sharon Klugewicz (48), Chief Operating Officer. Prior to joining the Company in September 2012, Ms. Klugewicz, served as Senior Vice President, Scientific & Laboratory Services at Pall Corporation (NYSE:PLL), a world leader in filtration, separation and purification technologies. Prior to that, Ms. Klugewicz held a number of positions at Pall Corporation over her 20-year tenure there, including in the Pall Life Sciences Division, in Marketing Product Management, and Field Technical Services, which included a position as Senior Vice President, Global Quality Operations. Ms. Klugewicz holds an M.S. in Biochemistry from Adelphi University and a B.S. in Neurobiology from Stony Brook University.
Dr. Gary Meller M.D. (65), Director. Dr. Meller was elected to our Board of Directors on March 15, 2005, and currently serves on the Board's Audit, and Nominating And Corporate Governance Committees, including as Chairman of the Audit Committee. Dr. Meller has been the president of CommSense Inc., a healthcare business development company, since 2001. CommSense Inc. works with clients in Europe, Asia, North America, and the Middle East on medical information technology, medical records, pharmaceutical product development and financing, health services operations and strategy, and new product and new market development. From 1999 until 2001 Dr. Meller was the executive vice president, North America, of NextEd Ltd., a leading internet educational services company in the Asia Pacific region. Dr. Meller also was a limited partner and a member of the Advisory Board of Crestview Capital Master LLC, which was our largest shareholder. Dr. Meller is a graduate of the University of New Mexico School of Medicine and has an MBA from the Harvard Business School. Dr. Meller's experience in the medical field both domestic and foreign (especially his experience with CommSense Inc.) as well as his financing experience make him an excellent candidate for serving on the board.
Kathy Davis (59), Director and Chair of the Board. Ms. Davis was elected to the Board in May 2007, and was elected in March 2014 to serve as Chair of the Board. She currently serves on the Board's Audit, Compensation, and Nominating And Corporate Governance Committees, including as Chair of the Nominating And Corporate Governance Committee. In 2014, Ms. Davis also served on the Board's CEO Search Committee, and in 2013 she served on the Board's Special Committee for handling certain strategic opportunities. Since January 2007, Ms. Davis has been the owner of Davis Design Group LLC, a company that provides analytical and visual tools for public policy design. As of January 1 2016 Ms. Davis serves as Systems Advisor to the Mayor of Indianapolis. Previously, from February 2005 to December 2006, she served as the Chief Executive Officer of Global Access Point, a start-up company with products for data transport, data processing, and data storage network and hub facilities. From October 2003 to January 2005, Ms. Davis was Lieutenant Governor of the State of Indiana, and from January 2000 to October 2003 was Controller of the City of Indianapolis. From 1989 to 2003, Ms. Davis held leadership positions with agencies and programs in the State of Indiana including State Budget Director, Secretary of Family & Social Services Administration, and Deputy Commissioner of Transportation. From 1982 to 1989 Ms. Davis held increasingly senior positions with Cummins Engine, where she managed purchasing, manufacturing, engineering, and assembly of certain engine product lines. Ms. Davis also led the startup of and initial investments by a $50 million Indiana state technology fund, serves on the not-for-profit boards of Noble of Indiana, Lumina Foundation for Education, Indianapolis Foundation, Central Indiana Community Foundation, Western Governor's University Indiana, and Indiana University School of Public and Environmental Affairs. She holds a Bachelor of Science in Mechanical Engineering from the Massachusetts Institute of Technology and an MBA from Harvard Business School. Ms. Davis has varied experience in business, political and financial areas that made her an excellent candidate for serving on the Board.
Dr. Barbara DeBuono M.D., M.P.H., (60), Director. Dr. DeBuono, who was elected to the Company's Board of Directors in June 2011, currently serves on the Board's Compensation and Nominating And Corporate Governance Committees, including as Chair of the Compensation Committee. Ms. DeBuono is a renowned expert in public health innovation, health policy, education and research. She currently serves as a consultant to both public and private entities involved in healthcare, healthcare policy and healthcare products. From May 2011 to January 31,2012., Dr. DeBuono served as President and CEO of ORBIS International, which is dedicated to saving sight and eliminating avoidable blindness worldwide with headquarters in New York City. Previously, from 2009-2011, Dr. DeBuono was Chief Medical Officer, Partner and Global Director of Health and Social Marketing at Porter Novelli, and from 2000-2008 she was Executive Director, Public Health and Government at Pfizer Inc. Dr. DeBuono has served as Commissioner of Health for the state of New York and as Director of Health in Rhode Island and she was honored by the CDC Foundation in 2005 as one of five Public Health Heroes nationwide. She serves as adjunct professor at The George Washington University School of Public Health, and is a co-founder of The MAIA Foundation, a charity dedicated to women's health in sub-Saharan Africa. A Fellow of the American College of Physicians, Dr. DeBuono received her B.A. from the University of Rochester, her M.D. from the University of Rochester School of Medicine, and a Masters in Public Health (M.P.H.) from Harvard University School of Public Health. Dr. DeBuono's experience in and knowledge of, both domestic and international, public health services, public health innovations, and the medical field make her an excellent candidate for serving on the board.
Dr. Peter Kissinger, Ph.D. (71), Director. Dr. Kissinger, who was elected to the Company's Board of Directors in June 2011, currently serves on the Company's Audit, and Compensation Committees. Dr. Kissinger is a scientist, entrepreneur and academic, with a multi-faceted career in biotechnology and biomedical technologies. He is the founder of Bioanalytical Systems, Inc. (NASDAQ: BASI), which he led from 1974-2007, and is Professor of Chemistry at Purdue University, West Lafayette, Indiana. Dr. Kissinger's academic research has involved the study of modern liquid chromatography techniques, and in vivo methodology for drug metabolism and the neurosciences. Dr. Kissinger has published more than 240 scientific papers and is a Fellow of the American Association of Pharmaceutical Scientists and the American Association for the Advancement of Science. In 2005, he became the Chairman of Prosolia, which markets mass spectrometry innovations for life science, industrial and homeland security applications. In 2007, he and Candice Kissinger founded Phlebotics, Inc., a medical device company focused on diagnostic information for intensive care medicine. He is a columnist for the trade publication Drug Discovery News. Dr. Kissinger received a B.S. in Chemistry from Union College, Schenectady, N.Y. and a Ph.D. in Analytical Chemistry from the University of North Carolina in Chapel Hill. Dr. Kissinger has knowledge of and experience in biotechnology and biomedical technologies as well as publicly-traded companies, all of which make him an excellent candidate for serving on the board.
Section 16(a) Beneficial Ownership Reporting Compliances
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's directors, executive officers and beneficial owners of more than 10% of the Company's common stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. The Company believes that during the year ended December 31, 2015, each person who was an officer, director and beneficial owner of more than 10% of the Company's common stock complied with all Section 16(a) filing requirements.
Code of Ethics
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, controller, and persons performing similar functions. A copy of the Company's code of ethics is available on the Company's website at www.chembio.com.
Identification of Audit Committee; Audit Committee Financial Expert
The Company's board of directors has established an audit committee. Katherine L. Davis, Dr. Pete Kissinger and Dr. Gary Meller each serves on the audit committee, with Dr. Meller serving as chairman. The Company's board of directors has determined that, based on his past experience, Dr. Meller is an audit committee financial expert and is independent.
| ITEM 11. | EXECUTIVE COMPENSATION |
The following table summarizes all compensation recordedinformation required in response to this Item 11 is incorporated herein by reference to our Definitive Proxy Statement to be filed with the Company in eachSEC pursuant to Regulation 14A of the last two completed fiscal years for our principal executive officer and our two most highly compensated executive officers otherExchange Act not later than our principal executive officer whose annual compensation exceeded $100,000.
| Name / | | | Salary1 | | Bonus2 | | Stock | | Option Awards3 | | All Other Compensation5 | | Total | |
| Principal | | | ($) | | ($) | | Awards | | ($) | | ($) | | ($) | |
| Position | Year | | | | | | ($) | | | | | | | |
John J. Sperzel4 | 2015 | | $ | 375,000 | | $ | 70,000 | | $ | - | | $ | - | | $ | - | | $ | 445,000 | |
| CEO | 2014 | | $ | 298,558 | | $ | - | | $ | - | | $ | 669,625 | | $ | - | | $ | 968,183 | |
| | | | | | | | | | | | | | | | | | | | | |
| Javan Esfandiari | 2015 | | $ | 304,130 | | $ | 60,000 | | $ | - | | $ | - | | $ | 10,520 | | $ | 374,650 | |
| CSTO | 2014 | | $ | 315,000 | | $ | 90,000 | | $ | - | | $ | - | | $ | 9,825 | | $ | 414,825 | |
| | | | | | | | | | | | | | | | | | | | | |
| Sharon Klugewicz | 2015 | | $ | 259,000 | | $ | 40,000 | | $ | - | | $ | - | | $ | 5,180 | | $ | 304,180 | |
| COO | 2014 | | $ | 259,616 | | $ | 75,000 | | $ | - | | $ | - | | $ | 4,182 | | $ | 338,798 | |
| | | | | | | | | | | | | | | | | | | | | |
1 Salary is total base salary. John Sperzel's 2014 salary reflects his base pay from commencement of his employment on March 13, 2014 until120 days after the end of 2014.
2 Bonuses earned in 2015 and 2014 were partially based on reaching certain objectives, which included revenue dollar levels and operating profit levels. Additional amounts earned were discretionary.
3 The estimated fair value of any option or common stock granted was determined in accordance with ASC 718, "Stock-Based Payment".
4 Mr. Sperzel also serves as a director on the Company's board of directors. Mr. Sperzel does not receive any compensation for this director role.
5 Other compensation includes an employer match to 401(K) contributions and car allowances where applicable.
Employment Agreements
Mr. Sperzel. Effective March 13, 2014 (the "Effective Date"), the Company entered into an Employment Agreement with John J. Sperzel III to serve as the Company's CEO for a term of three years. Mr. Sperzel's annual base salary is $375,000, with the possibility of a discretionary, performance-based annual cash bonus of up to 40% of his base salary. The Employment Agreement also provides for a grant of 250,000 options to purchase shares of the Company's common stock, 43,132 of which will be incentive stock options under the Company's 2008 Stock Incentive Plan (the "Plan"), and 206,868 of which will be non-qualified stock options. The options will become exercisable at the rate of 50,000 shares per year for each of the first through the fifth anniversary of the Effective Date. In the event Mr. Sperzel's employment is terminated by reason of disability or for "cause," as defined in the Employment Agreement, all compensation, including his base salary, his right to receive a performance bonus, and the vesting of any unvested options, will cease as of his termination date, and Mr. Sperzel will receive no severance benefits. If the Company terminates Mr. Sperzel's employment without cause or Mr. Sperzel terminates his employment for a reasonable basis, as defined in the Employment Agreement (which includes involuntary termination within a six-month period upon a "Change of Control"), then the Company will pay Mr. Sperzel his base salary for a period of six months as severance and all of his unvested stock options immediately shall become vested. The Employment Agreement also contains provisions prohibiting Mr. Sperzel from (i) soliciting the Company's employees for a period of 24 months following his termination, (ii) soliciting the Company's customers, agents, or other sources of distribution of the Company's business for a period of twelve months following his termination, and (iii) except where termination is involuntary upon a "Change in Control," engaging or participating in any business that directly competes with the business activities of the Company in any market in which the Company is in business or plans to do business during the period in which he is entitled to severance, or for a period of six months if he is not entitled to severance payments under the Employment Agreement. The foregoing description of the Employment Agreement is qualified in its entirety by reference to the full text of the Employment Agreement.
Mr. Esfandiari. The Company entered into an employment agreement effective March 5, 2013 (the "Employment Agreement"), with Mr. Esfandiari to continue as the Company's Chief Scientific and Technology Officer for an additional term of three years through March 5, 2016. The Company and Mr. Esfandiari currently are discussing terms for renewal of his employment agreement. Mr. Esfandiaris's salary under the Employment Agreement is $304,500 for the year ended March 5, 2016, and he is eligible for a performance-based bonus of up to 50% of his base salary for each year, which is in the same proportions as described below under "Executive Bonus Plan". The Company also granted Mr. Esfandiari, pursuant to the Company's 2008 Stock Incentive Plan, incentive stock options to purchase 30,000 shares of the Company's common stock. The price per share of these options is equal to the fair market value of the Company's common stock as of the close of the market on March 5, 2013, which is the trading date on which the Agreement was entered into. Of these stock options, options to purchase 10,000 shares vest on each of the first three anniversaries of the effective date of the Employment Agreement. Mr. Esfandiari is eligible to participate in any profit sharing, stock option, retirement plan, medical and/or hospitalization plan, and/or other benefit plans except for disability and life insurance that the Company may from time to time place in effect for the Company's executives during the term of Mr. Esfandiari's employment agreement. If Mr. Esfandiari's employment agreement is terminated by the Company without cause, or if Mr. Esfandiari terminates his employment agreement for a reasonable basis, as defined in the Employment Agreement, including within 12 months of a change in control, the Company is required to pay as severance Mr. Esfandiari's salary for twelve months.
Ms. Klugewicz. The Company entered into an employment agreement dated May 22, 2015 with Ms. Klugewicz (the "Employment Agreement"), effective May 22, 2015 (the "Effective Date"). The Agreement provides that she will serve as the Company's COO for a term of two years. Ms. Klugewicz will receive an annual salary of $265,000, with the option of a discretionary, performance-based annual cash bonus of up to 37.5% of her base salary. In the event Ms. Klugewicz's employment is terminated by reason of disability or for "cause", as defined in the Employment Agreement, all compensation including her base salary, her right to receive a performance bonus, and the vesting of any unvested options, will cease as of her termination date, and Ms. Klugewicz will receive no severance benefits. If the Company terminates Ms. Klugewicz's employment without cause or Ms. Klugewicz terminates her employment for a reasonable basis, as defined in the Employment Agreement (which definition includes involuntary termination within a six-month period upon a "Change of Control"), then the Company will pay Ms. Klugewicz her base salary for a period of six months as severance, and all her unvested stock options shall immediately become vested. The Employment Agreement also contains provisions prohibiting Ms. Klugewicz from (i) soliciting the Company's employees for a period of twenty-four months following her termination, (ii) soliciting the Company's customers, agents, or other sources of distribution of the Company's business for a period of twelve months following her termination, and (iii) for a period of twelve months following termination of this Agreement, except where termination is involuntary upon a "Change in Control," engaging or participating in any business that directly competes with the business activities of the Company in any market in which the Company is in business or plans to do business. The foregoing description of the Employment Agreement is qualified in its entirety by reference to the full text of the Employment Agreement.
None of the other officers of the Company has an employment contract with the Company.
Executive Bonus Plan
The Company has established a bonus plan for its executives who do not have a contract. For the fiscal year ended December 31, 2015, there were four executives eligible forcovered by this bonus plan. Each executive can earn up to 25% of that executive's salary in the form of a cash bonus. The Compensation Committee determined that 80% of the executive's bonus will be quantitative factors, basedAnnual Report on the budget, and the other 20%, which will be based on other factors, will be discretionary. For 2015, the quantitative 80% portion of the plan called for attaining certain revenue goals, and for attaining certain operating profit goals.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2015
| | Option Awards | Stock Awards | | |
Name | | Number of Securities Underlying Unexercised Options Exercisable (#) | | Number of Securities Underlying Unexercised Options Unexercisable
(#) | | Option Exercise Price
($) | | Option Expiration Date | Option Vesting Date | Number of Shares of Stock That Have Not Vested
(#) | Market Value of Shares of Stock That Have Not Vested
($) | | Foot-
note |
| John J. Sperzel | | 25,000 | | | | 3.4163 | | 3/21/2021 | 3/13/2015 | | | | 5 |
| | 25,000 | | | | 3.4163 | | 3/21/2021 | 3/13/2015 | | | | 2 |
| | | | 18,132 | | 3.4163 | | 3/21/2021 | 3/13/2016 | | | | 5 |
| | | | 31,868 | | 3.4163 | | 3/21/2021 | 3/13/2016 | | | | 2 |
| | | | 50,000 | | 3.4163 | | 3/21/2021 | 3/13/2017 | | | | 2 |
| | | | 50,000 | | 3.4163 | | 3/21/2021 | 3/13/2018 | | | | 2 |
| | | | 50,000 | | 3.4163 | | 3/21/2021 | 3/13/2019 | | | | 2 |
| | | | | | | | | | | | | |
| Javan Esfandiari | | 10,000 | | | | 5.44 | | 3/5/2018 | 3/5/2014 | | | | 1 |
| | 10,000 | | | | 5.44 | | 3/5/2018 | 3/5/2015 | | | | 1 |
| | | | 10,000 | | 5.44 | | 3/5/2018 | 3/5/2016 | | | | 1 |
| | 4,765 | | | | 5.56 | | 2/26/2018 | 2/26/2013 | | | | 4 |
| | 7,969 | | | | 4.00 | | 2/16/2017 | 2/16/2012 | | | | 3 |
| | 12,500 | | | | 2.16 | | 3/4/2015 | 3/5/2013 | | | | 1 |
| | 12,500 | | | | 2.16 | | 3/4/2015 | 3/5/2012 | | | | 1 |
| | 12,500 | | | | 2.16 | | 3/4/2015 | 3/5/2010 | | | | 1 |
| | | | | | | | | | | | | |
| Sharon Klugewicz | | 2,500 | | | | 4.50 | | 5/22/2018 | 5/22/2014 | | | | 1 |
| | 2,500 | | | | 4.50 | | 5/22/2018 | 5/22/2015 | | | | 1 |
| | 630 | | | | 5.56 | | 2/26/2018 | 2/26/2013 | | | | 4 |
| | 12,000 | | | | 4.45 | | 9/4/2017 | 9/4/2013 | | | | 5 |
| | 12,000 | | | | 4.45 | | 9/4/2017 | 9/4/2014 | | | | 5 |
| | 12,000 | | | | 4.45 | | 9/4/2017 | 9/4/2015 | | | | 5 |
1 Options issued in connection with an employment contract and under the 2008 Stock Incentive Plan. |
2 Options issued in connection with the start of employment with the Company and not under a Plan. |
3 On February 16, 2012, the Company determined to grant on February 16, 2012, to certain employees of the Company, options to purchase an aggregate of 203,125 shares of the Company's common stock. The exercise price for these options was the last traded market price for the Company's common stock on February 16, 2012, which was $4.00 per share. The options become exercisable on the effective date of the grant. Each option granted will expire and terminate, if not exercised sooner, upon the earlier to occur of (a) 30 days after termination of the employee's employment with the Company or (b) the fifth anniversary of the effective date of grant.
|
4 On February 26, 2013, the Company determined to grant on February 26, 2013 to certain employees of the Company, options to purchase an aggregate of 16,360 shares of the Company's common stock. The exercise price for these options was the last traded market price for the Company's common stock on February 26, 2013, which was $5.56 per share. The options become exercisable on the effective date of the grant. Each option granted will expire and terminate, if not exercised sooner, upon the earlier to occur of (a) 30 days after termination of the employee's employment with the Company or (b) the fifth anniversary of the effective date of grant.
|
5 Options issued in connection with the start of employment with the Company and under the 2008 Stock Incentive Plan. |
Director Compensation
Effective January 1, 2015, all non-employee directors are paid $25,000 annual fee in semi-annual payments. In addition, once every five years, on the date of the annual meeting of shareholders at which a director is elected or re-elected (every 5 years), that director receives stock options to acquire, subject to vesting as described below, 46,875 shares of the Company's common stock, with an exercise price equal to the market price on the date of the grant. Stock options to acquire 9,375 shares become exercisable on the date of grant, and options to acquire an additional 9,375 shares become exercisable on the date of each of the four succeeding annual meetings of shareholders if and to the extent that the non-employee director is reelected as a director at each such annual meeting. [These options grants also are described in note 1 below.] Beginning in April 2014, the non-employee board chair was paid a monthly fee of $6,500, and as of January 1, 2015, this monthly fee was adjusted to $4,167. The audit committee chair is paid an annual fee of $2,500, paid semi-annually. In addition, the non-employee directors are paid $1,000 for each board of directors' meeting attended, and paid $500 for each telephonic board of directors meeting. The non-employee directors who are members of a committee of the board of directors are paid $500 for each committee meeting attended, or $750 for each committee meeting attended if that non-employee director is the committee chair. Directors also may be paid for serving on ad hoc committees of the Board.
DIRECTOR COMPENSATION
| Name | | Fees Earned or Paid in Cash
($) 1 | | | Option Awards
($) 2 | | | Total
($) | |
| Katherine L. Davis | | $ | 82,500 | | | $ | - | | | $ | 82,500 | |
| | | | | | | | | | | | | |
| Barbara DeBuono | | | 30,250 | | | | - | | | | 30,250 | |
| | | | | | | | | | | | | |
| Pete Kissinger | | | 48,500 | | | | - | | | | 48,500 | |
| | | | | | | | | | | | | |
| Gary Meller | | | 58,500 | | | | - | | | | 58,500 | |
1 Fees earned or paid in cash represents a yearly fee and fees for meeting expenses: (a) Ms. Davis received a $25,000 annual fee as a member of the board of directors, a $4,167 monthly fee as chair aggregating $50,000 and $7,500 in meeting fees earned during 2015; (b) Dr. DeBuono received a $25,000 annual fee as a member of the board of directors and 5,250 in meeting fees; (c) Dr. Kissinger received a $25,000 annual fee as a member of the board of directors, $18,000 in fees as a member of a Special Committee and $5,500 in meeting fees; (d) Dr. Meller received a $25,000 annual fee as a member of the board of directors, $2,500 in fees as chairperson of the Audit Committee, $24,000 in fees as a member of a Special Committee and $7,000 in meeting fees.
2 Each non-employee member of the board of directors is granted, once every five years, options to purchase 46,875 shares of the company's common stock with an exercise price equal to the market price on the date of the grant as part of annual non-employee board compensation. One-fifth of these options are exercisable on the date of grant, one-fifth become exercisable on the first anniversary of the date of grant, and additional one-fifths become exercisable on the second through fourth anniversaries of the date of grant. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model.
Compensation Committee Interlocks and Insider Participation
No executive officer of the Company served as a member of the Board of any other public company during the year ended December 31, 2015, except for Mr. Sperzel who serves on the Board of Directors of Diadexus, Inc. No member of the Compensation Committee served as an executive officer of any other public company during the year ended December 31, 2015. No interlocking relationship exists between the members of our Compensation Committee and the Board or compensation committee of any other company. As of March 1, 2015, the members of the Compensation Committee were Dr. Barbara DeBuono (Chairman), Katherine Davis, and Dr. Peter Kissinger, each of whom is deemed by the Board of Directors to be independent.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth certain information regarding the beneficial ownership ofrequired in response to this Item 12 is incorporated herein by reference to our common stock by each person or entity known by usDefinitive Proxy Statement to be filed with the beneficial owner of more than 5%SEC pursuant to Regulation 14A of the outstanding shares of common stock, each of our directors, each of our "named executive officers", and all of our directors and executive officers as a group as of March 1, 2016.
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | | Percent of Class |
John J. Sperzel (1) 3661 Horseblock Road Medford, NY 11763 | 100,000 | | 1.03% |
| | | | |
Esfandiari, Javan (2) 3661 Horseblock Road Medford, NY 11763 | 134,844 | | 1.39% |
| | | | |
Larkin, Richard (3) 3661 Horseblock Road Medford, NY 11763 | 66,514 | | .69% |
| | | | |
Ippolito, Tom (4) 3661 Horseblock Road Medford, NY 11763 | 38,916 | | .40% |
| | | | |
Steele, Michael (5) 3661 Horseblock Road Medford, NY 11763 | 36,785 | | .38% |
| | | | |
Lambotte, Paul (6) 3661 Horseblock Road Medford, NY 11763 | 51,630 | | .53% |
| | | | |
Klugewicz, Sharon (7) 3661 Horseblock Road Medford, NY 11763 | 12,000 | | .12% |
| | | | |
Meller, Gary (8) 3661 Horseblock Road Medford, NY 11763 | 123,750 | | 1.28% |
| | | | |
Davis, Katherine L. (9) 3661 Horseblock Road Medford, NY 11763 | 77,046 | | .80% |
| | | | |
DeBuono, Barbara (10) 3661 Horseblock Road Medford, NY 11763 | 46,188 | | .48% |
| | | | |
Kissinger, Peter (11) 3661 Horseblock Road Medford, NY 11763 | 50,629 | | .52% |
| | | | |
GROUP (12) | 738,302 | | 7.36% |
| | | | |
Wellington Management Company, LLP 280 Congress Street Boston, MA 02210 | 1,092,780 | | 11.35% |
| | | | |
Norman H. Pessin 366 Madison Ave, 14th Floor New York, NY 10017 | 884,087 | | 9.18% |
Beneficial ownership is determined in accordance with the Rule 13d-3(a) of the Securities Exchange Act of 1934, as amended, and generally includes voting or investment power with respect to securities. Except as subject to community property laws, where applicable, the person named above has sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by that person.
The beneficial ownership percent in the table is calculated with respect to the number of shares (9,628,248) of the Company's common stock outstanding as of March 1, 2016. With respect to each stockholder, the denominator is the sum of the number of common shares outstanding and the number, if any, of outstanding options included in that stockholder's beneficial ownership. Each stockholder's beneficial ownership is calculated as the number of shares of common stock owned plus the number of shares of common stock into which any preferred stock, warrants, options or other convertible securities owned by that stockholder can be converted within 60 days.
The term "named executive officer" refers to our principal executive officer, our two most highly compensated executive officers othernot later than the principal executive officer who were serving as executive officers at120 days after the end of 2015, and two additional individuals for whom disclosure would have been provided but for the fact that the individuals were not serving as executive officers of the Company at the end of 2015.
| (1) | Includes 100,000 shares issuable upon exercise of options exercisable within 60 days. Does not include 150,000 shares issuable upon exercise of options that are not exercisable within the next 60 days. |
| (2) | Includes 42,734 shares issuable upon exercise of options exercisable within 60 days. |
| (3) | Includes 23,217 shares issuable upon exercise of options exercisable within 60 days. |
| (4) | Includes 20,399 shares issuable upon exercise of options exercisable within 60 days. |
| (5) | Includes 36,785 shares issuable upon exercise of options exercisable within 60 days. |
| (6) | Includes 41,630 shares issuable upon exercise of options exercisable within 60 days. |
| (7) | Includes 12,000 shares issuable upon exercise of options exercisable within 60 days. Does not include 24,000 shares issuable upon exercise of options that are not exercisable within the next 60 days. |
| (8) | Includes 18,750 shares issuable upon exercise of options exercisable within 60 days. Does not include 28,125 shares issuable upon exercise of options that are not exercisable within the next 60 days. |
| (9) | Includes 18,750 shares issuable upon exercise of options exercisable within 60 days. Does not include 28,125 shares issuable upon exercise of options that are not exercisable within the next 60 days. |
| (10) | Includes 48,829 shares issuable upon exercise of options exercisable within 60 days. |
| (11) | Includes 45,188 shares issuable upon exercise of options exercisable within 60 days. |
| (12) | Includes footnotes (1)-(10). |
fiscal year covered by this Annual Report on Form 10-K.
Equity Compensation Plan Information
| | | Combined Equity Compensation Plans - Information as of December 31, 2015 | |
| Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a) | |
| | | (a) | | (b) | | (c) | |
Equity compensation plans approved by security holders1 | | 649,478 | | | $ | 3.75 | | 753,455 | |
| Equity compensation plans not approved by security holders | | - | | | | - | | - | |
| Total | | 649,478 | | | $ | 3.75 | | 753,455 | |
1 The "Number of Securities to be Issued Upon Exercise of Outstanding Warrants and Rights" represents 312,860 from the 2008 Stock Incentive Plan, 129,750 under the 2014 Stock Incentive Plan and 206,868 issued outside of the Plans. The 2008 Stock Incentive Plan was increased by 125,000 units at the Annual Stockholder meeting held September 23, 2011. The "Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans" represents 83,205 from the 2008 Stock Incentive Plan and 670,250 under the 2014 Stock Incentive Plan.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The executive officersinformation required in response to this Item 13 is incorporated herein by reference to our Definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Company are as follows: John J. Sperzel, president, chief executive officer and memberExchange Act not later than 120 days after the end of the board of directors of the Company, Sharon Klugewicz, chief operating officer, Richard J. Larkin, chief financial officer of the Company, and Javan Esfandiari, chief science and technology officer of the Company.
The Company entered into an employment agreement effective March 5, 2013, with Mr. Esfandiari to continue as the Company's Chief Scientific and Technology Officer for an additional term of three years through March 5, 2016. The Company also entered into an employment agreement effective May 22, 2015, with Ms. Klugewicz to serve as Chief Operating Officer for a term of two years. On March 13, 2014, Mr. Siebert, the former Chief Executive Officer, retired from the Company and entered into a six-month Consulting Agreement with the Company. On March 13, 2014, the Company entered into an employment agreement (the "Employment Agreement") with John J. Sperzel III to serve as its Chief Executive Officer beginningfiscal year covered by this Annual Report on March 13, 2014 for a term of three years. See Item 11 for additional information.
Director Independence
Our common stock trades on the NASDAQ. Accordingly, we are subject to the corporate the governance standards of NASDAQ, which require, among other things, that the majority of the board of directors be independent. We define an "independent" director in accordance with the NASDAQ Global Market's requirements for independent directors. Under this definition, we have determined that each of Katherine Davis, Barbara DeBuono, Peter Kissinger, and Gary Meller currently qualify as independent directors. We do not list this "independent" definition on our internet website.Form 10-K.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit Fees
For the years ended December 31, 2015 and 2014 the Company engaged BDO USA, LLP as its independent accounting firmThe information required in response to perform an audit of the Company's annual financial statements included on Form 10-K, including reviews of the quarterly financial statements and assistance with and review of documentsthis Item 14 is incorporated herein by reference to our Definitive Proxy Statement to be filed with the SEC for $161,000 and $128,000 respectively in fees.
Audit-Related Fees
For the years ended December 31, 2015 and 2014, the Company's independent accounting firm, BDO USA, LLP, did not provide the Company with any assurance and related services reasonably relatedpursuant to the performanceRegulation 14A of the audit or reviewExchange Act not later than 120 days after the end of the Company's financial statements that are not reported above under "Audit Fees."
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 thefiscal 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 performedcovered 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.
35
this Annual Report on Form 10-K.
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) See “Item 8. Financial Statements and Supplementary Data – Index to Consolidated Financial Statements” above.
EXHIBITS INDEX(b) Exhibits
NumberExhibit No. | | Description |
|
| 3.1 | | |
| 3.2 | | |
4.110.1(a)* | | |
4.210.1(b)* | | |
4.310.2(a)* | | |
4.410.2(b)* | | |
4.510.3* | | Rights Agreement, dated |
4.610.4* | | Form of Warrant (to be filed by amendment) |
4.7 | | Rights Agreement, dated March 8, 2016 (14) |
4.8 | | Form of Warrant (to be filed by amendment) |
10.1* | | |
10.2*10.5* | | |
10.3*10.6* | | |
10.310.7(a)* | | HIV Barrel License, Marketing and Distribution |
10.410.7(b)* | | HIV Cassette License, Marketing |
10.510.8* | | Non-Exclusive License, Marketing |
10.6 | | Joint HIV Barrel Product Commercialization Agreement, dated as of September 29, 2006, between the Registrant and StatSure. (10) |
10.8 | | Secured Revolving Demand Note, dated as of April 30, 2013,Robert Passas, with respect to employment by and among the Registrant, Chembio Diagnostics Systems, Inc. and HSBC Bank, NA (11) |
10.910.9(a) | | Loan and SecurityLease Agreement, dated as of April 30, 2013, byFebruary 15, 2017, between Horseblock Associates and among the Registrant, Chembio Diagnostics, Inc. with respect to 3661 Horseblock Road, Medford, New York, as amended |
| 10.9(b) | | Agreement of Sublease dated February 5, 2019 between Chembio Diagnostic Systems Inc., as sublessor, and HSBC Bank, NA (11)Reliance Communications of New Jersey, LLC, as sublessee, with respect to 3661 Horseblock Road, Medford, New York, as amended |
| 10.10 | | 2015 Omnibus |
| 10.11 | | |
| 10.12 | | |
| 10.13 | | |
| 14.1 | | |
2121.1 | | |
| 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 | | Incorporated by reference to the Registrant's registration statement on Form SB-2 (File No. 333-85787) filed with the Commission on August 23, 1999 and the Registrant's Forms 8-K filed on May 14, 2004, December 20, 2007 and April 18, 2008. |
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. |
8 | | Incorporated by reference to the Registrant's Annual Report on Form 10-K filed with the Commission on March 7, 2013. |
9 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on June 17, 2015. |
10 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on October 5, 2006. |
11 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 8, 2013. |
12 | | Incorporated by reference to the Registrant's Annual Report on Form 10-K filed with the Commission on March 5, 2015. |
13 | | Incorporated by reference to the Registrant's Annual Report on Form 10-KSB filed with the Commission on March 30, 2006. |
| | |
(*) | | An asterisk (*) beside an exhibit number indicates the exhibit contains aIndicates management contract or compensatory plan or arrangement which is required to be identified in this report.plan. |
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: | By | /s/ John J. Sperzel | |
| | | John J. Sperzel III | |
| | | President, Chief Executive Officer and President
| |
| | | 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 Director
| | March 8, 201618, 2019 |
| John J. Sperzel | | Member Of The Board | | |
| III | | (Principal Executive Officer) | | |
| | | | | |
| | | | | |
| | | | | |
/s/ Richard J. LarkinNeil A. Goldman | | Executive Vice President and Chief Financial Officer (Principal Financial & | | March 8, 201618, 2019 |
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, 201618, 2019 |
| Katherine L. Davis | | | | |
| | | | | |
| | | | | |
| | | | | |
/s/ Peter T. KissingerGail S. Page
| | Director | | March 8, 201618, 2019 |
Peter T. KissingerGail S. Page
| | | | |
| | | | | |
| | | | | |
| | | | | |
/s/ Barbara DeBuonoMary Lake Polan | | Director | | March 8, 201618, 2019 |
Barbara DeBuonoMary Lake Polan | | | | |
| | | | |
| | | | |
| | | | |
/s/ John G. Potthoff
| | Director
| | March 18, 2019
|
John G. Potthoff
| | | | |
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, 20152018 and 20142017 | F-2 |
| | |
Statements of Operations for each of the years ended December 31, 20152018 and 20142017
| F-3 |
| |
Statements of Comprehensive Loss for the years ended December 31, 2018, and 2017
| F-4 |
| | |
Statements of Changes in Stockholders'Stockholders’ Equity for each of the years ended December 31, 20152018, and 20142017
| F-4F-5 |
| | |
Statements of Cash Flows for each of the years ended December 31, 20152018, and 20142017
| F-5F-6 |
| | |
| Notes to Consolidated Financial Statements | F-6F-7 - F-19F-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, 20152018 and 2014 and2017, the related consolidated statements of operations, comprehensive loss, changes in stockholders'stockholders’ equity, and cash flows for the years then ended. Theseended, and the related notes (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, 2018 and 2017, and the results of their operations and their cash flows for each of the years then ended, 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, 2018, 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 18, 2019 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
We have served as the Company's auditor since 2011.
Melville, New YorkNY
March 8, 201618, 2019
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, 2018 | | | December 31, 2017 | |
| CURRENT ASSETS: | | | | | | |
| Cash and cash equivalents | | $ | 12,524,551 | | | $ | 3,790,302 | |
| Accounts receivable, net of allowance for doubtful accounts of $42,000 at December 31, 2018 and 2017, respectively | | | 7,373,971
| | | | 2,085,340 | |
| Inventories, net | | | 7,851,222
| | | | 4,423,618 | |
| Prepaid expenses and other current assets | | | 702,010
| | | | 554,383 | |
| TOTAL CURRENT ASSETS | | | 28,451,754
| | | | 10,853,643 | |
| | | | | | | | | |
FIXED ASSETS, net of accumulated depreciation | | | 2,873,920
| | | | 1,909,232 | |
| | | | | | | | | |
| OTHER ASSETS: | | | | | | | | |
| Intangible assets, net | | | 3,884,831
| | | | 1,597,377 | |
| Goodwill | | | 4,983,127
| | | | 1,666,610 | |
| Deposits and other assets | | | 717,551
| | | | 589,159 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 40,911,183
| | | $ | 16,616,021 | |
| | | | | | | | | |
| - LIABILITIES AND STOCKHOLDERS’ EQUITY - | |
| CURRENT LIABILITIES: | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 5,888,681
| | | $ | 3,046,303 | |
| Deferred revenue | | | 422,905
| | | | 50,000 | |
Current portion of note payable
| | | 207,694 | | | | - | |
| TOTAL CURRENT LIABILITIES | | | 6,519,280
| | | | 3,096,303 | |
| | | | | | | | | |
| OTHER LIABILITIES: | | | | | | | | |
| Note payable | | | 171,821
| | | | 99,480 | |
| Deferred tax liability | | | 892,308
| | | | 341,042 | |
| | | | | | | | | |
| TOTAL LIABILITIES | | | 7,583,409
| | | | 3,536,825 | |
| | | | | | | | | |
| 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, 17,166,459 and 12,318,570 shares issued and outstanding at December 31, 2018 and 2017, respectively | | | 171,664
| | | | 123,185 | |
| Additional paid-in capital | | | 90,953,788
| | | | 62,821,288 | |
| Accumulated deficit | | | (57,909,874 | ) | | | (50,044,225 | ) |
| Accumulated other comprehensive income | | | 112,196
| | | | 178,948 | |
| TOTAL STOCKHOLDERS’ EQUITY | | | 33,327,774
| | | | 13,079,196 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 40,911,183
| | | $ | 16,616,021 | |
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, 2018 | | | December 31, 2017 | |
| REVENUES: | | | | | | |
| Net product sales | | $ | 26,741,020 | | | $ | 19,322,302 | |
| License and royalty revenue | | | 948,773
| | | | 741,534 | |
| R&D and grant revenue | | | 5,719,458
| | | | 3,951,591 | |
| TOTAL REVENUES | | | 33,409,251
| | | | 24,015,427 | |
| | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | |
| Cost of product sales | | | 21,427,243
| | | | 12,921,157 | |
| Research and development expenses | | | 8,526,256
| | | | 8,555,381 | |
| Selling, general and administrative expenses | | | 11,100,775
| | | | 8,963,363 | |
Acquisition costs
| | | 337,645 | | | | 58,076 | |
| | | | 41,391,919
| | | | 30,497,977 | |
| LOSS FROM OPERATIONS | | | (7,982,668 | ) | | | (6,482,550 | ) |
| | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | |
Interest income, net
| | | 49,498
| | | | 22,485 | |
| | | | | | | | | |
LOSS BEFORE INCOME TAXES (BENEFIT) PROVISION
| | | (7,933,170 | ) | | | (6,460,065 | ) |
| | | | | | | | | |
Income tax (benefit) provision
| | | (67,521 | ) | | | (88,305 | )
|
| | | | | | | | | |
| NET LOSS | | $ | (7,865,649 | ) | | $ | (6,371,760 | ) |
| | | | | | | | | |
| Basic loss per share | | $ | $ (0.55 | ) | | $ | (0.52 | ) |
| | | | | | | | | |
| Diluted loss per share | | $ | $ (0.55 | ) | | $ | (0.52 | ) |
| | | | | | | | | |
| Weighted average number of shares outstanding, basic | | | 14,432,505
| | | | 12,300,031 | |
| | | | | | | | | |
| Weighted average number of shares outstanding, diluted | | | 14,432,505
| | | | 12,300,031 | |
See accompanying notes to condensed consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARYSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF COMPREHENSIVE LOSS
| | | For the years ended |
| | | December 31, 2018 | | | December 31, 2017 | |
| | | | | | | |
| Net loss | | $ | (7,865,649 | ) | | $ | (6,371,760 | ) |
| Other comprehensive income: | | | | | | | | |
| Foreign currency translation adjustments | | | (66,752
| )
| | | 178,948 | |
| COMPREHENSIVE LOSS | | $ | (7,932,401 | ) | | $ | (6,192,812 | ) |
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, 20152018, AND 20142017
| | | Common Stock | | | Additional
Paid-in-Capital | | | Accumulated Deficit | | | AOCI | | | Total | |
| | | Shares | | | Amount | | | Amount | | | Amount | | | Amount | | | Amount | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock: | | | | | | | | | | | | | | | | | | | | | | | | |
New stock from offerings
| | | 4,509,760
| | | | 45,098
| | | | 27,431,162
| | | | - | | | | - | | | | 27,476,260
| |
Restricted stock issued
| | | 266,839 | | | | 2,668 | | | | (2,668 | )
| | | - | | | | - | | | | - | |
Restricted stock compensation
| | | - | | | | - | | | | 281,249 | | | | - | | | | - | | | | 281,249 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Options: | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercised | | | 71,290
| | | | 713
| | | | 71,201
| | | | - | | | | - | | | | 71,914
| |
| Stock option compensation | | | - | | | | - | | | | 351,556
| | | | - | | | | - | | | | 351,556
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (66,752
| )
| | | (66,752
| )
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (7,865,649 | ) | | | - | | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2018 | | | 17,166,459
| | | $ | 171,664
| | | $ | 90,953,788
| | | $ | (57,909,874 | ) | | $ | 112,196
| | | $ | 33,327,774
| |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
| | | December 31, 2018 | | | December 31, 2017 | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Cash received from customers and grants | | $ | 28,632,084 | | | $ | 24,971,299 | |
| Cash paid to suppliers and employees | | | (40,452,110 | ) | | | (30,028,299 | ) |
Income taxes paid
| | | (10,913 | )
| | | - | |
Interest received, net
| | | 69,930
|
| | | 22,485 | |
| Interest paid | | | (20,432
| )
| | | - | |
| Net cash used in operating activities | | | (11,781,441 | )
| | | (5,034,515 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchase of opTricon GmbH, net of cash acquired
| | | (5,491,204
| )
| | | - | |
Purchase of RVR Diagnostics Sdn Bhd, net of cash acquired
| | | - |
| | | (850,000 | ) |
| Acquisition of and deposits on fixed assets | | | (1,467,192 | ) | | | (1,026,954 | ) |
| Net cash used in investing activities | | | (6,958,396 | ) | | | (1,876,954 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Proceeds from option exercises | | | 71,914
| | | | 34,800 | |
| Proceeds from note payable | | | - | | | | 99,480 | |
Payments on note payable
| | | (64,481 | )
| | | - | |
| Proceeds from sale of common stock, net | | | 27,476,260
| | | | - | |
| Net cash provided by financing activities | | | 27,483,693
| | | | 134,280 | |
| | | | | | | | | |
| Effect of exchange rate changes on cash | | | (9,607
| )
| | | 13,027 | |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 8,734,249
|
| | | (6,764,162 | )
|
| Cash and cash equivalents - beginning of the period | | | 3,790,302
| | | | 10,554,464 | |
| | | | | | | | | |
| Cash and cash equivalents - end of the period | | $ | 12,524,551
| | | $ | 3,790,302 | |
| | | | | | | | | |
| RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: | | | | | | | | |
| | | | | | | | | |
| Net Loss | | $ | (7,865,649 | )
| | $ | (6,371,760 | ) |
| Adjustments: | | | | | | | | |
| Depreciation and amortization | | | 902,505
| | | | 1,276,963 | |
| Fair value adjustment to contingent consideration | | | - |
| | | (148,000 | )
|
| Share based compensation | | | 632,805
| | | | 384,897 | |
Change in deferred tax asset
| | | (78,432
| )
| | | -
| |
| Changes in assets and liabilities, net of effects from purchase of opTricon GmbH: | | | | | | | | |
| Accounts receivable | | | (5,150,072
| )
| | | 1,298,389 |
|
| Inventories | | | (3,077,104 | ) | | | (1,088,430 | )
|
| Prepaid expenses and other current assets | | | (118,293
| )
| | | 285,762 |
|
Deposits and other assets
| | | - |
| | | (512,272 | )
|
| Accounts payable and accrued liabilities | | | 2,599,894
| | | | 182,453 | |
| Deferred revenue | | | 372,905
|
| | | (342,517 | )
|
| Net cash used in operating activities | | $ | (11,781,441 | ) | | $ | (5,034,515 | ) |
| | | | | | | | | |
| Supplemental disclosures for non-cash investing and financing activities: | | | | | | | | |
| Deposits on manufacturing equipment transferred to fixed assets | | $ | 257,455
| | | $ | 174,399 | |
Deposits and other assets transferred to intangible assets
| | | 118,899
| | | | -
| |
Seller-financed equipment purchases
| | | 326,110 | | | | - | |
| 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 diagnostic tests that are used to detect infectiousand diagnose diseases. The Company's mainCompany is pursuing three corporate priorities: (1) expand its commercialization, (2) advance its research and development pipeline, and (3) prepare for future growth.
All 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.
The Company’s product commercialization and product development efforts are three rapidfocused on infectious disease testing and technology collaborations. In infectious disease, the Company is commercializing tests for HIV and Syphilis, 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, the detectionCompany is developing tests for a specific form of HIV antibodiescancer, concussion, bovine tuberculosis, and for eosinophilic respiratory disease, the latter in whole blood, serumcollaboration with global biopharmaceutical company AstraZeneca.
Large and plasma samples, twogrowing markets have been established for these kinds of which were approved bytests, initially in high prevalence regions where they are indispensable for large scale prevention and treatment programs. More generally, the FDACompany believes there is and will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in 2006;a rapid, cost-effective manner at the third is sold for export only. Lateral Flow Rapid HIV tests represented nearly 46%point of the Company's product revenues in 2015. care.
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'sCompany’s products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally. Chembio's products are soldinternationally, under the Company's STAT-PAK®Company’s STAT PAK®, SURE CHECK®, SURE CHECK®STAT-VIEW® or DPP®DPP® registered trademarks, or under the private labels of itsthe Company’s marketing partners,partners.
The Company routinely enters into arrangements with governmental and non-governmental organizations for example the Clearview® label owned by Alere, Inc. ("Alere"funding of certain research and development efforts.
NOTE 2 — ACQUISITIONS:
opTricon
On November 6, 2018, pursuant to a share purchase agreement, the Company acquired all of the outstanding shares of opTricon GmbH (“opTricon”), a privately-held Germany based developer and manufacturer of handheld analyzers for rapid diagnostic tests, for $5.5 million in cash, subject to routine post-closing adjustments. Since 2015, the Company and opTricon have been parties to an agreement under which the Company has collaborated in developing its DPP Micro Reader, a handheld, battery-operated analyzer that uses an innovative image sensor to provide, when combined with the Company’s DPP tests, a quantitative interpretation of diagnostic results. The Company purchased opTricon because it believes it will enable it to promote DPP tests and DPP Micro Reader more actively across global markets. The results of opTricon operations have been reflected in the consolidated financial statements since November 6, 2018.
As a result of the consideration paid exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $3,337,000 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. In addition, the Company recorded $2,260,000 in intangible assets associated with the addition of opTricon’s developed technology and customer base. The Consolidated Statements of Operations for the year ended December 31, 2018 include $337,645 of transaction costs related to the opTricon acquisition.
The acquisition was accounted for using the purchase method of accounting. The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of November 6, 2018:
| | | | |
| | | Amount | |
Net current assets
| | $
| 404,204 | |
| Property, plant and equipment | |
| 125,000
| |
| Goodwill | | | 3,337,000
| |
| Deferred tax liability | | | (635,000
| )
|
| Other intangible assets (estimated useful life): | | |
| |
| Developed technology (7 years) | | | 1,900,000
| |
| Customer contracts / relationships (10 years) | | | 360,000
| |
| Total consideration | | $ | 5,491,204 | |
The Company calculated the fair value of the fixed assets based on the net book value of opTricon as that approximates fair value. The developed technology and customer contracts/relationships were based on discounted cash flows using management estimates.
As indicated, the allocation of the purchase price shown above is preliminary, pending completion of an analysis of the deferred tax liability. Therefore, an adjustment may be required.
The following represents unaudited pro forma operating results for the year ended December 31, 2018 as if the operations of opTricon had been included in the Company’s Consolidated Statements of Operations as of January 1, 2018:
| | | Proforma | |
| | | December 31, 2018 | |
| Total revenues | | $ | 35,442,806 | |
| | | | | |
| Net loss | | | (8,394,074 | )
|
| | | | | |
| Net loss per common share | | $
| (0.58 | )
|
| | | | | |
| Diluted net loss per common share | | $ | (0.58 | )
|
The pro forma financial information includes business combination accounting effects from the acquisition including amortization charges from acquired intangible assets of opTricon approximately $351,000 for the year ended December 31, 2018. 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 2018. Included in the proforma table above are opTricon's net revenues and pre-tax loss for the year ended December 31, 2018 which were approximately $2,214,000 and $213,000, respectively. opTricon's results of operations from the date of acquisition through December 31, 2018 are immaterial to the Company's exclusive marketing partnerConsolidated Statements of Operations.
RVR Diagnostics
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 one$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 its rapid HIV lateral flow test productsin-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 United States. Allamount 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 Company's products that are currently being developed arepurchase 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 (10 years) | | | 800,000 | |
| Customer contracts / relationships (10 years) | | | 700,000 | |
| Order backlog (3 months) | | | 200,134 | |
| Trade name (11 years) | | | 100,000 | |
| Total consideration | | $ | 3,231,000 | |
The Company calculated the fair value of the fixed assets based on its patented Dual Path Platform (DPP®), which is a unique diagnostic point-of-care platformthe net book value of CDM as that has certain advantages over lateral flow technology. In December 2012,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 Company received FDA approval for its DPP® HIV 1/2 Assayclosing that was shipped in the first quarter of 2017, and valued at an estimated net income.
CDM's net revenues and pre-tax loss for the detectionyear ended December 31, 2017 were approximately $1,465,000 and ($406,000), respectively.
NOTE 23 — SIGNIFICANT ACCOUNTING POLICIES:
| (a) | Principles of Consolidation: |
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary.subsidiaries. All significant intercompany transactions and balances have beenare eliminated in consolidation. Certain amounts from prior years have been reclassified to conform to the 2018 presentation.
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. Included in cash and cash equivalents is $4.7 million and $2.1 million as of December 31, 2018 and 2017, respectively, of money market funds that are Level 1 fair value measurements under the hierarchy. 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.
Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories:
Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
Level 2: | Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and |
Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
| (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.and net realizable value. Cost is determined on the first-in, first-out method. The Company’s policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a write-down for any inventory considered slow moving or obsolete.
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, 20152018 and 20142017, total prepaids were $100,000 and is reported in prepaid$100,000, respectively.
Amortization expenses and other current assets. The long-term portion as offor the licenses above for the years ended December 31, 20152018, and 2014 is $100,0002017 were $0, and $200,000, respectively and is reflected in other assets on the consolidated balance sheet.$137,500, respectively.
In January 2015, the Company entered into a sublicense agreement for which it had initially recorded an asset of $400,000. This asset is being expensed over the life of the patent of 22 months. The current portion of this asset is $181,818 as of December 31, 2015 and is reported in prepaid expenses.
In August 2015, the Company entered into a sublicense agreement for which it had initially recorded an asset of $100,000. This asset is being validated and will be expensed over the estimated economic life of the product(s) which will utilize this sublicense. This asset as of December 31, 2015, is reported in prepaid expenses.
| (i) | ImpairmentValuation of Long-Lived Assets and Intangible AssetsAssets: |
Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. We believe that the carrying valuesNo impairment of our long-lived tangible and intangible assets were realizable atwas recorded for the years ended December 31, 20152018 and 2014, respectively.2017.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with customers, Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The intent of the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is for a company to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and in certain circumstances, allowing estimates of variable consideration to be recognized before contingencies are resolved. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.
The new revenue standards became effective for the Company on January 1, 2018 and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any material accounting changes that impacted the amount of reported revenues with respect to its product revenue, license and royalty revenue, and R&D, milestone and grant revenues, no adjustment to retained earnings was required upon adoption.
The Company adopted the standards to contracts that were not completed at the date of initial application (January 1, 2018).
Under the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligation.
Product Revenues
Revenues from product sales are recognized and commissions are accrued when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon tendering to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial. Freight and distribution activities on products are performed after the customer obtains control of the goods. The Company has made an accounting policy election to account for shipping and handling activities that occur either when or after goods are tendered to the customer as a fulfillment activity, and therefore recognizes freight and distribution expenses in Cost of Product Sales.
The Company’s payment terms vary by the type and location of the Company’s customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 60 days from date of shipment or satisfaction of the performance obligation.
Reserves for Discounts and Allowances
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers. The Company’s process for estimating reserves established for these variable consideration components does not differ materially from its historical practices.
Product revenue reserves, which are classified as a reduction in product revenues, are generally related to discounts. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based on all information (historical, current and forecasted) that is reasonably available to the Company, taking into consideration the type of customer, the type of transaction and the specific facts and circumstances of each arrangement. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from the Company’s estimates. If actual results vary, the Company adjusts these estimates, which could have an effect on earnings in the period of adjustment.
Royalty Revenues
The Company receives royalty revenues on sales by its licensees of products covered under patents that it owns. The Company does not have future performance obligations under these license arrangements. The Company records these revenues based on estimates of the sales that occurred during the relevant period as a component of license and royalty revenues. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical royalties that have been paid to the Company, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. Historically, adjustments have not been material when compared to actual amounts paid by licensees.
R&D and grant revenue
All such contracts are evaluated under the five-step model described above. For certain contracts that represent grants where the funder does not meet the definition of a customer, the Company recognizes revenue for product saleswhen earned in accordance with ASC 605,958. Such contracts are further described under Disaggregation of Revenue, below. Grants are invoiced and revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed and determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.
For certain contracts, the Company recognizes revenue from non-milestone contracts and grant revenues when earned. Grants are invoiced afteras expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned. incurred as that is the depiction of the timing of the transfer of services. Performance obligations generally follow the major phases of product development processes: design feasibility & planning, product development & design optimization, design verification, design validation & process validation, and pivotal studies.
Disaggregation of Revenue
The Company follows Financial Accounting Standards Board ("FASB") issued authoritative guidance ("guidance") prospectivelyfollowing tables disaggregate Total Revenues for the recognition of revenue under the milestone method. The Company applies the milestone method of revenue recognition for certain collaborative research projects defining milestones at the inception of the agreement.year ended December 31, 2018:
| | |
| |
| | | Exchange Transactions | | | Non-Exchange Transactions | | | Total | |
| Net product sales | | $ | 26,741,020
| | | $ | - | | | $ | 26,741,020
| |
| License and royalty revenue | | | 948,773
| | | | - | | | | 948,773
| |
| R&D, milestone and grant revenue | | | 2,687,210
| | | | 3,032,248
| | | | 5,719,458
| |
| | | $ | 30,377,003
| | | $ | 3,032,248
| | | $ | 33,409,251
| |
Exchange transactions are recognized in accordance with ASC 606, while non-exchange transactions are recognized in accordance with ASC 985.
F-7
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER| | | | |
| | | Total
| |
Africa
| | $ | 8,605,306 | |
Asia
| | | 1,389,120
| |
Europe & Middle East
| | | 4,726,691
| |
Latin America
| | | 11,722,224
| |
United States
| | | 6,965,910
| |
| | $ | 33,409,251 | |
Contract Liabilities
Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as (or when) the Company performs under the contract. At December 31, 2015 AND 20142017, the Company reported $50,000 in deferred revenue of which $50,000 was earned and recognized as R&D, milestone and grant revenue during the year ended December 31, 2018. At December 31, 2018, the Company reported $422,905 in deferred revenue which is expected to be recognized during the first quarter of 2019.
In April 2017, the Company entered into a $1.0 million agreement with FIND to develop a simple, point-of-care fever panel assay that can identify multiple life-threatening acute febrile illnesses common in the Asia Pacific region. The Company earned $0.1 million and $0.9 million for the year ended December 31, 2018, and from inception through December 31, 2018, respectively as R&D, milestone and grant revenue in the Company’s Consolidated Statements of Operations.
In August 2016, the Company was awarded a grant of $5.9 million from BARDA, which is part of the U.S. Department of Health And Human Resources to develop a rapid Zika virus assay. The Company earned $2.6 million and $5.3 million for the year ended December 31, 2018 and from inception through December 31, 2018, respectively, as R&D, milestone and grant revenue in the Company’s Consolidated Statements of Operations.
In September 2016, the Company was awarded a $0.7 million contract from the USDA to develop a Bovid TB assay. The Company earned $0.2 million and $0.5 million for the year ended December 31, 2018 and from inception through December 31, 2018, respectively, as R&D, milestone and grant revenue in the Company’s Consolidated Statements of Operations.
| (k) | Research and Development: |
Research and development (R&D) costs are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
| (l) | Stock-Based Compensation: |
The fair value of restricted stock and restricted stock unit awards are their fair value on the date of grant. Stock-based compensation expense for stock options is calculated using the Black-Scholes valuation model based on awards ultimately expected to vest together with the fair value of restricted stock and restricted stock unit awards, are, reduced for actual forfeitures, and, expensed on a straight-line basis over the requisite service period of the grant. During 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting".
The Company accounts for income taxes under an asset and liability approach whichthat recognizes deferred tax assets and liabilities based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
The Company follows a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. The guidance relates to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to uncertain tax positions will beare recorded in tax expense.
The Company assesses the realizability of its net deferred tax assets on an annual basis. If, after considering all relevant positive and negative evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, the Company wouldwill reduce the net deferred tax assets by a valuation allowance. The realization of the net deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of net operating loss carryforwards.
The following weighted average shares were used for the computation of basic and diluted earnings per share:
| | For the years ended |
| | December 31, 2015 | | December 31, 2014 |
| Basic | 9,626,028 | | 9,530,320 |
| | - | | - |
| Diluted | 9,626,028 | | 9,530,320 |
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period.period including outstanding restricted stock that by its terms is includible in the calculation. Diluted loss per share for the yearyears ended December 31, 20152018, and 20142017 reflects the potential dilution from the exercise or conversion of other securities into common stock, if dilutive.
The following securities, presented on a common share equivalent basis, have been used in the diluted per share computations:
| For the years ended |
| December 31, 2015 | | December 31, 2014 |
1999, 2008 and 2014 Plan Stock Options | - | | - |
There were 658,631711,968, and 798,475810,670 options and warrants outstanding as of December 31, 20152018 and 2014,2017, respectively, which were not included in the calculation of diluted income per share for the years ended because their effect would have been anti-dilutive.
| (o) | Goodwill and Intangible Assets: |
Goodwill represents the excess of the purchase price the Company paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company’s acquisition of opTricon in November 2018 and CDM in January 2017. Goodwill is not amortized but rather is tested annually as of the first day of the fiscal fourth quarter, or sooner if the Company believes that indicators of impairment exist. The Company makes a qualitative evaluation about the likelihood of goodwill impairment, which is based on a number of applicable factors. If the Company concludes that it is more likely than not that the carrying value of the applicable reporting unit is greater than its fair value, then it would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.
For the year ended December 31, 2018 and 2017, there was no impairment of goodwill and other intangible assets.
Following is a table that reflects changes in Goodwill:
| | |
| Beginning balance 1/1/18 | | $ | 1,666,610 | |
| | | | | |
Acquisition of opTricon
| | | 3,337,000 | |
| | | | | |
| Changes in foreign currency exchange rate | | | (20,483
| )
|
| | | | | |
| Balance at December 31, 2018 | | $ | 4,983,127
| |
Intangible assets consist of the following at:
| | | Weighted Average
Remaining Life
| | |
December 31, 2018 | | |
December 31, 2017 | |
| | | | | Cost | | | Accumulated Amortization | | | Net Book Value | | | Cost
| | | Accumulated Amortization
| | | Net Book Value
| |
| Intellectual property | | | 10 | | | $ | 1,089,688 | | | $ | 173,633 | | | $ | 916,055 | | | $ | 886,872 | | | $ | 88,687 | | | $ | 798,185 | |
| Developed technology | | | 7 | | | | 1,910,315 | | | | - | | | | 1,910,315 | | | | - | | | | - | | | | - | |
| Customer contracts/relationships | | | 8 | | | | 1,121,600 | | | | 151,929 | | | | 969,671 | | | | 776,013 | | | | 77,601 | | | | 698,412 | |
| Order backlog | | | - | | | | 217,187 | | | | 217,187 | | | | - | | | | 221,867 | | | | 221,867 | | | | - | |
| Trade names | | | 9 | | | | 108,521 | | | | 19,731 | | | | 88,790 | | | | 110,859 | | | | 10,079 | | | | 100,780 | |
| | | | | | | $ | 4,447,311 | | | $ | 562,480 | | | $ | 3,884,831 | | | $ | 1,995,611 | | | $ | 398,234 | | | $ | 1,597,377 | |
Amortization expense for the year ended December 31, 2018 and 2017 was $233,734 and $398,234, respectively, and is recorded within Selling, General and Administrative expenses. Amortization expense, subject to changes in currency exchange rates, is expected to be $496,512 per year from 2019 through 2023, and total $1,402,271 for all of the years thereafter.
F-8
| (p) | Allowance for Doubtful Accounts: |
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
The Company records allowances for doubtful accounts for the estimated probable losses on uncollectible accounts receivable. The allowance is based upon the credit worthiness of the Company’s customers, the Company’s historical experience, the age of the receivable and current market and economic conditions. Receivables are written off against these allowances in the period they are determined to be uncollectible.
Acquisition costs include period expenses, primarily professional services, related to acquisition activities.
| (o)(r) | Foreign Currency Translation: |
The functional currency of a foreign subsidiary is the local currency. Assets and liabilities of foreign subsidiaries that use a currency other than U.S. dollars as their functional currency are translated to U.S. dollars at end of period currency exchange rates. The consolidated statements of operations of foreign subsidiaries are translated to U.S. dollars at average period currency exchange rates. The effect of translation for foreign subsidiaries is generally reported in Other comprehensive income. Foreign transaction gains are immaterial.
| (s) | Recent Accounting Pronouncements Affecting the Company: |
In May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with customers, Accounting Standards Update No.(“ASU”) 2014-09, "RevenueRevenue from Contracts with Customers" ("ASU 2014-09"), which supersedes nearly all existingCustomers. The intent of the new standard is to improve financial reporting and comparability of revenue recognition guidance under accounting principles generally accepted in United States ("U.S. GAAP").globally. The core principle of ASU 2014-09the standard is for a company to recognize revenues when promisedrevenue in a manner that depicts the transfer of goods or services are transferred to customers in an amount that reflects the consideration to which an entitythe company expects to be entitledreceive in exchange for those goods or services. ASU 2014-09 definesThe guidance provides a five step processfive-step analysis of transactions to achieve this core principledetermine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and in doing so, more judgmentcertain circumstances, allowing estimates of variable consideration to be recognized before contingencies are resolved. The guidance also requires enhanced disclosures regarding the nature, amount, timing and estimates may be required within theuncertainty of revenue recognition process than are required under existing U.S. GAAP.
and cash flows arising from an entity’s contracts with customers. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and interim periods therein, using either2017.
The Company has completed its evaluation of the following transition methods: (i)new standard and assessed the impact of adoption on its consolidated financial statements. The Company reviewed significant open contracts with customers for each revenue stream, and based on its evaluation, revenue recognition under the new standard did not have a full retrospective approach reflectingmaterial impact on the applicationCompany’s consolidated financial statements because: i) product sales revenue is recognized when control of the standard in each prior reporting period withgoods is transferred to the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized atcustomer (i.e., the date of shipment, which is consistent under ASC 605), and ii) R&D and grant revenue historically did not constitute exchange transactions and therefore the new standard did not apply to such revenue upon adoption. The Company also assessed its control framework as a result of adopting the new standard and noted minimal, insignificant changes to its systems and other controls processes.
The new standard permitted two adoption (which includes additional footnote disclosures). We are currently evaluatingmethods under ASU 2014-09. The guidance could be adopted through either retrospective application to all periods presented in the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have(full retrospective) or through a cumulative effect adjustment to retained earnings at the effective date (modified retrospective). The Company adopted the new standard effective January 1, 2018 using the modified retrospective transition method. Under that method, the Company applied the rules to all contracts existing as of January 1, 2018. The cumulative effect was not yet determined the method by which we will adopt the standard in 2018.material.
In November 2015, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU")ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets. Assets. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under the new guidance. This guidance will bebecame effective for Chembio beginning in 2018, with early adoption permitted. The Company does not believe this2018. This new accounting standard update did not have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires the entity to recognize the assets and liabilities for the rights and obligations created by leased assets. Leases will be classified as either finance or operating, with classification affecting expense recognition in the income statement. In July 2018 the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provide supplemental adoption guidance and clarification to ASU 2016-02, and must be adopted concurrently with the adoption of ASU 2016-02, cumulatively referred to as “Topic 842”. Topic 842 is effective for the company in the first quarter of 2019, with early adoption permitted, and is to be applied using either a modified retrospective approach, or an optional transition method which allows an entity to apply the new standard at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
The Company will adopt Topic 842 on January 1, 2019 under the optional transition method and elect the short-term lease exception and available practical expedients. Under the transition method, the Company will not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date. Upon adoption, the Company expects the consolidated balance sheet to include a right of use asset and liability related to substantially all of the Company’s lease arrangements. While the Company continues to evaluate the effects of adopting the provisions of Topic 842, including the impact that this new guidance will have on its processes and controls, the Company expects most existing operating lease commitments will be recognized as operating lease liabilities and right-of-use assets upon adoption. The adoption is not expected to be material to the consolidated financial statements, and based on the Company’s ongoing assessment, is expected to increase total assets and total liabilities by no more than approximately $1.5 million, on a discounted basis.
Please see Note 15 – Subsequent Events, regarding the Company’s entering into a commercial real estate lease for a new corporate headquarters and a sublease for one of its current facilities on February 5, 2019. The Company is currently analyzing the impact of Topic 842 on these transactions and expects to report on that during the first quarter of 2019. Based on the term and rental cost, the Company expects the application of Topic 842 to these transactions to have a material impact on the Company’s total assets and total liabilities, and no impact on the Company’s results of operations or cash flows.
In March 2016, the FASB issued authoritative guidance under ASU 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 provides for simplification of several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company adopted ASU 2016-09 on January 1, 2017. As the Company has a full valuation allowance against its U.S. net deferred tax assets, the adoption of this standard for recognition of the tax effect of deductions for employee share awards in excess of compensation costs (“windfall”) did not have a material impact on its consolidated financial statements.statements and related disclosures. See Note 8 – Income Taxes, for additional information. Should the full valuation allowance be reversed in future periods, the adoption of this new guidance could introduce more volatility in the calculation of the Company’s effective tax rate, depending on the Company’s share price at exercise or vesting of share-based awards as compared to grant date. The other provisions of ASU 2016-09 did not have a material impact on the Company's consolidated financial statements and related disclosures.
In FebruaryAugust 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02,ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which amendsprovides guidance related to cash flows presentation. The Company adopted ASU 2016-15 in the ASCfirst quarter of 2018. The guidance in ASU 2016-15 is generally consistent with the Company’s current cash flow classifications, and creates Topic 842, Leases. Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous US GAAPdid not have a material impact on the balance sheet.Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. This guidance isupdate will be effective for annual and interim periods in fiscal years beginning after December 15, 2018 and early2019. Early adoption is permitted. The Company is currently assessingadopted ASU 2017-04 in the fourth quarter of 2017. The adoption of this standard did not have a material impact on itsthe Company’s consolidated financial positionstatements and resultsrelated disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of operations.Modification Accounting, to provide clarity to which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The Company adopted ASU 2017-09 in the first quarter of 2018. Adoption did not have a material effect on the Company’s consolidated financial statements.
In July 2018, the FASB issued ASU 2018-08Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made to clarify the accounting guidance related to contributions made or received. This guidance primarily affects not-for-profit entities, although it also applies to businesses to the extent that they make or receive contributions, including grants. ASU 2018-08 clarifies and improves the scope and accounting guidance for both contributions received and made in order to assist entities in evaluating if those transactions should be accounted for as contributions under the scope of Topic 958, or as an exchange transaction subject to other guidance.Public entities are required to apply the amendments on contributions received and contributions made to annual periods beginning after June 15, 2018, and December 15, 2018, respectively, each including interim periods within those annual periods. Early adoption is permitted, and the Company adopted ASU 2018-08 effective as of January 1, 2018. The impact of adoption was immaterial.
Inventories consist of the following at:
| | | December 31, 2015 | | | December 31, 2014 | |
| Raw materials | | $ | 2,248,371 | | | $ | 2,323,863 | |
| Work in process | | | 370,340 | | | | 346,494 | |
| Finished goods | | | 959,314 | | | | 967,942 | |
| | | $ | 3,578,025 | | | $ | 3,638,299 | |
| | | December 31, 2018 | | | December 31, 2017 | |
| Raw Materials | | $ | 2,803,677 | | | $ | 1,767,684 | |
| Work in Process | | | 263,043 | | | | 286,413 | |
| Finished Goods | | | 4,784,502 | | | | 2,369,521 | |
| | | $ | 7,851,222 | | | $ | 4,423,618 | |
Fixed assets consist of the following at:
| | | December 31, 2015 | | | December 31, 2014 | |
| Machinery and equipment | | $ | 3,862,698 | | | $ | 3,508,944 | |
| Furniture and fixtures | | | 436,588 | | | | 388,040 | |
| Computer and telephone equipment | | | 326,170 | | | | 315,916 | |
| Leasehold improvements | | | 2,012,945 | | | | 1,955,817 | |
| | | | 6,638,401 | | | | 6,168,717 | |
| Less accumulated depreciation and amortization | | | (4,264,093 | ) | | | (3,370,788 | ) |
| | | $ | 2,374,308 | | | $ | 2,797,929 | |
| | | December 31, 2018
| | | December 31, 2017
| |
| Machinery and Equipment | | $ | 6,070,137 | | | $ | 4,582,759 | |
| Furniture and Fixtures | | | 35,287 | | | | 449,548 | |
| Computer Equipment | | | 435,348 | | | | 422,946 | |
| Leasehold Improvements | | | 2,334,512 | | | | 2,258,779 | |
| Enterprise Business Systems | | | 462,420 | | | | - | |
| Less: Accumulated Depreciation and Amortization | | | (6,463,784 | ) | | | (5,804,800 | ) |
| | | $ | 2,873,920 | | | $ | 1,909,232 | |
There were no capital leases at the end of December 31, 2015.2018. Fixed assets at December 31, 20152018 also include $100,000$1,866,126 in equipment which has been delivered and set-up butthat is undergoing validation and as such is currently not yet being depreciated. Depreciation expense for the 20152018 and 20142017 years aggregated $893,305totaled $634,261 and $616,943,$727,563, respectively.
As of December 31, 20152018 and 2014,2017, the Company had paid deposits on various pieces of equipment classified within Deposits and Other Assets aggregating $30,918$428,859 and $20,017,$257,455, respectively. The Company is further committed to an additional obligation of $31,008 as various milestones are achieved by the various vendors.
NOTE 56 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following at:
| | | December 31, 2015 | | | December 31, 2014 | |
| Accounts payable – suppliers | | $ | 1,260,520 | | | $ | 1,980,120 | |
| Accrued commissions | | | 129,192 | | | | 947,451 | |
| Accrued royalties / license fees | | | 732,301 | | | | 1,034,062 | |
| Accrued payroll | | | 146,962 | | | | 106,487 | |
| Accrued vacation | | | 244,810 | | | | 219,924 | |
| Accrued bonuses | | | 177,700 | | | | 265,500 | |
| Accrued expenses – other | | | 109,947 | | | | 392,486 | |
| TOTAL | | $ | 2,801,432 | | | $ | 4,946,030 | |
| | | December 31, 2018
| | | December 31, 2017
| |
| Accounts Payable - suppliers | | $ | 3,622,765 | | | $ | 1,494,759 | |
| Accrued Commissions | | | 588,131 | | | | 126,827 | |
| Accrued Royalties / license fees | | | 279,213 | | | | 429,297 | |
| Accrued Payroll | | | 48,867 | | | | 187,305 | |
| Accrued Vacation | | | 264,789 | | | | 309,767 | |
| Accrued Bonuses | | | 494,318 | | | | 282,500 | |
| Accrued Expenses - Other | | | 590,598 | | | | 215,848 | |
| | | $ | 5,888,681 | | | $ | 3,046,303 | |
NOTE 67 — DEFERRED RESEARCH AND DEVELOPMENT REVENUE:
The Company recognizes income from R&D milestones when those milestones are reached and non-milestone contracts and grants when earned. GrantsThese projects are invoiced after expenses are incurred. Any projects or grants funded in advance are deferred until earned. As of December 31, 20152018 and 2014,2017, there were $353,406$422,905 and $340,000$50,000 unearned advanced revenues, respectively.
NOTE 7 — TERM NOTE, REVOLVING DEMAND NOTE, VEHICLE FINANCING AND LICENSE FEE PAYABLE:
On April 30, 2013, the Company entered into a new demand loan agreement ("Demand Note") with HSBC Bank, USA ("HSBC"). The Demand Note allowed the Company to draw on the line from time to time an amount up to an aggregate of $2,000,000 outstanding at any one time. The accrued interest on the Demand Note was payable monthly at an interest rate equal to one-quarter percent above prime per annum. The Company could repay any or all of the principal balance outstanding at any time. This was a demand note for which the bank lender could demand repayment of the entire loan, with accrued interest, at any time. The loan was subject to annual reviews, as well as an annual 30-day clean-up, during which there could be no amounts outstanding. In January 2016 HSBC notified the Company that it could no longer extend the credit and the Demand Note was cancelled.
The Security Agreement, related to the Demand Note, contained covenants that placed restrictions on the Company's operations, including covenants relating to mergers, debt restrictions, capital expenditures, tangible net worth, net profit, leverage, fixed charge coverage, employee loan restrictions, distribution restrictions (common stock and preferred stock), dividend restrictions, restrictions on lease payments to affiliates, restrictions on changes in business, asset sale restrictions, restrictions on acquisitions and intercompany transactions, and restrictions on fundamental changes in the Company and in its business.
The Company currently maintains its operating, payroll, and primary cash accounts at HSBC. During the year ended December 31, 2015, the Company had drawn down an aggregate of $700,000 on the Demand Note and each withdrawal was paid back within 30 days and all covenants were met.
NOTE 8 — INCOME TAXES:
The (benefit from) provision for income taxes for the years ended December 31, 20152018 and 2014,2017 is comprised of the following:
| | | 2015 | | | 2014 | | | 2018 | | | 2017 | |
| Current | | | | | | | | | | | | |
| Federal | | $ | - | | | $ | (16,119 | ) | | $ | - | | | $ | (97,339 | ) |
| State | | | 10,726 | | | | 6,576 | | | | 10,914 | | | | 9,034 | |
| | | | - | | | | - | |
| Total current (benefit) provision | | | 10,726 | | | | (9,543 | ) | | | 10,914 | | | | (88,305 | ) |
| | | | | | | | | | | | | | | | | |
| Deferred | | | | | | | | | | | | | | | | |
| Federal | | | (1,171,865 | ) | | | (449,452 | ) | | | - | | | | - | |
| State | | | 896 | | | | 46,077 | | | | - | | | | - | |
| | | | (78,435 | ) | | | - | |
| Total deferred (benefit) provision | | | (1,170,969 | ) | | | (403,375 | ) | | | (78,435 | ) | | | - | |
| | | | | | | | | | | | | | | | | |
| Total (benefit) provision | | $ | (1,160,243 | ) | | $ | (412,918 | ) | | $ | (67,521 | ) | | $ | (88,305 | ) |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 34% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As a result of the Tax Act, the Company remeasured its U.S. Federal deferred tax assets and liabilities at the rate they are expected to reverse in the future. The Company recorded a cumulative charge of $3,906,774 ($0 in 2018 and $3,906,774 in 2017), which was fully offset by an equivalent adjustment to the deferred tax valuation allowance. The Company recorded a cumulative benefit of $97,339 ($0 in 2018 and $97,339 in 2017) related to a credit for alternative minimum taxes (AMT) paid in prior years. During 2018, the Company finalized its computation of the impact of the Tax Act with no change to the provisional amount.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance allows companies to make an accounting policy election to either (1) account for GILTI as a component of tax expense in the period in which they are subject to the rules (the period cost method), or (ii) account for GILTI in the Company's measurement of deferred taxes (the deferred method). After completing the analysis of the GILTI provisions, the Company elected to account for GILTI using the period cost method.
The Company had an ownership change as described in Internal Revenue Code Sec. 382 during 2004 ("(“2004 change"change”). As a result, the Company'sCompany’s net operating losses prior to the 2004 change of $5,832,516 were subject to an annual limitation of $150,608 and for the first five (5) years are entitled to a BIG (Built-In-Gains) of $488,207 per year. These net operating losses expire in 20182019 through 2024.
The Company had a second ownership change during 2006 ("(“2006 change"change”). The net operating losses incurred between the 2004 change and the 2006 change of $8,586,861 were subject to an annual limitation of $1,111,831 and for the first five (5) years are entitled to a BIG of $1,756,842 per year. These net operating losses expire in 20182024 through 2028.2026.
After applying the above limitations, at December 31, 2015,2018, the Company has post-change net operating loss carry-forwards of approximately $15,815,108$27,303,044 which expire between 20202019 and 2035.2037 and $5,432,085 which do not expire. In addition the Company has research and development tax credit carryforwards of approximately $1,518,414$1,696,870 for the year ended December 31, 2015,2018, which expire between 2019 and 2036.
The Company has state net operating loss carryforwards of approximately $1,784,554 which expire between 2025 and 2035.
2037. The Company has foreign net operating loss carryforwards of approximately $586,206 which do not expire.
| | | 2015 | | | 2014 | |
| Current assets | | | | | | |
| Inventory reserves | | $ | 242,532 | | | $ | 311,931 | |
| Accrued expenses | | | 91,143 | | | | 286,616 | |
| Current deferred tax assets | | | 333,675 | | | | 598,547 | |
| Less valuation allowances | | | - | | | | - | |
| Net current deferred asset | | $ | 333,675 | | | $ | 598,547 | |
| | | | | | | | | |
| Noncurrent assets | | | | | | | | |
| Net operating loss carry-forwards | | $ | 5,365,401 | | | $ | 3,986,618 | |
| Research and development credit | | | 1,518,414 | | | | 1,175,725 | |
| Other credits | | | 97,339 | | | | 107,967 | |
| Other | | | 210,553 | | | | 149,923 | |
| Gross noncurrent deferred tax assets | | | 7,191,707 | | | | 5,420,233 | |
| Depreciation | | | (206,150 | ) | | | (213,206 | ) |
| Noncurrent deferred tax assets | | | 6,985,557 | | | | 5,207,027 | |
| Less valuation allowances | | | (1,518,414 | ) | | | (1,175,725 | ) |
| Net noncurrent deferred tax assets | | $ | 5,467,143 | | | $ | 4,031,302 | |
| | | 2018 | | | 2017 | |
| | | | | | | |
| Inventory reserves | | $ | 204,206
| | | $ | 244,158 | |
| Accrued expenses | | | 175,168
| | | | 102,332 | |
| Net operating loss carry-forwards | | | 7,122,576
| | | | 5,800,144 | |
| Research and development credit | | | 1,696,870
| | | | 1,918,137 | |
Stock-based compensation
| | | 215,797
| | | | 167,522 | |
| Depreciation | | | 139,362
| | | | 91,258 | |
| Total deferred tax assets | | | 9,553,979
| | | | 8,323,551 | |
| | | | | | | | | |
| Intangibles | | | (968,849
| )
| | | (341,042 | )
|
| Total deferred tax liabilities | | | (968,849 | ) | | | (341,042 | )
|
| | | | | | | | | |
| Net deferred tax assets before valuation allowance | | | 8,585,130
| | | | 7,982,509 | |
| Less valuation allowances | | | (9,477,438 | ) | | | (8,323,551 | ) |
| Net noncurrent deferred tax liabilities | | $ | (892,308 | ) | | $ | (341,042 | )
|
The components of (loss) before income taxes consisted of the following:
| | | Year Ending December 31, | |
| | | 2018 | | | 2017 | |
| United States operations | | $ | (7,137,428 | ) | | $ | (6,054,002 | ) |
| International operations | | | (795,742 | ) | | | (406,063 | ) |
| (Loss) before taxes | | $ | (7,933,170 | ) | | $ | (6,460,065 | ) |
F-11
A reconciliation of the Federal statutory rate to the effective rate applicable to income (loss)loss before income taxes is as follows:
| | Year Ending December 31, | | Year Ending December 31, | |
| | 2015 | | 2014 | | 2018 | | | 2017 | |
| Federal income tax at statutory rates | (34.00)% | | (34.00)% | | | 21.00 | % | | | 34.00 | % |
| State income taxes, net of federal benefit | .23% | | 0.28% | | | (.10 | )% | | | (0.09 | )% |
| Nondeductible expenses | 1.38% | | 4.54% | | | (1.58 | )% | | | (1.04 | )% |
| Foreign rate differential | | | | .36 | % | | | (2.14 | )% |
| Change in valuation allowance | 9.46% | | 9.47% | | | (18.44 | )% | | | (99.41 | )% |
| Impact of Tax Act on valuation allowance | | | | - | % | | | 60.48 | % |
| AMT refund under Tax Act | | | | - | % | | | 1.51 | % |
| Tax credits | (9.46)% | | (9.47)% | | | - | % | | | 7.07 | % |
| Change in tax rates | .00% | | 1.96% | |
| Other | .34% | | 0.58% | | | (.39 | )% | | | 0.99 | % |
| Income tax (benefit) | (32.05)% | | (26.64)% | |
| Income tax benefit | | | | .85 | % | | | 1.37 | % |
Interest and penalties, if any, related to income tax liabilities are included in income tax expense. As of December 31, 2015,2018, the Company does not have a liability for uncertain tax positions.
The Company files Federal and state income tax returns. Taxreturns, opTricon files in Germany and CDM files in Malaysia and has been on tax holiday which expired on December 31, 2018. With few exceptions, tax years for fiscal 20122015 through 20142018 are open and potentially subject to examination by the federal, state and stateforeign taxing authorities.
NOTE 9 — STOCKHOLDERS'STOCKHOLDERS’ EQUITY:
In February 2018, the Company closed on an underwritten registered public offering of 1,783,760 shares of its common stock at $6.75 per share. The net proceeds of the offering, after deducting the underwriter’s discounts and other offering expenses payable by the Company, was approximately $10.9 million.
In November 2018, the Company closed on an underwritten public offering of 2,726,000 shares of its common stock, including the underwriter’s exercise of its overallotment of 355,565 shares, at $6.75 per share. The net proceeds of the offering, after deducting the underwriter’s discounts and other offering expenses payable by the Company, was approximately $16.5 million.
During 2015,2018, options to purchase 41,141144,947 shares of the Company'sCompany’s common stock were exercised on a cashless basis into 17,109for 71,290 shares of common stock at exercise prices ranging from $2.16$3.48 to $3.60$5.64 by surrendering options and shares of common stock already owned.
During 2014,2017, options to purchase 318,75056,969 shares of the Company'sCompany’s common stock were exercised either for cash or cashless into 286,35622,487 shares of common stock at an exercise priceprices ranging from $3.48 to $4.45 by surrendering options and shares of $1.04.common stock already owned.
The Company has 10,000,000 shares of preferred stock authorized and none outstanding. These shares can become issuable upon an approved resolution by the board of directors and the filing of a Certificate of Designation with the state of Nevada.
| (c) | Options, Restricted Stock, and Restricted Stock Units
|
During 2015, the Company did notThe Board of Directors or its Compensation Committee may issue options, to purchase common stock.
During the fourth quarter of 2014, the Company issued 36,000 options to purchase commonrestricted stock, to a newly-hired vice-president of the Company. The options are exercisable in three equal annual installments starting on the first anniversary of the date of issue. The options issued have an exercise price of $4.35 per share, which was the last traded price of the commonand restricted stock on the day issued. The options expire five years from date of issue.
During the second quarter of 2014 the Company issued options to two of its directorsunits pursuant to employee stock incentive plans that have been approved by the Company's compensation policy for directors. Each director was issued 46,875 options to purchase common stock. The options become exercisable in five equal annual installments starting on the date of issue. The options issued have an exercise price of $3.480 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.stockholders.
The Company entered into an employment agreement, effective March 13, 2014 ("Employment Agreement"), with Mr. Sperzel to serve as the Company's Chief Executive Officer, which included issuing incentive and non-incentive stock options to purchase 250,000 shares of the Company's common stock. The options become exercisable in five equal annual installments starting on the first anniversary of the effective date of the Employment Agreement. The exercise price for these options was to be equal to the volume-weighted average trading price for the Company's common stock on March 13, 2014, which was $3.416 per share. The options expire seven years from date of issue.
As of December 31, 20152018 and 2014,2017, the Company had no warrants outstanding to purchase shares of common stock.
NOTE 10 — RIGHTS AGREEMENT:
In March 2010,2016, the Company entered into a Rights Agreement (the "Rights Agreement") between the Company andwith Action Stock Transfer Corp., as Rights Agent. The Rights Agreement expired at the end of November 2015.on March 7, 2019. Pursuant to the Rights Agreement, the Company declared a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of Common Stock, $0.01 par value (the "Common Stock"),common stock as of the Company. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2010, and the Rights were distributed to the Company's shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.2016.
Rights Initially Not Exercisable.The Rights were not exercisable until a Distribution Date.Date (as defined below). Until a Right was exercised, the holder thereof, as such, would have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights. The Rights were to be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof,common stock, and were not to be evidenced by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day (the “Distribution Date”) following either (i) a public announcement that an Acquiring Person (as defined in the Rights Agreement)a person or group acquired a Combined Ownership (as defined in the Rights Agreement)beneficial ownership of 15%20% or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date")common stock 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 or group is first published, announced, sent or given within the meaning of Rule 14d-4(A)14d-3(a) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in anythe person or group having Combined Ownershipbeneficial ownership of 15%20% or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date").common stock.
NOTE 11 — EMPLOYEE STOCK OPTION PLAN:INCENTIVE PLANS:
Effective June 3, 2008, the Company'sCompany’s stockholders voted to approve the 2008 Stock Incentive Plan ("SIP"(“SIP”), with 625,000 shares of Common Stockcommon stock available to be issued. At the Annual Stockholder meetingMeeting on September 22, 2011 the Company'sCompany’s stockholders voted to approve an increase to the shares of Common Stockcommon stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, which expired during 2018, the Board of Directors or its Compensation Committee had the discretion to select the persons to whom awards were to be granted. Awards could be stock options, restricted stock and/or restricted stock units ("Equity Award Units"). The awards became vested at such times and under such conditions as determined by the Board or its Compensation Committee. Cumulatively through December 31, 2018, there were 508,889 options exercised, and at December 31, 2018, 99,132 options were outstanding and no Equity Award Units were available to be issued under the SIP.
Effective June 19, 2014, the Company’s stockholders voted to approve the 2014 Stock Incentive Plan (“SIP14”), with 800,000 shares of common stock available to be issued. Under the terms of the Company'sSIP14, the Board or its Compensation Committee has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/or restricted stock units.in the form of Equity Award Units. The awards become vested at such times and under such conditions as determined by the Board or its Compensation Committee. As ofCumulatively through December 31, 2015,2018, there were 353,93585,407 options exercised, 312,860and at December 31, 2018, 405,968 options were outstanding and 83,205 options21,061 Equity Award Units were still available to be issued under the SIP.
Effective June 19, 2014, the Company's stockholders voted to approve the 2014 Stock Incentive Plan ("SIP14"), with 800,000SIP14. During 2018, 266,839 shares of Common Stock available to be issued. Under the terms of the SIP14, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/orand 20,725 restricted stock units. The awards become vested at such times andunits were awarded under such conditions as determined by the Compensation Committee. As of December 31, 2015, there were no options exercised, 129,750 options outstanding and 670,250 options still available to be issued under the SIP14.
The Company's results for the years ended December 31, 20152018 and 20142017 include stock-based compensation expense totaling $334,400$632,805 and $447,100,$384,897, respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold ($-25,615 and $700,$47,000, respectively), research and development ($62,70078,831 and $44,500,$89,400, respectively) and selling, general and administrative expenses ($271,700528,360 and $401,900,$248,497, respectively). In accordance with ASC 718 the Company has not recorded a deferred tax asset related to the net operating losses resulting from the exercise of disqualifying stock options in the accompanying financial statements. The cumulative amount of unrecognized tax benefits at December 31, 2015 was immaterial, and if the Company is able to utilize this benefit in the future it would result in a credit to additional paid-in capital.
Stock option compensation expense in the years ended December 31, 20152018 and 20142017 represents the estimated fair value of options outstanding which is being amortized on a straight-line basis over the requisite vesting period of the entire award.
The Company did not grant any stock options during the year ended December 31, 2015. The weighted average estimated fair value of stock options granted in the yearyears ended December 31, 2014 was $3.522018 and 2017 were $3.76 and $2.77 per share.share, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of ourthe Company’s stock and other contributing factors. The expected term is based on the Company'sCompany’s historical experience with similar type options.
The weighted-average assumptions made in calculating the fair values of options are as follows:follows for the respective years ended:
For the year ended | | December 31, 2014 |
Expected term (in years) | | 4.50-6.30 |
Expected volatility | | 61.50-96.10% |
Expected dividend yield | | n/a |
Risk-free interest rate | | .83-1.52% |
| | December 31, 2018 | | | December 31, 2017 | |
| Expected term (in years) | | | 4.96 | | | | 5.48 | |
| Expected volatility | | | 39.91 | % | | | 43.31 | % |
| Expected dividend yield | | | n/a | | | | n/a | |
| Risk-free interest rate | | | 2.70 | % | | | 1.78 | % |
The Company granted no93,750 new options during the year ended December 31, 2015 to employees.
2018.
The following table provides stock optionsoption activity for the yearyears ended December 31, 2015:2018 and 2017:
| Stock Options | | Number of Shares | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| Outstanding at December 31, 2014 | | 691,869 | | $ | 3.66 | | 3.97 years | | $ | 334,636 |
| | | | | | | | | | | |
| Granted | | - | | $ | - | | | | | |
| Exercised | | 41,141 | | $ | 2.25 | | | | | |
| Forfeited/expired/cancelled | | 1,250 | | $ | 4.30 | | | | | |
| Outstanding at December 31, 2015 | | 649,478 | | $ | 3.75 | | 3.21 years | | $ | 1,032,362 |
| | | | | | | | | | | |
| Exercisable at December 31, 2015 | | 359,228 | | $ | 3.89 | | 2.03 years | | $ | 522,039 |
| | | Number of Shares | | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | |
| Outstanding at December 31, 2016 | | | 600,549 | | | | 4.55 | | 3.43 years | | $ | 1,463,052 | |
| | | | | | | | | | | | | | |
| Granted | | | 267,875 | | | | 6.40 | | | | | | |
| Exercised | | | 56,969 | | | | 4.19 | | | | | 100,018 | |
| Forfeited/expired/cancelled | | | 785 | | | | 5.56 | | | | | | |
| Outstanding at December 31, 2017 | | | 810,670 | | | | 5.18 | | 3.69 years | | $ | 2,477,853 | |
| | | | | | | | | | | | | | |
| Exercisable at December 31, 2017 | | | 371,295 | | | | 4.44 | | 2.62 years | | $ | 1,409,440 | |
| | | | | | | | | | | | | | |
| Outstanding at December 31, 2017 | | | 810,670 | | | $ | 5.18 | | 3.69 years | | $ | 2,477,853 | |
| | | | | | | | | | | | | | |
| Granted | | | 93,750 | | | $ | 9.80 | | | | | 352,220 | |
| Exercised | | | 144,947 | | | $ | 4.83 | | | | | 523,327 | |
| Forfeited/expired/cancelled | | | 47,505 | | | $ | 8.82 | | | | | 154,583 | |
| Outstanding at December 31, 2018 | | | 711,968 | | | $ | 5.62 | | 3.33 years | | $ | 687,364
| |
| | | | | | | | | | | | | | |
| Exercisable at December 31, 2018 | | | 396,799 | | | $ | 4.70 | | 2.66 years | | $ | 568,956
| |
The following table summarizes information about stock options outstanding at December 31, 2015:2018:
| | | Stock Options Outstanding | | Stock Options Exercisable |
Range of Exercise Prices | | Shares | | Average Remaining Contract Life (Year) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| 0.0000 to 3.000 | | 92,063 | | 0.73 | | $ | 2.80 | | $ | 232,919 | | 92,063 | | $ | 2.80 | | $ | 232,919 |
| 3.0001 to 3.500 | | 343,750 | | 4.73 | | | 3.43 | | | 651,863 | | 87,500 | | | 3.44 | | | 165,060 |
| 3.5001 to 4.000 | | 15,720 | | 1.05 | | | 3.95 | | | 21,689 | | 15,720 | | | 3.95 | | | 21,689 |
| 4.0001 to 4.500 | | 122,320 | | 1.87 | | | 4.37 | | | 117,971 | | 98,320 | | | 4.37 | | | 94,451 |
| 4.5001 to 6.000 | | 75,625 | | 1.90 | | | 5.30 | | | 7,920.00 | | 65,625 | | | 5.28 | | | 7,920 |
| Total | | 649,478 | | 3.21 | | $ | 3.75 | | $ | 1,032,362 | | 359,228 | | $ | 3.89 | | $ | 522,039 |
| | | Stock Options Outstanding | | | Stock Options Exercisable | |
Range of Exercise Prices | | Shares Outstanding
| | | Average Remaining Contract Life (Year) | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | | | Shares Exercisable
| | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | |
| 1 to 2.79999 | | | - | | | | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | |
| 2.8 to 4.59999 | | | 304,343 | | | | 1.90
| | | | 3.45
| | | | 672,896 | | | | 254,343
| | | | 3.46
| | | | 560,711
| |
| 4.6 to 6.39999 | | | 152,875 | | | | 3.43
| | | | 5.85
| | | | 14,468 | | | | 58,020
| | | | 5.80
| | | | 8,245
| |
| 6.4 to 8.19999 | | | 207,875
| | | | 5.05
| | | | 7.31
| | | | - | | | | 75,041
| | | | 7.21
| | | | - | |
| 8.2 to 12 | | | 46,875
| | | | 4.60
| | | | 11.45
| | | | - | | | | 9,375
| | | | 11.45
| | | | - | |
Total
| | | 711,968
| | | | 3.33
| | | $ | 5.62
| | | $ | 687,364
| | | | 396,779
| | | $ | 4.70
| | | $ | 568,956
| |
As of December 31, 2015,2018, there was $297,000$710,376 of net unrecognized compensation cost related to stock options that are not vested, which is expected to be recognized over a weighted average period of approximately 2.052.45 years. The total fair value of shares vested during the year ended December 31, 2018, was $553,000.
The following table summarizes information about restricted stock and restricted stock units outstanding as of December 31, 2018:
| | | Number of Shares & Units
| | | Weighted Average Grant Date
Fair Value
| |
| Outstanding at December 31, 2017 | | | - | | | $ | - | |
| | | | | | | | | |
| Granted | | | 287,564 | | | | 9.65 | |
| Exercised | | | - | | | | - | |
| Forfeited/expired/cancelled | | | - | | | | - | |
| Outstanding at December 31, 2018 | | | 287,564 | | | | 9.65 | |
| | | | | | | | | |
| Exercisable at December 31, 2018 | | | - | | | $ | - | |
As of December 31, 2018, there was $1,688,746 of net unrecognized compensation cost related to restricted stock and restricted stock units that are not vested, which is expected to be recognized over a weighted average period of approximately 2.5 years. Stock based compensation cost related to restricted stock and restricted stock units recognized during the years ended December 31, 20152018 and 2014,2017 was $357,000$281,249 and $283,000,$0, respectively.
NOTE 12 — GEOGRAPHIC INFORMATION AND ECONOMIC DEPENDENCY:
FASB Guidance establishes standards for the way that business enterprises report information about operating segments in financial statements and requires that those enterprises report selected information. It also establishes standards for related disclosures about product and services, geographic areas, and major customers.
Sales to Africa increased in 2015 primarily due to increased sales in Uganda by approximately $1,344,500, and Nigeria by approximately $287,500. Sales in Asia increased slightly by $76,200. European sales increased by $972,500. Sales decreased in 2015 to North America from decreased sales to Mexico of $3,913,400 and by decreased sales in the U.S from approximately $7,208,000 to $6,563,000. Sales decreases in 2015 to South America were primarily from decreased sales in Brazil from approximately $12,253,500 to $10,141,800
The Company produces only one group of similar products known collectively as "rapid“rapid medical tests". Management believes thattests,” and it operates in a single business segment. Net product sales by geographic area are as follows:
| | | For the years ended | |
| | | December 31, 2015 | | | December 31, 2014 | |
| Africa | | $ | 3,673,199 | | | $ | 2,097,353 | |
| Asia | | | 172,250 | | | | 96,061 | |
| Europe | | | 1,164,476 | | | | 191,947 | |
| North America | | | 6,525,951 | | | | 11,134,691 | |
| South America | | | 10,350,812 | | | | 12,429,717 | |
| | | $ | 21,886,688 | | | $ | 25,949,769 | |
| | | For the years ended | |
| | | December 31, 2018 | | | December 31, 2017 | |
| Africa | | $ | 8,605,306 | | | $ | 3,568,455 | |
| Asia | | | 1,389,120
| | | | 1,626,750 | |
Europe & Middle East
| | | 2,172,031
| | | | 1,763,274 | |
| Latin America | | | 11,722,224
| | | | 8,476,003 | |
United States
| | | 2,852,339
| | | | 3,887,820 | |
| | | $ | 26,741,020
| | | $ | 19,322,302 | |
Sales to Africa increased in 2015 primarily due to increased sales in UgandaLong-lived assets by approximately $1,344,500, and Nigeria by approximately $287,500. Sales in Asia increased slightly by $76,200. European sales increased by $972,500. Sales decreased in 2015 to North America from decreased sales to Mexico of $3,913,400 and by decreased sales in the U.S from approximately $7,208,000 to $6,563,000. Sales decreases in 2015 to South America were primarily from decreased sales in Brazil from approximately $12,253,500 to $10,141,800.geographic area are as follows:
F-15| | | 2018 | | | 2017 | |
| Asia | | $
| 466,185
| | | $
| 472,774 | |
Europe & Middle East
| | | 123,752
| | | | - | |
United States
| | | 2,283,983
| | | | 1,436,458 | |
| | | $ | 2,873,920
| | | $ | 1,909,232 | |
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 13 — COMMITMENTS, CONTINGENCIES AND CONTINGENCIES:CONCENTRATIONS:
Employment Contracts:
The Company has multi-year contracts with threetwo key employees. The contracts call for salaries presently aggregating $944,500$770,000 per year. One contract expires in May 2017, one expiresyear, and they expire in March 20162019 and one contract expires in March 2017.2020. The following table is a schedule of future minimum salary commitments:
| 2016 | | $ | 690,800 | |
| 2017 | | | 181,200 | |
| 2019 | | $ | 485,493
| |
| 2020 | | | 85,000
| |
Pension Plan:
The Company has a 401(k) plan established for its employees. Effective January 1, 2011 the Company elected to matchemployees whereby it matches 40% of the first 5% (or 2% of salary) that an employee contributes to their 401(k)the plan. Expenses related to this matchingMatching contribution aggregated $90,915expenses totaled $94,544 and $82,750$91,150 for the years ended December 31, 20152018 and 2014,2017, respectively.
Obligations Under Operating Leases:
The Company leases industrial space used for office, R&D and manufacturing facilities, currently with a monthly rent of $27,988.$30,140. The current lease expires on April 30, 2017.2019. The lease provides for annual increases of 2 1/22.5% percent each year starting May 1, 2016. In February of 2014, the Company entered into a lease for office and warehouse space, effective March 1, 2014, for another facility located a short distance from its current facility currently with a monthly rent of $15,097.$16,709. The space is used primarily for warehousing and provides for additional office space. The lease expires on April 30, 2018.2020. The lease provides for annual increases of three3.0% percent each year starting March 1, 2016. The Company also leases office, warehouse, and manufacturing space in a single building in Kuala Lumpur, Malaysia persuant to two separate leases that each expire on April 30, 2020 and have an additional three year renewal option with combined monthly rent of approximately $5,400. The Company also leases space in Germany for offices, manufacturing, and center of excellence for optical technology. The lease will automatically renew annually on May 31. The monthly cost is estimated at $13,445 with yearly increases of 2%.
The following is a schedule of future minimum rental commitments (assuming no increases):
Yearsfor the years ending December 31,
| 2016 | | $ | 527,151 | |
| 2017 | | | 306,018 | |
| 2018 | | | 64,067 | |
| | | $ | 897,236 | |
| 2019 | | $ | 384,308
| |
| 2020 | | | 88,576
| |
| 2021 | | | -
| |
| | | $ | 472,884
| |
Rent expense was $511,900$653,155 and $476,000$586,730 for the years ended December 31, 20152018 and 2014,2017, respectively.
Economic Dependency:
The following table delineatesCustomers are considered major customers when net sales exceed 10% of the Company's total net sales for period or outstanding trade receivables exceed 10% of accounts receivable. The Company had tothe following major customers in excess of 10% of total sales for the periods indicated:respective periods:
| | For the years ended | | Accounts Receivable As of | | For the years ended | | Accounts Receivable | |
| | December 31, 2015 | | December 31, 2014 | | December 31, 2015 | | December 31, 2014 | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2018 | | | December 31, 2017 | |
| | Sales | | % of Sales | | Sales | | % of Sales | | | | | | Sales | | | % of Sales | | | Sales | | | % of Sales | | | | | | | |
| Customer 1 | | $ | 10,132,512 | | 46 | % | $ | 12,253,526 | | 47 | % | $ | 775,209 | | $ | 6,230,886 | | $ | 11,171,174
| | | | 42
| % | | $ | 8,065,217 | | | | 42 | % | | $ | 3,499,340
| | | $ | - | |
| Customer 2 | | | 4,526,908 | | 21 | % | | 6,618,251 | | 26 | % | | 700,656 | | | 386,270 | | | 4,346,640
| | | | 16 | %
| | | - | | | | - | % | | | 1,033,824 | | | | - | |
The following table delineates purchases the Company had with vendors in excess of 10% of total purchases for the periods indicated.indicated:
| | For the years ended | | Accounts Payable As of | | For the years ended | | Accounts Payable | |
| | December 31, 2015 | | December 31, 2014 | | December 31, 2015 | | December 31, 2014 | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2018 | | | December 31, 2017 | |
| | Purchases | | % of Purc. | | Purchases | | % of Purc. | | | | | | Purchases | | | % of Purc. | | | Purchases | | | % of Purc. | | | | | | | |
| Vendor 1 | | $ | 794,536 | | 11 | % | $ | 1,331,647 | | 14 | % | $ | 90,075 | | $ | 200,855 | | $ | *
| | | | *
| | | $ | * | | | | * |
| | $ | *
| | | $ | * | |
| Vendor 2 | | | * | | * | | $ | 1,594,838 | | 17 | % | | * | | | - | | | *
| | | | *
|
| | | 746,868 | | | | 12 | %
| | | *
| | | | * | |
| Vendor 3 | | | | *
| | | | *
|
| | | 849,966 | | | | 14 | %
| | | 164,312
| | | | * | |
| Vendor 4 | | |
| 1,646,614
| | | | 16
| % | | | 884,698 | | | | 14 | %
| | | *
| | | | * | |
In the tabletables above, thean asterisk (*) indicates that purchases from the vendor did not exceed 10% for the period indicated.
The Company currently buyspurchases materials which are purchased underpursuant to intellectual property rights agreements andthat are important components in its products. Management believes that other suppliers could provide similar materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which wouldcould adversely affect operating results adversely.results.
Litigation:
From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. The outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s future financial position or results of operations.
NOTE 14 — COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS:
In 2015 and 2014, the Company earned $2,316,044 million and $1,672,258 million, respectively, from research revenues and milestones. The Company is now involved in additional feasibility and development contracts related to its DPP® technology. The total expended on R&D, excluding regulatory, in 2015 and 2014, was approximately $5.4 million and $4.1 million, respectively.
| a. | National Institutes of Health (NIH) Grant: |
In March 2011, the Company received a $2.9 million, three-year grant from the United States National Institutes of Health to complete development of a test for Tuberculosis. Grants are invoiced after expenses are incurred. The Company earned, for the years ended December 31, 2015 and 2014, $- and $388,000, respectively from this grant. The Company has earned $2,850,000 from this grant from inception through December 31, 2015, of which $1,019,000 was paid to sub-contractors.
| b. | Battelle/CDC DPP® Influenza Immunity Test: |
In November 2014, the Company entered into a follow-on, milestone-based development agreement bringing the total up to $1,253,100 based on Chembio's previous successful initial development of a multiplex rapid point-of-care ("POC") influenza immunity test utilizing its patented Dual Path Platform (DPP®) technology. The follow-on agreement contemplates a period of approximately six months in which the follow-on development activity is to be completed. For the years ended December 31, 2015 and 2014, the Company earned $216,850 and $115,000, respectively from this grant. The Company has earned $1,253,100 from this grant from inception through December 31, 2015.
| c. | Cooperative research agreement with a U.S. government agency: |
NOTE PAYABLE:
In May 2013, the Company was awarded a cooperative research agreement with a U.S. government agency for up to $883,000 for an eight-month development project to develop rapid POC diagnostic tests for five infectious diseases associated with febrile illness. For the years ended December 31, 2015 and 2014, the Company earned $- and $117,000, respectively from this grant. The Company has earned $883,000 from this grant from inception through December 31, 2015.
d. RVR DPP® technology transfer agreement:
In February 2014, the Company entered into a technology transfer agreement with RVR Diagnostics for $1,500,000. The agreement was modified in September 2014 and September 2015. Per the agreement, as modified, the Company earned $125,000 and $1,125,000 in milestone payments during 2015 and 2014. The Company has earned $1,250,000 from this grant from inception through December 31, 2015.
e. Dengue agreement:
In October 2014, the Company entered into a development agreement with an international diagnostics company for $300,000. Revenue for this agreement is being recognized under a proportional performance method. For the years ended December 31, 2015 and 2014, the Company earned $240,000 and $60,000, respectively from this grant. The Company has earned $300,000 from this grant from inception through December 31, 2015.
| f. | Brain Injury agreement: |
In January 2015, the Company entered into a technology development agreement with Perseus Science Group LLC for $946,000. Revenue for this agreement is being recognized under a proportional performance method. The Company earned $469,600 for the year ended December 31, 2015 from this agreement.
In January 2015, the Company was awarded a grant from The Bill & Melinda Gates Foundation for $307,000. The Company earned $307,000 for the year ended December 31, 2015 from this agreement.
In October 2014, the Company entered into a technology development agreement with an international diagnostics company for $320,000. Revenue for this agreement is being recognized under a proportional performance method. The Company earned $205,000 for the year ended December 31, 2015 from this agreement.
In October 2015,2017, the Company entered into an agreement with Paul G. Allen Ebola Programan equipment vendor to purchase automated assembly equipment for $2,118,265. Revenueapproximately $660,000. The terms call for this agreement is being recognized under a proportional performance method.prepayments of 30% down, 60% at time of factory acceptance testing and 10% after delivery. The vendor agreed to lend the Company 15%, 40%, and 10% of each originally scheduled payment, respectively. The Company earned $408,500 forwill pay interest at an annual rate of 12% until delivery. Beginning in September 2018, the year ended December 31, 2015 from this agreement.
Governmental Regulation:
AllCompany began making monthly payments of the Company's existingprincipal and proposed diagnostic products are regulated by the United States Food and Drug Administration (FDA), United States Departmentinterest of Agriculture, certain state and local agencies, and/or comparable regulatory bodies in other countries. Most aspectsapproximately $20,150, at an annual rate of development, production, and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing, and record keeping are subject to review. After marketing approval has been granted, Chembio must continue to comply with governmental regulations. Failure to comply with these regulations can result in significant penalties.12% over a twenty-four month period.
NOTE 15 — SUBSEQUENT EVENTS:
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.
On March 8, 2016,February 5, 2019, the Company entered into a Rights Agreement (the "Rights Agreement") betweencommercial real estate lease for a new corporate headquarters comprised of 70,000 square feet of office, research and development, and warehouse space in Hauppauge, New York. The lease has an initial term of eleven years that can be extended, at the Company’s option, for two additional terms of five years each. Rent under the lease, which is payable in monthly installments, totals approximately $900,000 for the initial year and then increases by approximately three percent each succeeding year. Upon lease inception, the Company provided a security deposit and Action Stock Transfer Corp., as Rights Agent. Pursuant topaid four months base rent that together totaled approximately $450,000. The base rent which will be deducted against the Rights Agreement,rent due following a nine-month free rent period.
On February 5, 2019, the Company declared a dividend distributionalso entered into an agreement of one preferred share purchase right (a "Right") for each outstanding share of Common Stock, $0.01 par value (the "Common Stock"),sublease with an affiliate of the Company,Hauppauge, NY facility landlord to sublet the Company’s warehouse space and supplemental administrative office facility in the manner described below.Holbrook, New York. 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's shareholders of recordsublease has a term that will (a) commence on that date. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable. The Rights are not exercisable until a Distribution Date. Until a Right is exercised, the holder thereof, as such, has no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights. The Rights are to be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) has acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date") or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 20% or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day afterMarch 18, 2019 and the date the Rights Agreement was entered into (or such later date as may be determined by action ofCompany vacates the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i)premises and (ii),(b) terminate on April 29, 2020, which date may include any such date that is after the date of the Rights Agreement butimmediately prior to the issuancetermination of the Rights, being calledCompany’s lease for the "Distribution Date").facility. The sublessee will pay the Company 50% of the Company’s rent and additional rent payments, which will total approximately $100,000 per year during the term of the sublease.
F-18
F-19