| ·● | WeIn October 2014, we entered into an agreement in October 2014 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. |
| · | 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®DPP® technology outside the infectious disease field. |
| ·● | We entered into a milestone-based development agreement with a private contracting organization acting on behalf of the CDC, for a multiplex POC influenza immunity test utilizing our patented Dual Path Platform (DPP® ) technology. |
| · | In January 2015, we entered into an agreement with the Concussion Science Group (CSG) Division of Perseus Science Group LLC to utilize our patented DPP®DPP® technology to develop a POC diagnostic test for traumatic brain injury (TBI), including sports-related concussions. Under terms of the agreement, CSG's patented biomarker will be combined with our proprietary DPP® platform to develop a semi-quantitative or quantitative point-of-care test to diagnose TBI. CSG agreed to pay Chembio milestone development payments during 2015. |
| ·● | In January 2015, we were awarded a grant from The Bill & Melinda Gates Foundation to expedite the feasibility testing and development of a DPP®DPP® Malaria POC rapid diagnostic to accurately identify individuals infected with Plasmodium falciparum parasite. Our 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. |
| ·● | In October 2015, we were awarded a grant from theThe Paul G. Allen Family Foundation to develop a POC test to identify multiple life-threatening febrile illnesses. Under the $2.1 million dollar grant, we are to useused our patented DPP®DPP® technology to seek to develop a DPP®DPP® Fever Panel Assay, a POC multiplex assay to simultaneously detect Malaria, Dengue, Zika, Chikungunya, Ebola, Lassa and Marburg. The multiplex assay 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. |
5
| ·● | Also inIn October 2015, we signed an agreement with opTricon (Berlin, Germany), a leading developer of mobile analysis devices for rapid diagnostic tests. Through this exclusive agreement, subject to certain terms, and covering the fields of sexually transmitted diseases, certain "fever" diseases, and a specific form of cancer, we expect to launch the DPP®The DPP® Micro Reader a point-of-care instrument designed specifically to complement our 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 our 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 provideprovides customers with various options to capture, record, transmit and store test results. With one-button operation, the palm-sized and battery-operated DPP®DPP® Micro Reader is simple, fast, portable, and cost-effective. |
| ● | In October 2017, we signed a development agreement with AstraZeneca for the development of a quantitative point-of-care assay for a novel biomarker based on our DPP® assay and DPP® Micro Reader technologies. |
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 us with a non-exclusive license to certain Alere lateral flow patents that may be applicable to our lateral flow products, including for manufacture of the HIV tests in the United States for sales outside the United States and even for sale in the United States should Alere enter the U.S. market with a competitive rapid HIV test product and in such case we choose to market our products directly as provided in the agreements in such event of a competitive rapid HIV test product. Simultaneous with the execution of the agreements, we also settled litigation with StatSure Diagnostics, Inc. (SDS), that had been ongoing relating to the proprietary barrel device which is incorporated into one of our two FDA-approved rapid HIV tests (See Lateral Flow HIV Tests above). SDS, pursuant to the settlement, is a party to the 3-way Barrel Agreement. As a result, until the dates described below and elsewhere in this report, it is through the agreements with Alere that we were 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 intended 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, we 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, we may, at any time, terminate such agreement, which termination would become effective 60 days after the date notice was made. Under the Barrel Agreement, we and SDS may jointly issue a non-exclusivity notice, which notice shall be effective immediately. In the event that we make this election with respect to the cassette product, or that both we 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 we have from Alere for international sales would be expanded to include sales in the United States. See Lateral Flow Technology and Reagent Licenses. In April 2014, we gave notice to Alere of our intent to terminate the Cassette Agreement and 60 days later, we began marketing the cassette product in the United States under the Chembio brand of HIV 1/2 STAT-PAK® assay. On May 31, 2016, the Barrel Agreement expired pursuant to its terms, and, given our January 2015 agreement with SDS, we now market the barrel product in the U.S. under the brand of SureCheck® HIV 1/2 Assay.Sales, Marketing & Distribution
We have developedcontinue to target the following geographies: United States, Europe, Latin America, Africa and Southeast Asia. We reach our owntarget markets through a combination of direct sales, strategic local distributors and OEM partners. Our efforts are focused on raising awareness of Chembio’s products and technology through global and regional marketing departments for the salesactivities such as tradeshows and working with local key opinion leaders, local distributors, and strategic partners. We are also increasing our digital and social media activities to drive awareness of our products in the U.S. and internationally. We also have appointed distributors in the U.S. and internationally for our lateral flow HIV tests. Our largest markets outside the U.S. for our lateral flow HIV rapid tests are certain countries in Africa, Asia, and South America, as well as Mexico. Internationally, most of the demand for our products is based on governmental and non-governmental prevention and treatment efforts. Given this, these programs can and do often result in large orders, but also can result in periods of relatively lower demand, based on the variations associated with this kind of demand.
OEM DPP® Products
Oswaldo Cruz Foundation OEM DPP® Agreements
During 2008-2010 we signed five separate agreements, each of which is titled and constitutes a "Technology Transfer Agreement", with the Oswaldo Cruz Foundation (FIOCRUZ) in Brazil. FIOCRUZ includes the Institute of Technology on Immunobiologicals/Bio- Manguinhos, which is the FIOCRUZ unit that produces vaccines and diagnostic kits. FIOCRUZ and Bio-Manguinhos are referred to herein interchangeably. Each of the five agreements relates to a different specific product or group of products based on our DPP® technology. FIOCRUZ is the leading public health organization in Brazil, and it is affiliated with Brazil's Ministry of Health, which is its principal client. It has extensive research, educational and manufacturing facilities for drugs and vaccines, as well as for diagnostic products.
Each of the agreements grants to FIOCRUZ the right, but not the obligation, to earn the right to request a technology transfer to be able to license and manufacture that product on its own. FIOCRUZ is not required to earn this right, but if it desires to do so, then it needs to purchase a stated amount of the product as set forth in the respective agreement for that product.
During 2010 and 2011, all of the initial products contemplated under the five agreements were approved for marketing by the applicable regulatory agencies in Brazil. The agreements between us 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 us of the information and training that is required for this to occur, will occur only if FIOCRUZ purchases from us the amount of that product that is specified in the respective agreement for that product. The actual amount of purchases for each product is totally at the discretion and option of FIOCRUZ and may be more or less than the amount needed to qualify for a technology transfer.
More specifically, the five agreements, although separate and independent of one another, are structurally similar according to the following:
| · | Each agreement states: "the object of this Agreement is for the Transfer of Technology from Chembio to Bio-Manguinhos, the license by Chembio to Bio-Manguinhos for the Chembio Patents applied or granted in Brazil or other Mercosur countries for the term of the patents and the transfer of all the technical information related to the DPP® technology and the process to obtain the product by the DPP® technology. This Agreement contemplates the scientific and technological co-operation between Chembio and Bio-Manguinhos for such activities so that Bio-Manguinhos will be able to manufacture the Product in Brazil." |
| · | Each agreement provides that we will supply free of charge to Bio-Manguinhos prototypes of the product to demonstrate performance characteristics that are necessary for evaluation by the Brazilian Ministry of Health and for registration with ANVISA. ANVISA is the Agencia Nacional de Vigilancia Sanitaria, or the National Sanitary Vigilance Agency. The number of prototypes ranges from 15,000 to 45,000 in the various agreements. |
| · | Each agreement provides that the prototypes will be utilized both for a performance study that follows a protocol prepared and approved by Bio-Manguinhos and the Brazilian Ministry of Health, and also will be used for studies in Brazil for the registration procedures at ANVISA. Bio-Manguinhos will then apply to ANVISA to register the product. Within 120 days of the registration of the product with ANVISA, Bio-Manguinhos will make an advance technology transfer payment to us (the "Advance Payment"), in an amount specified in that particular agreement. All five of the Advance Payments provided for in the agreements were made in 2010 and 2011. |
| · | At such time, if any, that the product for a particular agreement has been successfully registered with ANVISA, then Bio-Manguinhos has the right to qualify for the full technology transfer for that product by purchasing the amount of the product, and at the price, specified in the agreement. |
| · | Bio-Manguinhos is not required to purchase any amount of any product. For each product, it only needs to purchase that product, in the amount specified in the agreement, only if it desires to be able to complete the technology transfer process in order to manufacture and sell that product on its own. We do not have recourse against Bio-Manguinhos if Bio-Manguinhos does not purchase the qualifying purchase amount of any product. In that case, we can only suspend further phases of the technology transfer, attempt to renegotiate the agreement, and/or retain any amounts previously paid by Bio-Manguinhos. We cannot force Bio-Manguinhos to purchase any amount of any product. |
| · | As a result of the terms of these agreements, Bio-Manguinhos has never been required to, and is not now required to, purchase any amount of any of the products. |
| · | As of December 31, 2016, Bio-Manguinhos had earned the status described below with respect to each of the five products: |
| 1. | With respect to our DPP® HIV1/2 Screen test, Bio-Manguinhos had qualified to request the technology transfer. It has requested, and has received, the technology transfer information. Bio-Manguinhos purchased $880,175, $4,990,840 and $291,235 of this product in 2011, 2012 and 2013, respectively, all of which applied to the qualifying amount to obtain the right to the technology transfer (the "Qualifying Amount") for this product. In 2013, 2014, 2015 and 2016 Bio-Manguinhos made $3,320,010, $4,799,250, $5,410,350 and $5,900, respectively, of purchases in excess of the Qualifying Amount. |
| 2. | With respect to our Canine Leishmania test, Bio-Manguinhos had qualified to request the technology transfer and did so request. Submission of the technology transfer information is in process at this time. Bio-Manguinhos purchased $2,000,817 and $99,183 of this product in 2011 and 2012 respectively, of this product in that applied to the Qualifying Amount. In addition, Bio-Manguinhos made purchases in excess of the Qualifying Amount equal to $1,314,117, $1,736,700, $2,394,000, $3,772,482 and $4,221,000 in 2012, 2013, 2014, 2015 and 2016, respectively. |
3.
| a. | With respect to the three variations of our 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 no purchases of this product were made in 2016. |
| b. | With respect to the two variations of our Screen & Confirm Test, Bio-Manguinhos had not made any purchases in 2011, 2012, 2013, 2014, 2015 or 2016, and therefore had not qualified to request the technology transfer for either of them. This agreement was terminated in December 2015. |
| c. | This syphilis agreement was terminated during the fourth quarter of 2015. |
| 4. | With respect to our DPP® Confirmatory test, Bio-Manguinhos has qualified to request the technology transfer. Bio-Manguinhos made purchases of $560,000, $819,000, $390,000, $390,000, $156,000 and $39,000 of this product in 2011, 2012, 2013, 2014, 2015 and 2016 respectively, all of which applied to the Qualifying Amount. In addition, Bio-Manguinhos made purchases in excess of the Qualifying Amount equal to $485,940 in 2016. |
| 5. | With respect to our DPP® Leptospirosis test, Bio-Manguinhos had not qualified to request the technology transfer. Bio-Manguinhos made purchases of $135,000 of this product in 2011, and it made -0- purchases in 2012, $45,000 in 2013 and it made -0- purchases in 2014, 2015 and 2016. In order to qualify for the technology transfer, Bio-Manguinhos would need to purchase an additional $225,000 of this product. |
| · | As stated above, Bio-Manguinhos is not obligated to make any purchases. After the specified level of sales for a particular product has been achieved, FIOCRUZ may request that the technology for that product be transferred to FIOCRUZ together with an exclusive license to produce and sell that product in a defined territory. The license is to provide that we will receive a royalty on all sales. We do not release the amount of this royalty because it could have an adverse effect on negotiations concerning royalties in potential transactions with other parties. |
| · | All the agreements expire five years after the date of the technology transfer. If terminated earlier by default of FIOCRUZ, FIOCRUZ must stop all activity; if terminated earlier because of our default, 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, we will sell the appropriate DPP® components to Labtest for further manufacture and assembly in Brazil.
In February 2014, we entered into a technology transfer and license agreement with RVR Diagnostics SDN BHD ("RVR"), a privately-held company in Malaysia. The agreement supports our 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 our DPP® HIV 1/2 Assay and DPP® HIV-Syphilis Assay, and potentially other products that are developed by us, such as Dengue, incorporating its patented DPP® technology as indicated in the DPP® Technology & Development section above. As indicated elsewhere, we acquired RVR in January 2017.
Our Rapid Test Technologies
All of our commercially available current products employ either in-licensed lateral flow technology or our own patented Dual Path Platform (DPP®) technology. Both lateral flow technology and DPP® allow the development of accurate, low cost, easy-to-perform, single-use diagnostic tests for rapid, visual detection of specific antigen-antibody complexes on a test strip. These formats provide a test that is simple (requires neither electricity nor expensive equipment for test execution or reading, nor skilled personnel for test interpretation), rapid (turnaround time approximately 15 minutes), safe (minimizes handling of potentially infected specimens), non-invasive (requires 5-20 micro liters of whole blood easily obtained with a finger prick, or alternatively, serum or plasma), stable (24 months at room temperature storage in the case of our HIV tests), and highly reproducible.
We believe that products developed using DPP® technology can provide superior diagnostic performance as compared with products that use lateral flow technology. The reason for this is that one of the major differences between the two platforms is that in DPP® samples are allowed to incubate with the target analyte in the test zone before introduction of the labeling reagent/conjugate, whereas in lateral flow, samples are combined with the labeling reagent to form a complex before coming in contact with the target analyte. We believe that this complex can compromise test performance. Also, because of the usage in DPP® of a separately connected sample strip, the control and delivery of sample material is substantially improved. This feature is critical in the development of multiplex tests, as well as tests that involve viscous sample material (such as oral fluid) that can be impeded when forced to combine with labeling reagents before migration on the test strip to the test zone area.
Multiplexing is significantly improved as a result of the design of DPP® and this provides a significant advantage. For example, the HIV confirmatory test we developed for Bio-Rad that is described above employs six different markers related to various epitopes of the HIV antigen. We have a number of other products in development, including those being developed in sponsored development programs that involve the use of multiple (e.g. eight) test bands. Although all of these products could be visually read, we can also use handheld and desktop readers with our DPP® products to objectively measure, quantify, record and report DPP® test results. Certain of the products we have and/or are developing incorporate some of these readers, and we are developing other products that may be used with or will require use of a reader. Also, platforms can incorporate labeling reagents that cannot be visually read except by employing a reader, such as fluorescence, though no products are currently utilizing such reagents.
We are pursuing additional capabilities and technologies that will complement our current product portfolio and business strategy. This activity includes pursing development, license or acquisition of diagnostic technologies that complement our existing platforms, proprietary biomarkers that can result in new product applications of our existing platforms, and new platforms that would complement our commercial strategy.
Target Markets
Rapid HIV Tests
A large percentage of individuals that are HIV positive worldwide are unaware of their status. Part of the reason for this is that even those that do get tested in public health settings will often not return or call back for their test results when samples have to be sent out to a laboratory which can take up to several days to process. The increased availability, greater efficacy and reduced costs for anti-retroviral treatments (ARVs) for HIV has increased the demand for testing, as the stigma associated with the disease is lessened, and the ability to resume normal activities is substantially improved, providing a positive message to those potentially infected. The impact that rapid HIV testing has had on prevention efforts has in turn increased the demand for testing, particularly by public health programs worldwide, which have also become more effective in reducing the number of annual new infections in many, but by no means all, high prevalence regions.
Despite less attention to HIV by the media as compared with prior years, there are still approximately 50,000 new diagnoses of HIV infection in the United States each year, according to the CDC. CDC estimates that approximately 1.1 million individuals in the U.S. are living with HIV, with an estimated 1 of 8 of these U.S. individuals, or almost 13%, unaware that they are infected. It is transmissions from these infected people that are reported to account for the majority of all new infections per year. Part of the reason for this is that even those individuals that do get tested in public health settings will often not return or call back for their test results if their blood samples have to be sent out to and tested in a laboratory and then reported back, a process which can take up to several days to complete. Making more people aware of their HIV status at the point-of-care reduces the number of HIV transmissions.
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. Assuming that new legislation does not modify this requirement, of which there is no assurance, we expect this requirement to result in an increase in HIV testing in the United States in the coming years, which we believe will include point-of-care HIV testing utilizing our 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.
With our four U.S.-manufactured rapid HIV tests, all of which are FDA-approved, we are recognized as a reputable and dependable supplier of high quality products that are available at reasonably competitive prices. As a result, certain of our products have been selected in the testing protocols in countries (national algorithms) that are large beneficiaries of PEPFAR and the Global Fund. As mentioned above, these programs can and do often result in large orders, but also can result in periods of relatively lower demand, based on the variations associated with this kind of demand. Also, even though the United States taxpayer is funding the largest share of global AIDS relief, U.S. companies do not receive any preference for these procurements, and therefore must compete with foreign suppliers that manufacture competitive products with lower costs, including those related to quality, regulatory, intellectual property, and costs of manufacturing.
Oral fluid testing is an established alternative to blood testing for diagnostic tests, including HIV tests. It is also often patient preferred, providing a more comfortable, less invasive test. In certain public health clinics, staffs choose not to handle blood specimens; thus, oral sample collection provides a viable alternative. The most well-established market for oral fluid HIV testing is the United States. Given the premium price required for an oral fluid test as compared with blood tests, the higher volume programs will not specify an oral fluid test. However, segments of these programs may want to have an oral fluid testing option, and certain programs that have greater resources may also choose to incorporate oral fluid testing into the testing protocol.
There is also now an over-the-counter market for HIV self-testing in the United States. OraSure Technologies Inc. received FDA approval for an over-the-counter (self-testing) version of its previously professional-market-approved (test performed on an individual by a health care professional) HIV test. The FDA approval was granted in July 2012, and OraSure has been investing heavily in developing this market. Initial results after over two years of marketing are well below expectations. The costs for such over-the-counter approval, including primarily the associated clinical trials, are estimated to be at least $5 million and they may take two to three years to complete, not to mention the cost of distribution. OraSure's initial results are not convincing of a large market, although this possibility remains. If it appears that there is an attractive market, we believe we are very well positioned to participate in this market.
Rapid HIV-Syphilis Test
There are significant risks relating to transmission of Syphilis from a pregnant mother to child, just as there are for transmission of HIV. Therefore we believe there is a significant opportunity to improve prevention efforts in pregnant mother to child transmission testing programs (PMTCT) that are currently not doing any or nearly enough testing for syphilis even though they are testing for HIV. In the United States, we believe there is also a significant need for this product in some of the highest HIV prevalence populations, such as among men that have sex with men (MSM), as data show high degrees of HIV and Syphilis co-infection in this segment of the population.
Marketing Strategy
Our marketing strategy is to:
| · | Market our DPP® HIV 1/2 Assay, HIV 1/2 STAT-PAK® Assay, our SURE CHECK® HIV 1/2 Assay and future DPP® based new products in the US through our internal sales and marketing organization and selected channel partners (e.g., McKesson/PSS, Fisher Healthcare, Henry Schein, etc.). Following the June 2014 termination of the STAT-PAK® agreement with Alere, and the May 31, 2016 termination of the SURE CHECK® agreement with Alere, we no longer have to share any portion of the net sales proceeds for these products with Alere. These changes resulted in our incurring expenditures related to hiring sales representatives, establishing agreements and associated discounts with distributors, incurring advertising and marketing expenditures, warehousing, customer service and technical support. If Alere's new competitive product is indeed successful, our ability to retain a significant share of the market that has been established for our products may be enhanced by our having control of the marketing of our products, rather than relying on Alere to sell both our products while it is also selling its own competing product. We are leveraging the same sales force for U.S. Sales of our DPP® HIV 1/2 Assay. |
| · | Outside the U.S., we will market our products primarily through commercial collaborators and distribution partners. |
| · | Leverage our DPP® intellectual property and product development and manufacturing experience to continue creating new collaborations where we can be the exclusive development and manufacturing partner supporting leading marketing organizations. |
| · | Establish strong distribution relationships for our Chembio-branded products in the U.S and abroad, and establish a direct sales and marketing organization that is focused in the public health market segment, and that utilizes distributors for other market segments, primarily the acute care market which, together with public health, are the main market segments for rapid HIV tests in the United States. We believe that creation of a Chembio public health brand and marketing organization is fundamental to the creation of shareholder value over the long-term. |
We have increased our commercial activities and efforts in Africa, Europe and Asia for our HIV tests and product pipeline. We believe these efforts will enable us to be more closely engaged with opportunities to engage with customers and partners and to participate in the national testing algorithms that are established and revised from time to time by countries that are beneficiaries of PEPFAR, Global Fund and/or other bilateral or multilateral donor funding. In Europe, where there are a larger percentage of HIV positive people unaware of their status than in the United States, we believe that there is an emerging public health outreach opportunity, and there are relatively few strong competitors that are CE-marked. Most recently we have established new sales and marketing positions in the Company to support our efforts to increase brand awareness globally and to lead our direct sales effort in the U.S. market.
Competition
ThereMany of our competitors are several established rapid HIV tests which are already in the marketplace that compete with our lateral flow HIV tests and DPP® HIV 1/2 Assay. These include OraSure (sold by OraSure Technologies), Alere Determine® rapid test product (sold by Alere, Inc.), and INSTI (sold by Biolytical, Inc.). Our competitors may have significant advantages over us, including being substantiallysignificantly larger and havinghave 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:
| ·● | Scientific and technological capability;Patent protection |
| ·● | Proprietary know-how;Scientific expertise |
| ·● | The abilityAbility to develop and market products and processes;processes |
| ·● | The abilityAbility to obtain FDA or other required regulatory approvals;approvals |
| ·● | The abilityAbility to manufacture cost-effective products that meet applicable FDAregulatory requirements (i.e. FDA's Quality System Regulations) (see Governmental Regulation section);
|
| · | The ability to manufacture products cost-effectively; |
| ·● | Access to adequate capital;capital |
| ·● | The abilityAbility to attract and retain qualified personnel; andpersonnel |
| · | The availability of patent protection. |
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.
11
sexually transmitted diseases, fever and tropical diseases, 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 Development
During 2017, 2016 2015 and 2014,2015, we spent $8.6 million, $8.4 million and $6.4 million, and $4.8, respectively, on research and development (including regulatory activities). These expenses were in part underwrittenfunded by funding from R&D milestone and milestonesgrant revenues of $4.0 million in 2017, $3.7 million in 2016 and $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.2015.
Employees
At December 31, 2016,2017, we employed approximately 131165 people. We have entered into employment contracts with our Chief Executive Officer and President, John J. Sperzel, our Chief Operating Officer, Sharon Klugewicz, and our Chief Science and Technology Officer, Javan Esfandiari. Due to the specific knowledge and experience of these executives regarding the industry, technology and market, the loss of the services of any one of them would likely have a material adverse effect on the Company. The contract with Mr. Sperzel has a term of three years ending March 13, 2017. The contract with Ms. Klugewicz, has a term of two years ending May 2017. The contract with Mr. Esfandiari has a term of three years ending March 2019. The Company and Mr. Sperzel currently are discussing terms for renewal of his employment agreement. We have obtained a key man insurance policy for Mr. Esfandiari.
Governmental Regulation
The manufacturing and marketingCertain of our existing and proposed diagnostic productsactivities are regulatedsubject to regulatory oversight by the United States Food and& Drug Administration ("FDA"), United States Department of Agriculture ("USDA"), certain state and local agencies, and/or comparable regulatory bodies in other countries. These regulations govern almost all aspects of development, production and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing and record keeping. The Company's FDA and USDA regulated products require some form of action by each agency before they can be marketed in the United States, and, after approval or clearance, the Company must continue to comply with other FDA requirements applicable to marketed products, e.g. Quality Systems (for medical devices). Failure to comply with the FDA's requirements can lead to significant penalties, both before and after approval or clearance.
There are two review procedures by which medical devices can receive FDA clearance or approval. Some products may qualify for clearance(FDA) 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 is subject to oversight by Centers for Medicare and Medicaid Services (CMS) pursuant to CLIA (defined below), 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 U.S. 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 sure 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, 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 (MDUFMA), as of October 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 MDUFMA, 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 (BPAC). Approved Rapid HIV tests must meet the regulations in the 21 CFR 800 series subparts, under the Investigational Device exemption (IDE) and PMA pathways.
Premarket Approval Pathway
We manufacture, market, and distribute three rapid HIV tests in the U.S: our HIV 1/2 STAT-PAK® Assay, SURE CHECK® HIV 1/2 Assay, and DPP® HIV 1/2 Assay, all of which have received FDA PMA approval. A PMA application must be submitted if a device cannot be cleared through the 510(k) process. 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 investigational device exemption, or “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; and, in some instances, IVD clinical trials 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 IRB 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 Quality Systems Regulations (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 on May 25, 2006. Our DPP® HIV 1/2 Assay PMA application number BP120032/0 was approved by the FDA on December 19, 2012.
510(k) Clearance Pathway
We do not currently market, distribute, or sell a product that has market clearance by the FDA. However, 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 our SURE CHECK® 1/2 HIV.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 ("(CLIA)
A manufacturer of a test categorized as moderately complex may request that categorization of the test as waived through a CLIA") prohibits Waiver by Application (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, 42 U.S.C. 263a(d)(3). Congress passed CLIA in 1988, which provided 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.pay fees. We have received a CLIA waiver for eachboth of the twoour lateral flow rapid HIV tests now marketedthat we market in the U.S. TheSpecifically, the CLIA waiver was granted by the FDA for HIV 1/2 STAT-PAK®STAT-PAK® on November 20, 2006 and for SURE CHECK®CHECK® HIV 1/2 on October 22, 2007. In 2008 the FDA revised its CLIA waiver requirements so that an additional prospective trial need be conductedis required in order to demonstrate clinical utility by showing that the device is capable of identifying new infections when used by untrained users. Our DPP®DPP® HIV 1/2 test received a CLIA waiver inunder these newer requirements on October of29, 2014.
Pervasive and Continuing FDA Regulation
In addition,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 (MDR) regulations (which require that manufacturers report to the FDA regulatesspecified types of adverse events involving their products), labeling regulations, and the exportFDA’s general prohibition against promoting products for unapproved or “off-label” uses. Class II devices also can have special controls such as performance standards, post-market surveillance, patient registries, and FDA guidelines that do not apply to Class I devices.
A noncomprehensive list of the regulatory requirements that apply to our approved products classified as medical devices or IVDs includes:
· | product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action; |
· | QSR, which requires 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; |
· | labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication; |
· | 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; |
· | approval of product modifications that affect the safety or effectiveness of one of our cleared devices; |
· | 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; |
· | post-approval restrictions or conditions, including post-approval study commitments; |
· | post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; |
· | 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; |
· | regulations pertaining to voluntary recalls; and, |
· | notices of corrections or removals. |
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 to determine our compliance with quality system regulation and other regulations.
21st Century Cures Act
The 21st Century Cures Act, enacted in December 2016, contains several sections specific to medical device innovations. The Company believes that implementation of the 21st Century Cures Act may have not been approveda positive impact on its businesses by facilitating innovation and/or reducing the regulatory burden imposed on medical device manufacturers.
Government Regulation of Medical Devices for marketingAnimal Subjects
We currently sell, market, or distribute two veterinary devices 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 United States Department of Agriculture (USDA) Animal and Plant Health Inspection Service (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 States and is intended for export. Specifically, a medical device intended for export is not deemed to be adulterated or misbranded if the product: (1) complies with the specifications of the foreign purchaser; (2) is not in conflict with the laws of the country to which it is intended for export; (3) is prominently labeled on the outside of the shipping package that it is intended for export; and (4) is not sold or offered for sale in the United States. However, the Federal Food, Drug and Cosmetic Act does permit the export of devices to any country in the world, if the device complies with the laws of the importing country and has valid marketing authorization in one of several "listed" countries under the theory that these listed countries have sophisticated mechanisms for the review of medical devices for safety and effectiveness.U.S.
WeThe APHIS regulatory approval process involves the submission of product performance data and manufacturing documentation. Following regulatory approval to market a product, APHIS requires that each lot of product be submitted for review before release to customers. In addition, APHIS requires special approval to market products where test results are also subject to regulationsused 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 requiredpart 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 us that might arise from future legislative or administrative action cannot be predicted.government-mandated disease management programs.
Environmental Laws
To date, we have not encountered any costs relating to compliance with any environmental laws.
Intellectual Property
Intellectual Property Strategy
Our intellectual property strategy is to: (1) build our own intellectual property portfolio around our DPP®DPP® technology; (2) pursue licenses, trade secrets and know-how within the area of rapid point-of-care testing,testing; and, (3) develop and acquire proprietary positions to reagents and new hardware platforms for the development and manufacturecertain reagents.
DPP® Intellectual Property
We have obtained patent coverage on our DPP®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 our DPP®DPP® technology are pending in the U.S., as well as in many foreign countries such as Brazil, Canada, the European Union, India, Israel, and South Africa. Patents have also been filed on extensions to the DPP® product line concept, such as 4th generation assays. The four U.S. patents are as follows:
U.S. Patent No. | Issued | Expires | Nature | Type | Description |
7,189,522 | 3/13/2007 | 3/11/2025 | test device | utility | a test device for determining the presence of a ligand in a sample |
7,682,801 | 3/23/2010 | 3/11/2025 | test device
The DPP® technology provides us with our own intellectual property. We believe it provides us with freedom to operate, which enables us to develop tests with better performance and unmatched capabilities compared with tests built on traditional lateral flow platforms. These advantages have allowed us to enter into multiple technology collaborations based upon the DPP® technology, which we believe will provide new manufacturing and marketing opportunities. We have filed other patent applications that we believe will strengthen the DPP® intellectual property 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
|
We have also filed for patents and obtained some patents in the U.S.patent protection for certain other inventions, such as its multiple host species veterinary TB test, and patentpoint-of-care technologies or applications for the other inventions are in various stages from being recently filed and not yet examined, to already examined and allowed but not yet issued. We selectively and strategically foreign files its patent applications based on a number of economic and strategic factors related to the invention.thereof.
Trademarks
We have filed and obtained trademarks for our products, including DPP®DPP®, SURE CHECK®CHECK®, STAT-VIEW®, and STAT-PAK® and alsoSTAT-PAK®, as well as for the SampleTainer®SampleTainer®, which is used inwith certain DPP®DPP® products. Our DPP® trademark is also registered undertrademarks have been obtained in the European convention (ECT). We recently filed a trademark for STAT-VIEW®, to marketUnited States and certain other countries around 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®DPP®-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.reproducibility 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 February 3, 2015 the agreements executed in 2006 with Alere for the marketing of our HIV tests, we were granted non-exclusive licensesroyalty expenses related to certain lateral flow patents for certain products manufactured and marketed by us, including but not limited to our lateral flow HIV tests. This license allowstechnology expired. These now allow us to produce market and sell assays using lateral flow technologies specifically including our STAT-PAK®STAT-PAK®, SURE CHECK®CHECK®, DIPSTICK®STAT-VIEW®, 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. Between 2007 and 2015 we incurred a totallines free of $2.87 million in lateral flow royalty expenses. As of February 3, 2015 this royalty expense was no longer payable.those royalties.
Although we believe our DPP®DPP® IP is outside of the scope of all lateral flow patents of which we are aware, we consult with patent counsel, and seek licenses and/or redesigns of products that we believe to be in our best 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 our lateral flow or DPP®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. We have signed and anticipate 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 other license agreements. In prior years, we concluded license agreements related to intellectual property rights owned by the United States associated with HIV-1, and, during the first quarter of 2008, we entered into a sub-license agreement for HIV-2 with Bio-Rad Laboratories N.A., the exclusive licensee of the Pasteur Institute's HIV-2 intellectual property estate.
Corporate Information
We are a Nevada corporation that was formed in December 1985. Since inception, we have been involved in developing, manufacturing, selling and distributing medical diagnostic tests, including rapid tests that detect a number of diseases and other conditions in humans and animals.
On May 30, 2012, we effected a 1-for-8 reverse split of its common stock. 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, we entered into a Rights Agreement (the "Rights Agreement") between us and Action Stock Transfer Corp., as Rights Agent. Pursuant to the Rights Agreement, we declared a dividend distribution of one Preferred Share Purchase Right (a "Right") for each outstanding share of our common stock, par value $0.01 (the "Common Stock"), 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 our shareholders of record on that date. The Rights Agreement also provides that Rights are issued with respect to any shares of our common stock that are newly issued after March 8, 2016, such as with respect to the Company's underwritten public offering in February 2018. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable.Exercisable
The Rights are not exercisable until a Distribution Date. Until a Right is exercised, the holder thereof, as such, has no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights.
The Rights are to be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) has acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date") or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 20% or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date").
Glossary
AIDS | Acquired Immunodeficiency Syndrome. AIDS is caused by the Human Immunodeficiency Virus, HIV. |
ALGORITHM (parallel or serial) | For rapid HIV testing, this refers both to method or protocol (in developing countries to date) for using rapid tests from different manufacturers in combination to screen and confirm patients at the point-of-care, and may also refer to the specific tests that have been selected by an agency or ministry of health to be used in this way. A parallel algorithm uses two screening tests from different manufacturers and a tie-breaker test only if there is a discrepancy between the screening tests results. A serial algorithm only uses a second confirmatory test if there is a positive result from the screening test, meaning that the number of confirmatory tests used is equal to the positivity rate in the testing venue. A tie-breaker test resolves discrepancies between the screen and the confirmatory test. |
ANTIBODY | A protein which is a natural part of the human immune system produced by specialized cells to neutralize antigens, including viruses and bacteria that invade the body. Each antibody producingantibody-producing cell manufactures a unique antibody that is directed against, binds to and eliminates one, and only one, specific type of antigen. |
ANTIGEN | Any substance which, upon entering the body, stimulates the immune system leading to the formation of antibodies. Among the more common antigens are bacteria, pollens, toxins, and viruses. |
ANVISA | The National Health Surveillance Agency of BrazilBrazil. |
ARVs | Anti-retroviral medications developed to fight AIDSAIDS. |
CDC | United States Centers for Disease Control and PreventionPrevention. |
CLIA waiver | Clinical Laboratory Improvement Act designation that allows simple tests to be performed in point-of-care settings such as doctor'sdoctor’s offices, walk-in clinics and emergency rooms. |
DIAGNOSTIC | Pertaining to the determination of the nature or cause of a disease or condition. Also refers to reagents or procedures used in diagnosis to measure proteins in a clinical sample. |
FIOCRUZ | The Oswaldo Cruz Foundation of BrazilBrazil. |
FDA | United States Food and Drug AdministrationAdministration. |
IgG | IgG or Immunoglobulin G are proteins found in human blood. This protein is called an "antibody"“antibody” and is an important part of the body'sbody’s defense against disease. When the body is attacked by harmful bacteria or viruses, antibodies help fight these invaders. |
IgM | IgM or Immunoglobulin M are proteins found in human blood. This protein is called an "antibody" and is an important part of the body's defense against disease. When the body is attacked by harmful bacteria or viruses, antibodies help fight these invaders. |
NGO | Non-Governmental OrganizationOrganization. |
OTC | Over-the-CounterOver-the-Counter. |
PEPFAR | The President'sPresident’s Emergency Plan for AIDS ReliefRelief. |
PMA | Pre-Marketing Approval –FDA approval classification for a medical device that is not substantially equivalent to a legally marketed device or is otherwise required by statute to have an approved application. Rapid HIV tests must have an approved PMA application before marketing of such a product can begin. |
PROTOCOL | A procedure pursuant to which an immunodiagnostic test is performed on a particular specimen in order to obtain the desired reaction. |
REAGENT | A chemical added to a sample under investigation in order to cause a chemical or biological reaction which will enable measurement or identification of a target substance. |
RETROVIRAL | A type of virus which contains the enzyme Reverse Transcriptase and is capable of transforming infected cells to produce diseases in the host such as AIDS. |
SENSITIVITY | Refers to the ability of an assay to detect and measure small quantities of a substance of interest. The greater the sensitivity, the smaller the quantity of the substance of interest the assay can detect. Also refers to the likelihood of detecting the antigen when present. |
SPECIFICITY | The ability of an assay to distinguish between similar materials. The greater the specificity, the better an assay is at identifying a substance in the presence of substances of similar makeup. |
USDA | U.S Department of AgricultureAgriculture. |
WHO | World Health OrganizationOrganization. |
You should carefully consider each of the following risk factors and all of the other information provided in this Form 10-K before purchasingin considering whether to make or continue to hold an investment in our Common Stock. The risks described below are those we currently believe may materially affect us. An investment in our Company involves a high degree of risk, and should be considered only by persons who can afford the loss of their entire investment. Although we believe that these risks are the most important for you to consider, you should read this section in conjunction with our financial statements, the notes to those financial statements and our management's discussion and analysis of financial condition and results of operations included in our periodic reports and incorporated into this prospectus supplementForm 10-K by reference.
Risks relatedRelated to our industry, business and strategyOur Business
Because we may not be able to obtain or maintain the necessary regulatory approvals for some of our products, we may not generate revenues in the amounts we expect, or in the amounts necessary to continue our business. Our existing products as well as our manufacturing facility must meet quality standards and are subject to inspection by a number of domestic regulatory and other governmental and non-governmental agencies.
All of our proposed and existing products are subject to regulation in the U.S. by the U.S. Food and Drug Administration, the U.S. Department of Agriculture and/or other domestic and international governmental, public health agencies, regulatory bodies or non-governmental organizations. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products. The process of obtaining required approvals or clearances varies according to the nature of, and uses for, a specific product. These processes can involve lengthy and detailed laboratory testing, human or animal clinical trials, sampling activities, and other costly, time-consuming procedures. The submission of an application to a regulatory authority does not guarantee that the authority will grant an approval or clearance for that product. Each authority may impose its own requirements and can delay or refuse to grant approval or clearance, even though a product has been approved in another country.
The time taken to obtain approval or clearance varies depending on the nature of the application and may result in the passage of a significant period of time from the date of submission of the application. Delays in the approval or clearance processes increase the risk that we will not succeed in introducing or selling the subject products, and we may determine to devote our resources to different products.
Changes in government regulations could increase our costs and could require us to undergo additional trials or procedures, or could make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all.
Changes in government regulations may adversely affect our financial condition and results of operations because we may have to incur additional expenses if we are required to change or implement new testing, manufacturing and control procedures. If we are required to devote resources to develop such new procedures, we may not have sufficient resources to devote to research and development, marketing, or other activities that are critical to our business.
We can manufacture and sell our products only if we comply with regulations and quality standards established by government agencies such as the FDA and the USDA as well as by non-governmental organizations such as the ISO and WHO. We have implemented a quality control system that is intended to comply with applicable regulations. Although FDA approval is not required for the export of our products, there are export regulations promulgated by the FDA that specifically relate to the export of our products that require compliance with FDA quality system regulation ("QSRs") and that also require meeting certain documentary requirements regarding the approval of the product in export markets. Although we believe that we meet the regulatory standards required for the export of our products, these regulations could change in a manner that could adversely impact our ability to export our products.
Our products may not be able to compete with new diagnostic products or existing products developed by well-established competitors, which would negatively affect our business.
The diagnostic industry is focused on the testing of biological specimens in a laboratory or at the point-of-care and is highly competitive and rapidly changing. Some of our principal competitors may have considerably greater financial, technical and marketing resources than we do. Several companies produce diagnostic tests that compete directly with our testing product line, including but not limited to, OraSure Technologies, Alere and Trinity Biotech. Furthermore these and/or other companies have or may have products incorporating molecular and/or other advanced technologies that over time could directly compete with our testing product line. As new products incorporating new technologies enter the market, our products may become obsolete or a competitor's products may be more effective or more effectively marketed and sold.
There are competing products that could significantly reduce our U.S. sales of rapid HIV tests.
In 2006 Alere, Inc. acquired a division from Abbott Diagnostic located in Japan that manufactured and marketed a rapid HIV test product line called Determine®. The Determine® format was developed for the developing world and remote settings and, central to the needs of that market. The format is essentially a test strip that is integrated into a thin foil wrapper. When opened, the underside of the wrapper serves as the test surface for applying the blood sample and performing the test. This design reduces costs and shipping weights and volumes and provides an advantage for the developing world markets it serves. Some of the disadvantages of the platform are the amount of blood sample that is needed (50 microliters versus 2.5, 5 and 10 for our lateral flow barrel, lateral flow cassette, and DPP® products respectively), the open nature of the test surface, and the absence of a true control that differentiates biological from other kinds of samples.
The so-called "3rd generation" version of this product has been marketed for many years and is the leading rapid HIV test that is used in a large majority of the national algorithms of countries funded by PEPFAR and the Global Fund, as well as many other countries in the world. That product is not FDA-approved though it is CE marked. The newest Determine® HIV version, which was developed and manufactured by Alere's subsidiary in Israel, Orgenics, is the so-called "4th Generation" version Determine® test. According to its claims, this product detects HIV antibodies and P24 HIV antigens. Because the P24 antigen is known to occur in HIV-positive individuals' blood samples before antibodies do, the 4th generation Determine® test is designed to detect HIV infection earlier than tests that solely rely on antibody detection. Chembio's tests, as well as all of the other currently FDA-approved rapid HIV tests, only detect antibodies. There are however laboratory tests that are FDA-approved that are "4th generation" tests, but they are 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. 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.
We believe that our DPP® is outside of the scope of currently issued patents in the field of lateral flow technology, thereby offering the possibility of greater freedom to operate. However there can be no assurance that our patents or our products incorporating the patent claims will not be challenged at some time in the future.
Our useCompetitors May Develop and Commercialize More Effective or Successful Products, and Our Research, Development and Commercialization Efforts May Not Succeed.
We must regularly commit substantial resources to research and development and the commercialization of third-party suppliers, someour new or enhanced products. The research and development process usually takes a long time from inception to commercial launch. During each stage of which may constitute our sole supply source, for certain important product components presentsthis process there is a substantial risk that could have negative consequences for other business.
A number of our components and critical raw materials are provided by third-party suppliers, some of which may be sole-source suppliers, which impacts our ability to manufacture or sell certain products if our suppliers cannot orwe will not deliver those materialsachieve our goals in a timely fashion, or at all, dueand we may have to an interruptionabandon a new or enhanced product in their supply, qualitywhich we have invested substantial time and money. We expect to continue to incur significant costs related to our research and development activities.
Our products require significant development and investment prior to commercialization, including testing to demonstrate the products performance capabilities, cost-effectiveness or technical issues, or any other reason. If this occurs, we could incur substantial expensebenefits. We must obtain regulatory approval before most products may be sold and time toadditional development efforts on these products may be able to reestablishrequired before the appropriate quality, cost,products will be reviewed. However, regulatory and market-acceptance circumstances neededauthorities may not approve these products for commercial success. Even withsale or may substantially delay or condition such approval. There may be little or no market for the needed expenseproduct and time,entry into or development of new markets for our products may require an investment of substantial resources even if all applicable regulatory approvals are obtained. Furthermore, we may spend a significant amount of money on advertising or other activities and still fail to develop a market for the product. The success of our efforts may be affected by our ability to manufacture products in a cost-effective manner, whether we can obtain necessary intellectual property rights and protection and our ability to obtain reimbursement authorizations in the markets where the product will be sold. Therefore, if we fail to develop and gain commercial acceptance for our products, or if competitors develop more effective products or a greater number of successful new products, customers may decide not 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 forpurchase 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 developmentdiagnostic industry is focused on the testing of biological specimens in a laboratory or at the point-of-care and commercializationis highly competitive and rapidly changing. Some of our principal competitors may have considerably greater financial, technical and marketing resources than we do. Several companies produce diagnostic tests that compete directly with our testing product line, including but not limited to, OraSure Technologies, Alere and Trinity Biotech. Furthermore these and/or other companies have or may have products outside ofincorporating 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 diagnostics industry could adversely affectmarket, our products may become obsolete or a competitor's products may be more effective or more effectively marketed and sold.
Our Business Prospects May be Negatively Affected if We Fail to Achieve Our Financial and Strategic Objectives.
There is no assurance that we will be successful in implementing our financial and strategic objectives, including our efforts to increase sales of our products. For example, the funds for research, clinical development of a safe and effective vaccine to HIV or treatments for other diseases or conditions thatprojects have in the past come primarily from our business operations. If the sale of our products slows and we have less money available to fund research and development and clinical programs, we will have to cut certain programs. If adequate financial, personnel, equipment or other resources are designednot available, we may be required to detect,delay or scale back our business. If our total revenue and gross profits do not correspondingly increase or if our technology, product, clinical and market development efforts are unsuccessful or delayed, our operations will be negatively affected. Furthermore, our failure to successfully introduce new or enhanced products and develop new markets could have a material adverse effect on our business and prospects.
Our Future Revenues and Operating Results May be Negatively Affected by the Ongoing Consolidation in the Healthcare Industry.
There has been a significant amount of consolidation in the healthcare industry. This consolidation has increased the competition to provide goods and services to customers. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. Due to ongoing consolidation, there could be additional pressure on the prices of our products.
Our Continued Growth Depends on Retaining Our Current Key Employees and Attracting Additional Qualified Personnel, and We May Not Be Able to Do So.
Our success will depend to a large extent upon the skills and experience of our executive officers, management and sales, marketing, operations and scientific staff. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among medical products businesses, geographic considerations, our ability to offer competitive compensation, relocation packages, benefits, and/or other reasons.
If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products to meet the demands of our strategic partners in a timely fashion, or to support internal research and development programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms.
We have entered into employment contracts with our Chief Executive Officer, John Sperzel; our Chief Financial Officer, Neil Goldman; our President of the Americas, Sharon Klugewicz; and our Chief Scientist & Technology Officer , Javan Esfandiari. Due to the specific knowledge and experience of these executives regarding the industry, technology and market, the loss of the services of any one of them could have a material adverse effect on the Company. The contract with Mr. Sperzel expires March 2020. The contract with Mr. Esfandiari has a term of three years ending March 2019. The contract with Ms. Klugewicz expires May 2019. The contract with Mr. Goldman expires December 2018. The Company has obtained a key man insurance policy on Mr. Esfandiari.
We May Not Generate the Expected Benefits of Our Acquisitions or Investments and They Could Disrupt Our Ongoing Business, Distract Our Management, Increase Our Expenses and Negatively Affect Our Business.
As a way for us to grow our business, we may pursue strategic acquisitions or investments. These activities, and their impact on our business, are subject to many risks, including the following: (i) the benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new businesses or markets, general economic conditions and increased competition; (ii) we may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products and/or technology into our business; (iii) we may not be able to accurately forecast the performance or ultimate impact of an acquired business; and (iv) an acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business.
If these factors occur, we may be unable to achieve all or a significant part of the benefits expected from an acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial and strategic objectives.
Third-Party Reimbursement Policies and Potential Cost Constraints Could Negatively Affect Our Business.
The list of our product end-users includes hospitals, physicians and other healthcare providers. If these end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors, the use of our products could be negatively impacted. Furthermore, the net sales of our products could also be adversely affected by changes in reimbursement policies of government or private healthcare payors.
Hospitals, physicians and other healthcare providers who purchase diagnostic products in the United States generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product. Due to the overall escalating cost of medical products and services, there is increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States, available levels of reimbursement may change for our existing products or eventually eliminateproducts under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for our products or our ability to sell our products on a profitable basis.
To the Extent That We Are Unable to Collect Our Outstanding Accounts Receivable, Our Operating Results Could be Materially Harmed.
There may be circumstances and timing that require us to accept payment terms, including delayed payment terms, from distributors or customers, which, if not satisfied, could cause financial losses.
We generally accept payment terms which require us to ship product before the contract price has been paid fully, and there also are circumstances pursuant to which we may accept further delayed payment terms pursuant to which we may continue to deliver product. To the extent that these circumstances result in significant accounts receivables and those accounts receivables are not paid on a timely basis, or are not paid at all, especially if concentrated in one or two customers, we could suffer financial losses.
The Ongoing Changes in Healthcare Regulation Could Negatively Affect Our Revenues, Business and Financial Condition.
There have been several proposed changes in the United States at the federal and state level for comprehensive reforms regarding the payment for, the availability of and reimbursement for healthcare services. These proposals have ranged from fundamentally changing federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (the “Affordable Care Act”).
Healthcare reform initiatives will continue to be proposed, and may reduce healthcare related funding in an effort. It is impossible to predict the ultimate content and timing of any healthcare reform legislation and its resulting impact on us. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase our costs or otherwise negatively effect on our financial condition and results of operations.
We Believe Our Success Depends In Part on the Continued Funding of and Our Ability to Participate in Large Testing Programs in the U.S. and Worldwide. Funding of These and or Similar Programs May be Reduced, Discontinued and/or We May Not be Able to Participate for Other Reasons.
We believe it to be in our best interests to meaningfully participate in large testing programs. Moreover many of these programs are funded by governments and other donors, and there can be no assurance that funding will not be reduced or completely discontinued. Participation in these programs also requires alignment and engagement with the many other participants in these programs, including WHO, CDC, U.S. Agency for International Development, foreign governments and their agencies, non-governmental organizations, and HIV service organizations. If we are unsuccessful in our efforts to participate in these programs, our operating results could be materially harmed.
In December 2013 President Obama signed into law the PEPFAR Stewardship and Oversight Act, which is the most recent reauthorization of PEPFAR. However, unlike the 2008 PEPFAR authorization, which authorized approximately $45 billion in funding, the new law does not authorize a specific dollar amount for funding.
Developing Testing Guidelines Could Negatively Affect The Sales of Our Products.
Government agencies may issue diagnostic testing guidelines or recommendations, which can alter the usage of our HIV testing products. New laws or guidelines, or changes to existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied, could impact the degree to which our testing products are used. These developments could affect the frequency of testing, the number of people tested and whether the testing products are used broadly for screening large populations or in a more limited capacity. These factors could in turn affect the level of sales of our products and our results of operations.
Legislative and Other Regulatory Changes Could Have An Effect On Our Business.
The current U.S. Presidential Administration has promised to repeal and replace the Affordable Care Act, expressed concerns with respect to existing trade agreements, and has indicated a desire to make other diagnostic productsregulatory changes during his administration. Changes in regulatory or economic conditions or in the laws and policies governing foreign trade, taxes, manufacturing, and development in the United States could impact our business. Economic and regulatory changes could also affect foreign currency exchange rates which, in turn, could affect our reported financial results and our competitiveness on a worldwide basis.
Developments Related To The U.K.’s Referendum On Membership in The E.U. Could Adversely Affect Us.
On June 23, 2016, the United Kingdom (“U.K.”) voted in favor of leaving the European Union, or E.U. Following this “Brexit” referendum there has been increased political and economic uncertainty, particularly in the U.K. and E.U. and this uncertainty may last for the foreseeable future. Until the terms and timing of the U.K.’s exit from the E.U. are finalized, it will be difficult to predict the impact of Brexit. Our business in the U.K., the E.U. and world-wide could be negatively affected during this period of uncertainty, and perhaps longer. The decision of voters in the U.K. to exit the E.U. could cause volatility in global financial markets, such as global currency exchanges, resulting in a slow-down in economic activity in the U.K., Europe or globally, and result in a losssignificant regulatory changes and uncertainty. These events could make it more difficult or costly to sell our products, particularly in the U.K. and Europe, and negatively affect our revenues and results of revenues.operations. The Brexit referendum may also influence other countries and result in additional countries deciding to leave the E.U. This in turn could result in additional changes and uncertainty, any or all of which could negatively impact our business.
We Could be Exposed To Liability if We Experience Security Breaches or Other Disruptions and it Could Harm Our Reputation and Business.
We may be subject to cyber-attacks whereby computer hackers may attempt to access our computer systems or our third party IT service provider’s systems and, if successful, misappropriate personal or confidential information. In addition, a contractor or other third party with whom we do business may attempt to circumvent our security measures or obtain such information, and may purposefully or inadvertently cause a breach involving sensitive information. We will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, but cyber-attacks are becoming more sophisticated and frequent and the techniques used in such attacks change rapidly. Even though we take cyber-security measures that are continuously reviewed and updated, our information technology networks and infrastructure may still be vulnerable due to sophisticated attacks by hackers or breaches.
Even the most well protected IT networks, systems, and facilities remain potentially vulnerable because the techniques used in security breaches are continually evolving and generally are not have sufficientrecognized until launched against a target and, in fact, may not be detected. Any such compromise of our or our third party’s IT service providers’ data security and access, public disclosure, or loss of personal or confidential business information, could result in legal claims proceedings, liability under laws to protect, privacy of personal information, and regulatory penalties, disrupt our operations, require significant management attention and resources to remedy any damages that result, damage our reputation and customers willingness to transact business with us, any of which could adversely affect our business.
Our Ability to Efficiently Operate Our Business is Reliant on Information Technology and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Business.
We rely heavily on complex information technology systems across our operations and on the internet, including for management of inventory, invoices, purchase orders, shipping, interactions with our third-party logistics provider, revenue and expense accounting, consumer call support, online business, and various other processes and transactions. Our ability to effectively introducemanage our business, coordinate the production, distribution and marketsale of our products, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the reliability and capacity of these systems and the internet.
If any of the foregoing systems fails to operate effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales and reduced efficiency of our operations. Significant expenditures could be required to fix any such problem.
If There is an Increase in Demand for Our Products, it Could Require Us to Expend Considerable Resources or Harm Our Customer Relationships if We are Unable to Meet That Demand.
If there are significant or unexpected increases in the demand for our products, we may not be able to meet that demand without expending additional capital resources. This would increase our capital costs, which could materiallynegatively affect our earnings. In addition, new manufacturing equipment or facilities may require FDA approval before they can be used to manufacture our products. To the extent we are unable to obtain or are delayed in obtaining such approvals, our ability to meet the demand for our products could be adversely affected. Furthermore, our suppliers may be unable or unwilling to expend the necessary capital resources or otherwise expand their capacity, which could negatively affect our business.
Our business could be negatively affected if we or our suppliers are unable to develop necessary manufacturing capabilities in a timely manner. If we fail to increase production volumes in a cost effective manner or if we experience lower than anticipated yields or production problems as a result of changes that we or our suppliers make in our manufacturing processes to meet increased demand, we could experience shipment delays or interruptions and increased manufacturing costs, which could also have a material adverse effect on our revenues and profitability.
If there are unexpected increases in demand for our products, we may be required to obtain additional raw materials in order to manufacture products to meet the increase in demand. However, some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. It is also possible that one or more of our suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits.
If we are unable to meet customer demand for our products, it could also harm our operating results.relationships with our customers and impair our reputation within the industry. This, in turn, could have a material adverse effect on our business.
Risks Related to Our Products
For Our Business to Succeed in the Future, Our Current and Future Products Must Receive Market Acceptance.
The market acceptance and the timing of such acceptance, of our new products or technologies is necessary for our future success. To achieve market acceptance, we and/or our distributors will likely be required to undertake substantial efforts and spend significant funds to inform every one of the existence and perceived benefits of our products. We also may require government funding for the purchase of our products may be needed to help create market acceptance and expand the use of our products.
It may be difficult evaluate the market reaction to our products and our marketing efforts for new products may not be successful. The government funding we receive may be limited for new products. As such, there can be no assurance that any products will obtain significant market acceptance and fill the market need that is perceived to exist on a timely basis, or at all.
We May Not Have Sufficient Resources to Effectively Introduce and Market Our Products, Which Could Materially Harm Our Operating Results.
Introducing and achieving market acceptance for our rapid HIV tests and other new products will require substantial marketing efforts and will require us and/or our contract partners, sales agents, and/or distributors to make significant expenditures of time and money. In some instances we will be significantly or totally reliant on the marketing efforts and expenditures of our contract partners, sales agents, and/or distributors. If they do not have or commit the expertise and resources to effectively market the products that we manufacture, our operating results will be materially harmed.
The successOther Providers of Diagnostic Tests and Sample Collection Products Will Likely Provide Us with Substantial Competition.
Our competitors make similar products to ours. A number of our business depends on,competitors are making investments in technologies and products, and may have a competitive advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines and may have greater name recognition than we have. We also face competition from certain of our distributors or former customers that have created or may decide to create, their own products to compete with ours. If our competitors’ products take market share from our products through more effective marketing or competitive pricing, our revenues, margins and operating results could be adversely affected. In addition, to the market successour revenues and operating results could be negatively impacted if some of our customers internally develop or acquire their own sample collection devices and use those devices in place of our products in order to reduce costs.
New Developments in Health Treatments and Non-Diagnostic Products May Reduce or Eliminate the Demand For Our Products.
The development and commercialization of products outside of the diagnostics industry could adversely affect sales of our abilityproducts. For example, the development of a safe and effective vaccine to raise additional capital throughHIV or treatments for other diseases or conditions that our products are designed to detect, could reduce or eventually eliminate the saledemand for our HIV or other diagnostic products and result in a loss of debtrevenues.
The Sales Cycles for Our Products Can Be Lengthy, Which Can Cause Variability and Unpredictability in Our Business.
Some of our products may require lengthy and unpredictable sales cycles, which makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Our products may involve sales to large public and private institutions which may require many levels of approval and may be dependent on economic or equitypolitical conditions and the availability of grants or through borrowing, andfunding from government or public health agencies which can vary from period to period. There can be no assurance that purchases or funding from these agencies will occur or continue, especially if current negative economic conditions continue or intensify. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to raise capitalcomplete transactions at all or borrow funds on attractivea schedule and in an amount consistent with our objectives.
Our Insurance May be Inadequate to Cover Our Potential Business Risks.
We believe that our present product liability and other insurance coverage is sufficient to cover our current estimated exposures, but we cannot be sure that we will not incur liabilities in excess of our policy limits. Although we believe that we will be able to continue to obtain adequate coverage in the future, there is no assurance that we will be able to do so.
Due to the Use of Our Products, We May Face Product Liability Claims for Injuries.
If any of our products, or any product which is made with the use or incorporation of any of our technologies, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage, we may subject to liability. We may not be successful in defending any product liability lawsuits brought against us. Regardless of merit or eventual outcome, product liability claims could result in (i) decreased demand for our products; (ii) damage to our image or reputation; (iii) lost revenues; and (iv) incurrence of damages payable to plaintiffs
Legal Proceedings May Cause Us to Suffer Monetary Damages or Incur Substantial Costs.
In the future we may become involved in various legal proceedings arising out of our businesses. These may include negligence claims, commercial disputes or other lawsuits arising in the ordinary course of business. These lawsuits may result in damages, sometimes in substantial amounts, for commercial or personal injuries allegedly suffered. An adverse ruling or rulings in one or more such lawsuits could result in the termination or modification of a material contract or otherwise have a material adverse effect on our business.
Our Customers May Not Adopt Rapid Point-of-Care Diagnostic Testing.
Rapid point-of-care tests are beneficial because, among other things, they can be administered by healthcare providers in their own facilities or used by consumers at home without sending samples to central laboratories. But currently the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. are provided by clinical reference laboratories and hospital-based laboratories. In some international markets, such as Europe, diagnostic testing is performed primarily by centralized laboratories. Future sales of our products will depend, in part, on our ability to expand market acceptance of rapid point-of-care testing and successfully compete against laboratory testing methods and products. However, we expect that clinical reference and other hospital-based laboratories will continue to compete vigorously against our rapid point-of-care products. Even if we can demonstrate that our products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. If we fail to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers, it would have a negative effect on our future sales growth.
If Our Products Do Not Perform Properly, It May Affect Our Revenues, Stock Price and Reputation.
Our products may not perform as expected. For example, a defect in one of our diagnostic products or a failure by a customer to follow proper testing procedures may cause the product to report inaccurate information. Identifying the root cause of a product performance or quality issue can be difficult and time consuming.
If our products do not to perform in accordance with the applicable label claims or otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be negatively affected. If this occurs, we may be required to implement holds or product recalls and incur warranty obligations. Furthermore, the poor performance by one or more of our products could have an adverse effect on our reputation, our continuing ability to sell products and the price of our Common Stock.
If We Expand Our International Presence, It May Increase Our Risks and Expose Our Business to Regulatory, Cultural or Other Challenges.
We will continue to try to increase revenue derived from international sales of our products. There are several of factors that could adversely affect the performance of our business and/or cause us to incur substantially increased costs because of our international presence and sales, including: (i) uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; (ii) cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of our products; (iii) exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or representatives; (iv) trade protection measures, trade sanctions and import/export licensing requirements; (v) our inability to obtain or maintain regulatory approvals or registrations for our products; (vi) Economic conditions, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign countries; (vii) Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign countries; (viii) our inability to identify international distributors and negotiate acceptable terms for distribution agreements; and (ix) restrictions on our ability to repatriate investments and earnings from foreign operations.
Economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of the supply of our products could reduce revenues or cause us to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of manufacturing our products in foreign countries.
Financial Results, Economic, and Financing Risks
The Success of Our Business Depends On, in Addition to the Market Success of Our Products, Our Ability to Raise Additional Capital Through the Sale of Debt or Equity or Through Borrowing, and We May Not be Able to Raise Capital or Borrow Funds on Attractive Terms and/or in amounts necessaryAmounts Necessary to continue our business,Continue Our Business, or at all.At All.
We were profitable for five consecutive years through 2013. Nevertheless, prior to 2009 we sustained significant operating losses since 2004, and we incurred an operating loss each year for 2014 2015 and 2016.through 2017. We estimate that our resources are sufficient to fund our needs through the end of 20172018 and beyond. 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, among others, (1) the level of revenues; (2) the extent to which, if any, that revenue level improves operating cash flows; (3) our investments in research and development, facilities, marketing, regulatory approvals, and other investments we may determine to make; and (4) our investment in capital equipment and the extent to which it improves cash flow through operating efficiencies. There are no assurances that we will generate positive cash flow for 20172018 or, in the alternative, be successful in raising sufficient capital to fund our needs after 2017.2018.
Our U.S. market sales are difficult to predict in 20172018 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 May 31, 2016 termination of the agreement with a third party for exclusive distribution of our barrel product in the U.S. As a result of these terminations, we expect to continue to experience higher average revenue per unit, and a lower volume of U.S. sales, of the cassette and barrel products. Higher revenue per unit is anticipated because we previously sold these products to the exclusive U.S. distributor at a significantly lower price than the price at which the distributor resold these products to customers (including re-sellers and distributors) in the United States. However at this point with respect to the barrel product, this can occur only after any inventory that the exclusive U.S. distributor has accumulated is consumed, which may take several months. In addition, in marketing these products directly, we are incurring substantial costs associated with developing our sales and marketing organization and channel distribution partners.
We believe that underlying demand for HIV rapid testing in the United States remains strong, and that the restoration of some of the funding cutbacks from sequestration and the implementation of the Affordable Care Act and of the United States Preventive Services Task Force recommendations will have a positive impact on the development of the market. On the other hand, it is possible that changes to healthcare law in 2017 and thereafter could change this and/or have a negative impact on the market for our products. Further, our products are well established and relied upon by a large installed base of customers over many years of use in the U.S. global market, and we believe this is a strong advantage. We also believe that our DPP® HIV 1/2 Assay, for which CLIA waiver was obtained in October 2014, for use with oral fluid or bloods samples will be able to serve new customers that were previously unavailable to us with our lateral flow blood tests. However, development of new customers with this product is costly and time-consuming.
We are attempting to increase international sales of our products, and we have invested in additional resources in connection with this effort; but as we have experienced, the nature of international business is such that it can be volatile from period to period, depending on ordering patterns of donor-funded programs.
Furthermore, a number of factors can slow or prevent international sales increases or cause international sales decreases, or substantially increase the cost of achieving sales assuming they are achieved. These factors include:
| · | economic conditions and the absence of or reduction in available funding sources; |
| · | regulatory requirements and customs regulations; |
| · | cultural and political differences; |
| · | foreign exchange rates, currency fluctuations and tariffs; |
| · | dependence on and difficulties in managing international distributors or representatives; |
| · | the creditworthiness of foreign entities; |
| · | difficulties in foreign accounts receivable collection; |
| · | any inability we may have in maintaining or increasing revenues. |
If we are unable to maintain or increase our revenues from domestic and/or international customers, our operating results will be materially harmed.
Although We Were Profitable From 2009 Through 2013, We Incurred a Net Loss For Each Year From 2014 Through 2017 and Cannot be Certain that We Will be able to Sustain Profitability in the Future.
From the inception of Chembio Diagnostic Systems, Inc. in 1985 through the period ended December 31, 2008, we incurred net losses. We were then profitable each year from 2009 through 2013. In 2014, 2015, 2016 and 2017, we made substantial expenditures for sales and marketing, regulatory submissions, product development, production and warehouse capacity, and other purposes, and we incurred a net operating loss. Our ability to re-achieve profitability in the future will primarily depend on our ability to increase sales of our products based on having made the aforementioned expenditures to reduce production and other costs, and to successfully introduce new products and enhanced versions of our existing products into the marketplace. If we are unable to increase our revenues at a rate that is sufficient to achieve profitability, or adequately control and reduce our operating costs, our operating results would be materially harmed.
We Base Our Estimates or Judgments Relating to Critical Accounting Policies on Assumptions That Can Change or Prove to be Incorrect.
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States and our discussion and analysis of financial condition and results of operations is based on such statements. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We continuously evaluate significant estimates used in preparing our financial statements, including those related to (i) revenue recognition; (ii) stock-based compensation; (iii) allowance for uncollectible accounts receivable; (iv) customer sales returns and allowances; (v) contingencies; and (vi) income taxes.
Our estimates are based on historical experience and various other assumptions that we believe to be reasonable, as set forth in our discussion and analysis of financial condition and results of operations, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these and other estimates if our assumptions change or if actual circumstances differ from those in our assumptions. If our operating results fall below the expectations of securities analysts and investors, the price of our Common Stock may decline.
We May Fail to Meet Our Financial Projections and There May be Fluctuations in Our Financial Results.
From quarter to quarter and year to year, our operating results can fluctuate, which could cause our growth or financial performance to fail to meet the expectations of investors and securities analysts. Our financial projections are based on a number of assumptions, including the estimated demand for our products. However, sales to our distributors and other customers may not meet expectations because of lower than expected customer demand or other factors, including continued economic volatility and disruption, reduced governmental funding, and other circumstances described elsewhere in this Form 10-K. A variety of factors could also contribute to the variability of our financial results, including infrequent, unusual or unexpected changes in revenues or costs.
Different products provide dissimilar contributions to our gross product margin. Accordingly, our operating results could also fluctuate and be negatively affected by the mix of products sold and the relative prices and gross product margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts could adversely affect our reputation and the price of our Common Stock.
Our Operating Results May be Negatively Affected by Changes in Foreign Currency Exchange Rates.
In the past our exposure to foreign currency exchange rate risk has not been material. Nevertheless, sales of our products are subject to currency risks, since changes in the values of foreign currencies relative to the value of the U.S. Dollar can render our products comparatively more expensive. The fluctuations in the exchange rate could negatively impact international sales of our products, as could changes in the general economic conditions.
The revenues and expenses of Chembio Diagnostics Malaysia, one of our subsidiaries, are recorded in Malaysian Ringgit. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of reporting our consolidated financial results. Our expectation is that the Chembio Diagnostics Malaysia business will continue to grow and, consequently, our exposure to foreign currency exchange rates may grow as well.
Chembio Diagnostics Malaysia’s revenues and expenses and the translation of Chembio Diagnostics Malaysia’s financial results into U.S. Dollars may be negatively affected by fluctuations in the exchange rate. Favorable movement in exchange rates have benefited us in prior periods. However, where there are unfavorable currency exchange rate fluctuations, our consolidated financial statements could be negatively affected. Furthermore, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, we have not generally entered into hedging instruments to manage our currency exchange rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. If we are unable to successfully hedge against unfavorable foreign currency exchange rate movements, our consolidated financial results may be adversely impacted.
Economic Volatility Around the World Could Adversely Affect Our Results.
Volatility in the economy may continue or exist in the future. This could negatively impact our financial performance or those of our customers and suppliers. These circumstances could inhibit our access to liquidity needed to conduct or expand our business. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of economic conditions. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase our products or supply us with necessary equipment, raw materials or components. Even with the improvement of economic conditions, it may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of an ethicseconomic recovery.
The New U.S. Tax Cuts and anti-corruption policyJobs Act of 2017 and Any Subsequent Tax Law Changes Could Adversely Affect Us.
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA includes, among other matters, changes to U.S. federal tax rates, allows for the expensing of capital expenditures, imposes significant additional limitations on the deductibility of interest, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We do not expect tax reform to have a material impact to our projection of minimal cash taxes or to our net operating losses. Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate of 21 percent, and the impact will be recognized in our tax expense in the year of enactment. We continue to evaluate the TCJA may have on our business. The impact of this tax reform on holders of our common stock is uncertain and could be adverse. In addition, subsequent unforeseen changes in U.S. or other countries’ tax laws could adversely affect us. We urge our stockholders to consult with their legal and tax advisors with respect to the TCJA and the potential tax consequences of investing in our common stock.
We May Require Additional Capital in the Future.
Our liquidity and ability to meet capital requirements will depend on numerous factors, including, but not limited to, the following: (i) the costs and timing of expansion of sales and marketing activities; (ii) the extent to which we gain or expand market acceptance for existing, new or enhanced products; (iii) the timing and success of the commercial launch of new products; (iv) the success of our research and product development efforts; (v) changes in existing and potential relationships with distributors and other business partners; (vi) the costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; and (vii) Competing technological and market developments.
If we require new financing, we may seek to raise funds by selling equity or other securities or through bank borrowings. There can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all.
Our Business May be Negatively Affected by Terrorist Attacks or Natural Disasters.
Terrorist attacks or natural disasters could cause economic instability. These events could negatively affect economic conditions both within and outside the United States and harm demand for our products. The operations of our customers and suppliers could be negatively impacted and eliminate, reduce or delay our customers’ ability to purchase and use our products and our suppliers’ ability to provide raw materials and finished products.
Our facilities, including some pieces of manufacturing equipment and our computer systems, may be difficult to replace. Various types of disasters, including fires, earthquakes, floods and acts of terrorism, may affect our facilities and computer systems. In the event our existing facilities or computer systems are affected by man-made or natural disasters, we may have difficulty operating our business and may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business.
Risks Related to Intellectual Property
Our Success Depends on Our Ability to Protect Our Proprietary Technology. We Rely on Trade Secret Laws and Agreements With Our Key Employees and Other Third Parties to Protect Our Proprietary Rights, and We Cannot be Sure That These Laws or Agreements Adequately Protect Our Rights.
Our industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in other countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenues and gross profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other technologies may not be adequate for the operation of our business.
As appropriate, we intend to file patent applications and obtain patent protection for our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to the use or manufacture of those products. However, there have been changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, which may impact our ability to protect our technology and enforce our intellectual property rights. For example, in 2011, the U.S. enacted sweeping changes to the U.S. patent system under the Leahy-Smith America Invents Act (the “AIA”), including changes that would transition the U.S. from a “first-to-invent” system to a “first-to-file” system and alter the processes for challenging issued patents. These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.
We believe that factors such as the technological and creative skills of our personnel, strategic relationships, new product developments, frequent product enhancements and name recognition are essential to our success. All our management personnel are bound by non-disclosure agreements. If personnel leave our employment, in some cases we would be required to protect our intellectual property rights pursuant to common law theories which may be less protective than provisions of employment, non-competition or non-disclosure agreements.
We seek to protect our proprietary products under trade secret and copyright laws, enter into license agreements for various materials and methods employed in our products, and enter into strategic relationships for distribution of the products. These strategies afford only limited protection. We currently have some foreign patents issued, and we are seeking additional patent protection in several other foreign jurisdictions for our DPP® technology. We have licenses to reagents (antigens and peptides) used in several of our products and products under development. Despite our efforts to protect our proprietary assets, and respect the intellectual property rights of others, we participate in several markets where intellectual property rights protections are of little or no value. This can place our products and our company at a competitive disadvantage.
Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how.
To facilitate development and commercialization of a proprietary technology base, we may need to obtain additional licenses to patents or other proprietary rights from other parties. Obtaining and maintaining these licenses, which may not be available, may require the payment of up-front fees and royalties. In addition, if we are unable to obtain these types of licenses, our product development and commercialization efforts may be delayed or precluded.
If We Become Involved in Intellectual Property Disputes, Such Disputes Could Increase Our Costs and Limit or Eliminate Our Ability to Sell Products or Use Certain Technologies.
We may be required to expend substantial resources in asserting or protecting our intellectual property rights, or in defending suits related to intellectual property rights. We may seek to enforce our patents or other intellectual property rights through litigation. Such litigation is prevalent and is expected to continue. In our business, there are a large number of patents and patent applications similar to our products, and additional patents may be issued to third parties relating to our product areas. We, our customers or our suppliers may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of our products. We may also have disputes with parties that license patents to us if we believe the license is no longer needed for our products or the licensed patents are no longer valid or enforceable.
There are a large number of patents in our industry, and the claims of these patents appear to overlap in many cases. Therefore there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing that cover technologies we incorporate in our products. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third party’s proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another party’s proprietary rights.
If we are involved in litigation or other legal proceedings with respect to patents or other intellectual property and proprietary technology, it could adversely affect our revenues, results of operations, market share and business because (i) it could consume a substantial portion of managerial and financial resources; (ii) its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by our products; (iii) the pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products; (iv) a court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products; and (v) an adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect our future earnings.
Under certain contracts with third parties, we may indemnify the other party if our products or activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Furthermore, our products may contain technology provided to us by third parties, and we may be unable to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the event that an infringement or misappropriation claim is asserted against us.
There may also be other types of disputes that we become involved in regarding intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reissue, patent reexamination, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office as well. These proceedings permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Risks Related to Our Third Party Collaborators
Our Use of Third-Party Suppliers, Some of Which May Constitute Our Sole Supply Source, for Certain Important Product Components Presents a Risk That Could Have Negative Consequences for Our Business.
A number of our components and critical raw materials are provided by third-party suppliers, some of which may be sole-source suppliers, which impacts our ability to manufacture or sell certain products if our suppliers cannot or will not deliver those materials in a timely fashion, or at all, due to an interruption in their supply, quality or technical issues, or any other reason. If this occurs, we could incur substantial expense and time to be able to reestablish the appropriate quality, cost, regulatory and market-acceptance circumstances needed for commercial success. Even with the needed expense and time, we may not be able to reestablish any or all of these factors. The absence of any one or more of these factors could prevent us from being able to commercially produce and market the affected product or products.
If Needed, We May Work with Strategic Collaborators to Assist in Developing and Commercializing Our Products.
Some business opportunities that require a technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic collaborators. As part of our strategy for development and commercialization of our products, we may enter into arrangements with distributors or other third-parties. Relying on such collaborative relationships could be risky to our business for a number of reasons, including: (i) we may be required to transfer material rights to such strategic collaborators, licensees and others; (ii) our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; (iii) our collaborators may decide to terminate our collaborative arrangement or become insolvent; (iv) our collaborators may develop technologies or components competitive with our products; (v) disagreements with collaborators could result in the termination of the relationship or litigation; and (vi) we may not be able to agree to future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all.
We expect our collaborators will have an economic motivation to succeed in performing their contractual responsibilities under our agreements, there is no assurance that they will do so. Due to our reliance on strategic agreements, it can make it difficult to accurately forecast our future revenues and operating results.
If We Fail to Maintain Existing Distribution Channels, or Develop New Distribution Channels, It May Result in Lower Revenues.
We collaborate with laboratories, diagnostic companies and distributors in order to sell our products. The sale of our products depends in large part on our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate and work with.
By relying on distributors or third-parties to market and sell our products could negatively impact our business for various reasons, including: (i) we may not be able to find suitable distributors for our products on satisfactory terms, or at all; (ii) agreements with distributors may prematurely terminate or may result in litigation between the parties; (iii) our distributors or other customers may not fulfill their contractual obligations and distribute our products in the manner or at the levels we expect; (iv) our distributors may prioritize their own private label products that compete with our products; (v) Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements with other distributors; and (vi) we may not be able to negotiate new or renew existing distribution agreements on acceptable terms, or at all.
We will try to maintain and expand our business with distributors and customers and make every effort to require that they fulfill their contractual obligations, but there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. If we are unable to do so, our business will be negatively impacted.
Risks Related to Regulations
Because We May Not Be Able to Obtain or Maintain the Necessary Regulatory Approvals for Some of Our Products, We May Not Generate Revenues in the Amounts We Expect, or in the Amounts Necessary to Continue Our Business. Our Existing Products as well as Our Manufacturing Facility Must Meet Quality Standards and are Subject to Inspection by a Number of Domestic Regulatory and Other Governmental and Non-Governmental Agencies.
All of our proposed and existing products are subject to regulation in the U.S. by the U.S. Food and Drug Administration, the U.S. Department of Agriculture and/or other domestic and international governmental, public health agencies, regulatory bodies or non-governmental organizations. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products. The process of obtaining required approvals or clearances varies according to the nature of, and uses for, a specific product. These processes can involve lengthy and detailed laboratory testing, human or animal clinical trials, sampling activities, and other costly, time-consuming procedures. The submission of an application to a regulatory authority does not guarantee that the authority will grant an approval or clearance for that product. Each authority may impose its own requirements and can delay or refuse to grant approval or clearance, even though a product has been approved in another country.
The time taken to obtain approval or clearance varies depending on the nature of the application and may result in the passage of a significant period of time from the date of submission of the application. Delays in the approval or clearance processes increase the risk that we will not succeed in introducing or selling the subject products, and we may determine to devote our resources to different products.
Changes in government regulations could increase our costs and could require us to undergo additional trials or procedures, or could make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all.
Changes in government regulations may adversely affect our financial condition and results of operations because we may have to incur additional expenses if we are required to change or implement new testing, manufacturing and control procedures. If we are required to devote resources to develop such new procedures, we may not have sufficient resources to devote to research and development, marketing, or other activities that are critical to our business.
We can manufacture and sell our products only if we comply with regulations and quality standards established by government agencies such as the FDA and the USDA as well as by non-governmental organizations such as the ISO and WHO. We have implemented a quality control system that is intended to comply with applicable regulations. Although FDA approval is not required for the export of our products, there are export regulations promulgated by the FDA that specifically relate to the export of our products that require compliance with FDA quality system regulation ("QSRs") and that also require meeting certain documentary requirements regarding the approval of the product in export markets.
If We Do Not Comply With FDA or Other Regulatory Requirements, We May Be Required to Suspend Production or Sale of Our Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues.
FDA Regulations and regulations by other federal, state and foreign regulatory agencies has an effect on many aspects of our operations, and the operations of our suppliers and distributors, including packaging, labeling, manufacturing, adverse event reporting, recalls, distribution, storage, advertising, promotion and record keeping. We are subject to routine inspection by the FDA and other agencies to determine compliance with QSRs and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. We believe that our facilities and procedures are in material compliance with the FDA requirements and ISO standards, but the regulations may be unclear and are subject to change, and we cannot be sure that the FDA or other regulators will agree with our compliance with these requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products. Regulatory agencies may impose restrictions on our or our distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market.
Our inability to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, recall or seizure of products, civil penalties, withdrawal of product registrations, total or partial suspension of production, refusal to grant premarket clearance or PMA approval for devices, marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations.
We must frequently make judgment decisions with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with how we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. Our reputation could be substantially impaired if we are assessed any civil and criminal penalties and limit our ability to manufacture and market our products which could have a material adverse effect on our business.
Demand For Our Products May be Affected by FDA Regulation of Laboratory-Developed Tests and Genetic Testing.
Regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical laboratories is covered by the FDA. The FDA has previously taken the position that it has regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion by not regulating most LDTs performed by high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. These laboratories are subject to CLIA regulation but such laboratories have previously not been subject to regulation by FDA under the agency’s medical device requirements.
However, the FDA has announced that it would begin regulating LDTs, and in October 2014 the FDA issued proposed guidance on the regulation of LDTs for public comment. But, on November 18, 2016, the FDA announced that it would not finalize the proposed guidance prior to the end of the Obama administration. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. We cannot predict what policies the Trump administration will adopt with respect to LDTs. If the FDA increases regulation of LDTs, it could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could reduce demand for our products and adversely impact our revenues.
In Addition to FDA Requirements, We Are Subject to Several Government Regulations, the Compliance With Which Could Increase Our Costs and Affect Our Operations.
In addition to the FDA regulations previously described, laws and regulations in some states may restrict our ability to sell products in those states.
We must comply with numerous laws related to safe working conditions, environmental protection, disposal of hazardous substances, fire hazard control, manufacturing practices and labor or employment practices. Compliance with these laws or any new or changed laws regulating our business could result in substantial costs. Due to the number of laws and regulations governing our industry, and the actions of a number of government agencies that could affect our operations, it is impossible to reliably predict the full nature and impact of these laws and regulations. To the extent the costs and procedures associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely affected.
We May Incur Additional Costs If We Do Not Comply With Privacy, Security and Breach Notification Regulations.
We believe we are not a covered entity nor a business associate of a covered entity and the Company is not responsible for complying with the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”). Even though the Company is likely not a covered entity under HIPAA, the Company does have in place administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information.] The Company is required to comply with varying state privacy, security and breach reporting laws. If we fail to comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. Also, there are other federal and state laws that protect the privacy and security of consumers’ personal information, and we may be subject to enforcement by various governmental authorities and courts resulting in complex compliance issues. We could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information.
If We Are Not Able to Manufacture Products in Accordance With Applicable Requirements, It Could Adversely Affect Our Business.
Our products must meet detailed specifications, performance standards and quality requirements. As a result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in materials or production methods, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our label claims or the expectations of our customers.
If we are not able to meet the applicable specifications, performance standards, quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations.
Healthcare Fraud and Abuse Laws Could Adversely Affect Our Business and Results of Operations.
There are various federal and state laws targeting fraud and abuse in the healthcare industry that the Company is subject to, including anti-kickback laws, laws constraining the sales, false claims laws, marketing and promotion of medical devices by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. There are other laws the Company is subject to that require the Company to report certain transactions between it and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs. Many of the existing requirements are new and have no knowledgenot been definitively interpreted by state authorities or reasoncourts, and available guidance is limited. We could face enforcement action and fines and other penalties, and could receive adverse publicity, unless and until we are in full compliance with these laws, all of which could materially harm the Company. Furthermore, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require us to knowchange our business practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations.
Our Compliance With Regulations Governing Public Companies is Complex and Expensive.
Public companies are subject to various laws and regulations, which have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. For example, we are subject to the Sarbanes-Oxley Act of 2002, The Dodd-Frank Wall Street Reform and Consumer Protection Act, the requirements of The NASDAQ Global Market, and the SEC’s requirements for public companies to provide financial statements in interactive data format using the eXtensible Business Reporting Language (“XBRL”). The implementation of certain aspects of these laws and regulations has required and will continue to require substantial management time and oversight and may require us to incur significant additional accounting and legal costs. We continually review changes with respect to new and proposed rules and cannot predict or estimate the amount of additional costs, and the timing of such costs, we may incur. There are several interpretations of these laws and regulations, in many cases due to their lack of specificity, and as a result, their application in practice may change as new guidance is provided by regulatory and governing bodies. This may result in continuing uncertainty regarding compliance matters and higher costs. We are committed to maintaining high standards of corporate governance and public disclosure, but if we fail to comply with any practicesof these requirements, legal proceedings may be initiated against us, which may adversely affect our business.
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, agentsOur Employees, Agents or distributors that couldDistributors That Could be construedConstrued as in violationViolation of such policies, our business includes salesSuch Policies, Our Business Includes Sales of productsProducts to countries where thereCountries Where There is or may be widespread corruption.Widespread Corruption.
We have a policy in place prohibiting our employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the United States Foreign Corrupt Practices Act (the "FCPA"). Nevertheless, because we work through independent sales agents and distributors (and do not have any employees or subsidiaries) outside the United States, we do not have control over the day-to-day activities of such independent agents and distributors. In addition, in the donor-funded markets in Africa where we sell our products, there is significant oversight from PEPFAR, the Global Fund, and advisory committees comprised of technical experts concerning the development and establishment of national testing protocols. This is a process that includes an overall assessment of a product which includes extensive product performance evaluations including five active collaborations and manufacturer's quality systems, as well as price and delivery. In Brazil, where we have had a total of six product collaborations with FIOCRUZ, the programs through which our products may be deployed are all funded by the Brazilian Ministry of Health. Although FIOCRUZ is affiliated with the Brazilian Ministry of Health, and is its sole customer, FIOCRUZ is not the exclusive supplier for the Ministry of Health. However, because each of our previous collaborations with FIOCRUZ incorporates a technology transfer aspect, we believe we have a competitive advantage versus other suppliers to the Brazilian Ministry of Health, assuming other aspects of our product offering through FIOCRUZ are otherwise competitive in comparison. We have no knowledge or reason to know of any activities by our employees, distributors or sales agents of any actions which could be in violation of the FCPA, although there can be no assurance of this.
We rely on trade secret laws and agreements with our key employees and other third parties to protect our proprietary rights, and we cannot be sure that these laws or agreements adequately protect our rights.
We believe that factors such as the technological and creative skills of our personnel, strategic relationships, new product developments, frequent product enhancements and name recognition are essential to our success. All our management personnel are bound by non-disclosure agreements. If personnel leave our employment, in some cases we would be required to protect our intellectual property rights pursuant to common law theories which may be less protective than provisions of employment, non-competition or non-disclosure agreements.
We seek to protect our proprietary products under trade secret and copyright laws, enter into license agreements for various materials and methods employed in our products, and enter into strategic relationships for distribution of the products. These strategies afford only limited protection. We currently have some foreign patents issued, and we are seeking additional patent protection in several other foreign jurisdictions for our DPP® technology. We have licenses to reagents (antigens and peptides) used in several of our products and products under development. Despite our efforts to protect our proprietary assets, and respect the intellectual property rights of others, we participate in several markets where intellectual property rights protections are of little or no value. This can place our products and our company at a competitive disadvantage.
Despite the efforts we make to protect our confidential information, such as entering into confidentiality agreements in connection with new business opportunities, unauthorized parties may attempt to copy aspects of our products or to obtain information that we regard as proprietary. We may be required to expend substantial resources in asserting or protecting our intellectual property rights, or in defending suits related to intellectual property rights. Disputes regarding intellectual property rights could substantially delay product development or commercialization activities because some of our available funds would be diverted away from our business activities. Disputes regarding intellectual property rights might include state, federal or foreign court litigation as well as patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the U.S. Patent and Trademark Office.
To facilitate development and commercialization of a proprietary technology base, we may need to obtain additional licenses to patents or other proprietary rights from other parties. Obtaining and maintaining these licenses, which may not be available, may require the payment of up-front fees and royalties. In addition, if we are unable to obtain these types of licenses, our product development and commercialization efforts may be delayed or precluded.
Our continued growth depends on retaining our current key employees and attracting additional qualified personnel, and we may not be able to do so.
Our success will depend to a large extent upon the skills and experience of our executive officers, management and sales, marketing, operations and scientific staff. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among medical products businesses, geographic considerations, our ability to offer competitive compensation, relocation packages, benefits, and/or other reasons.
If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products to meet the demands of our strategic partners in a timely fashion, or to support internal research and development programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms.
We have entered into employment contracts with our Chief Executive Officer, John Sperzel, our Chief Operating Officer, Sharon Klugewicz, and our Chief Scientist & Technology Officer, Javan Esfandiari. Due to the specific knowledge and experience of these executives regarding the industry, technology and market, the loss of the services of any one of them could have a material adverse effect on the Company. The contract with Mr. Sperzel has a term of three years ending March 2017. The contract with Ms. Klugewicz has a term of two years ending May 2017. The contract with Mr. Esfandiari has a term of three years ending March 2019. The Company has obtained a key man insurance policy on Mr. Esfandiari. The Company and Mr. Sperzel currently are discussing terms for renewal of his employment agreement.
We believe our success depends in part on the continued funding of and our ability to participate in large testing programs in the U.S. and worldwide. Funding of these and or similar programs may be reduced, discontinued and/or we may not be able to participate for other reasons.
We believe it to be in our best interests to meaningfully participate in large testing programs. Moreover many of these programs are funded by governments and other donors, and there can be no assurance that funding will not be reduced or completely discontinued. Participation in these programs also requires alignment and engagement with the many other participants in these programs, including WHO, CDC, U.S. Agency for International Development, foreign governments and their agencies, non-governmental organizations, and HIV service organizations. If we are unsuccessful in our efforts to participate in these programs, our operating results could be materially harmed.
In December 2013 President Obama signed into law the PEPFAR Stewardship and Oversight Act, which is the most recent reauthorization of PEPFAR. However, unlike the 2008 PEPFAR authorization, which authorized approximately $45 billion in funding, the new law does not authorize a specific dollar amount for funding.
To the extent that we are unable to collect our outstanding accounts receivable, our operating results could be materially harmed.
There may be circumstances and timing that require us to accept payment terms, including delayed payment terms, from distributors or customers, which, if not satisfied, could cause financial losses.
We generally accept payment terms which require us to ship product before the contract price has been paid fully, and there also are circumstances pursuant to which we may accept further delayed payment terms pursuant to which we may continue to deliver product. To the extent that these circumstances result in significant accounts receivables and those accounts receivables are not paid on a timely basis, or are not paid at all, especially if concentrated in one or two customers, we could suffer financial losses.
Although we were profitable from 2009 through 2013, we incurred a net loss for 2014, 2015 and 2016 and cannot be certain that we will be able to sustain profitability in the future.
From the inception of Chembio Diagnostic Systems, Inc. in 1985 through the period ended December 31, 2008, we incurred net losses. We were then profitable each year from 2009 through 2013. In 2014, 2015 and 2016, we made substantial expenditures for sales and marketing, regulatory submissions, product development, production and warehouse capacity, and other purposes, and we incurred a net operating loss. Our ability to re-achieve profitability in the future will primarily depend on our ability to increase sales of our products based on having made the aforementioned expenditures to reduce production and other costs, and to successfully introduce new products and enhanced versions of our existing products into the marketplace. If we are unable to increase our revenues at a rate that is sufficient to achieve profitability, or adequately control and reduce our operating costs, our operating results would be materially harmed.
To the extent that we are unable to obtain sufficient product liability insurance or that we incur product liability exposure that is not covered by our product liability insurance, our operating results could be materially harmed.
We may be held liable if any of our products, or any product which is made with the use or incorporation of any of the technologies belonging to us, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or use. We have obtained product liability insurance even though we have never received a product liability claim, and have generally not seen product liability claims for screening tests that are accompanied by appropriate disclaimers. Nevertheless, in the event there is a claim, this insurance may not fully cover our potential liabilities. In addition, as we attempt to bring new products to market, we may need to increase our product liability coverage which could be a significant additional expense that we may not be able to afford. If we are unable to obtain sufficient insurance coverage at an acceptable cost to protect us, we may be forced to abandon efforts to commercialize our products or those of our strategic partners, which would reduce our revenues.
Risks relatedRelated to ourOur Common Stock
Our Common Stock continues to be illiquid, so investors may not be able to sell as much stock as they want at prevailing market prices.
The average daily trading volume of our Common Stock on the NASDAQ market was approximately 16,368 shares per day over the three months ended December 31, 2017 as compared with approximately 19,300 shares per day over the three months ended December 31, 2016 as compared with approximately 21,600 shares per day over the three months ended December 31, 2015.2016. The liquidity of our stock depends on several factors, including but not limited to the financial results of the Company and overall market conditions, so it is not possible to predict whether this level of liquidity will continue, be sustained, or decrease.
Decreased trading volume in our stock would make it more difficult for investors to sell their shares in the public market at any given time at prevailing prices. Our management and larger stockholders exercise significant control over the Company.
The Price of Our Common Stock Could Continue to be Volatile.
The price of our Common Stock has been volatile and may be volatile in the future. The following factors, among others, could have a significant impact on the market for our Common Stock: (i) the performance of our business; (ii) clinical results with respect to our products or those of our competitors; (iii) the gain or loss of significant contracts and availability of funding for the purchase of our products; (iv) actions undertaken by the Congress or the Presidential Administration; (v) changes in our relations with our key customers, distributors or suppliers; (vi) developments in patent or other proprietary rights; (vii) litigation or threatened litigation; (viii) general market and economic conditions; (ix) the relatively low trading volume for our Common Stock; (x) changes in competition; (xi) Complaints or concerns about the performance or safety of our products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; (xii) failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; (xiii) announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or our customers; (xiv) changes in our operating results; and (xv) terrorist attacks, civil unrest, war and national disasters.
Overall, the stock market has experienced price and volume fluctuations that have affected the market price of our Common Stock, as well as the stock of many other similar companies. Such price fluctuations are generally unrelated to the operating performance of the specific companies whose stock is affected.
After the volatility in the market price of a company’s stock, class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and the attention and resources of our management could be diverted, each of which could have a material adverse effect on our revenue and largerearnings. 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, exerciseofficers or directors sell our Common Stock in the public market, or the perception that such sales may occur, it could negatively affect the price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors.
Institutional stockholders own significant amounts of our Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, the prevailing price of our Common Stock could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock.
We Do Not Intend to Pay Cash Dividends on Our Common Stock, Therefore an Investor in Our Common Stock Will Benefit Only if the Value of Our Common Stock Increases.
We do not expect to pay any cash dividends on our Common Stock and currently intend to retain our earnings, if any, to finance the expansion of our business. Therefore, the success of an investment in our Common Stock will depend entirely upon any future increase in value of our Common Stock. There is no guarantee that our Common Stock will gain value or even maintain the price at which investors purchased their shares.
If We and/or Our Independent Registered Public Accounting Firm Conclude That Our Internal Control Over Financial Reporting is Not Effective, Investor Confidence and the Value of Our Common Stock May be Adversely Impacted.
The SEC has adopted rules requiring us, as a public company, to include a report in our Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must report on the effectiveness of these internal controls.
We believe our internal controls will continue to evolve as our business develops. We continue to review our internal control over financial reporting in an effort to ensure compliance with SEC rules and regulations, any control system, regardless of how well designed and operated, can provide only reasonable assurance that its objectives will be met. In addition, the overall quality of our internal controls may be affected by the internal control over financial reporting implemented by any business we acquire and our ability to assess and successfully integrate the internal controls of any such business.
If our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, implemented, or tested, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then it may issue a report noting such dissatisfaction. We also could conclude that our internal control over financial reporting is not effective. These events could result in an adverse reaction in the financial marketplace, which ultimately could negatively impact the market price of our Common Stock.
Any Future Issuances of Shares of Our Common Stock by Us Could Harm the Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings.
Any future sales of a substantial number of our shares of Common Stock or other equity-related securities, or the perception that such sales may occur, could adversely affect the price of our Common Stock, and could impair our ability to raise capital through future offerings of equity or equity-related securities.
Our Stockholder Rights Agreement Could Make a Third-Party Acquisition of Us Difficult.
Our Stockholder Rights Agreement, which is described above under "BUSINESS: Stockholder Rights Agreement" contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders.
Our Management and Larger Stockholders Exercise Significant Control Over the Company.
As of December 31, 2016,2017, our named executive officers, directors and 5% stockholders beneficially owned approximately 38.43%44.35% of our voting power, which includes four large investors that beneficially own approximately 10.36%13.97%, 9.36%10.42%, 9.00%7.46%, and 5.02%7.09%, respectively of the outstanding stock. For the foreseeable future, and assuming these ownership percentages continue to apply, to the extent that these parties vote similarly, they may be able to exercise significant control over many matters requiring approval by the board of directors or our stockholders. As a result, they may be able to:
| · | control the composition of our board of directors; |
| · | control our management and policies; |
| · | determine the outcome of significant corporate transactions, including changes in control that may be beneficial to stockholders; and, |
| · | act in each of their own interests, which may conflict with or differ from the interests of each other or the interests of the other stockholders. |
ITEM 1B. Unresolved Staff Comments.
Not Applicable
Our corporate headquarters and U.S. manufacturing, administrative offices, and research facilities are located in leased space in Medford, New York. In addition we have warehousingYork, together with nearby warehouse space as well as someand additional administrative offices located in Holbrook, New York. We lease approximately 39,660 square feet of industrialOur Southeast Asia manufacturing, warehouse, and commercial facilities are located in leased space in Medford for $28,688 per month. The space is utilized for researchKuala Lumpur, Malaysia. We regularly review our real estate portfolio and development activities (approximately 5,440 square feet), offices (approximately 2,640 square feet)develop footprint strategies to support our customers’ global plans, while at the same time supporting our technical needs and production (approximately 31,580 square feet). The lease term expires on April 30, 2017. The lease provides for annual increases of two and one-half percent each year starting May 1, 2015. We lease approximately 21,450 square feet of industrial space in Holbrook for $15,550 per month. The space is utilized for offices (approximately 2,500 square feet) and warehousing (approximately 18,950 square feet). The lease term expires on April 30, 2018. The lease provides for annual increases of three percent each year starting March 1, 2015. The Company believes this space should be sufficient for its needs in the foreseeable future.controlling operating expenses.
ITEM 3. | ITEM 3. LEGAL PROCEEDINGS |
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest that is adverse to our interest.
ITEM 4. | ITEM 4. MINE SAFETY DISCLOSURES |
Not Applicable.
PART II
ITEM 5.MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our stock is listed on the NASDAQ Global Select Market of the NASDAQ Stock Market LLC under the symbol "CEMI."“CEMI.” The table below sets forth the high and low prices per share of our common stock for each quarter of our two most recently completed fiscal years.
Fiscal Year 2017 | | | High | | | Low | |
First Quarter | | | $ | 6.80 | | | $ | 5.05 | |
Second Quarter | | | $ | 7.04 | | | $ | 5.15 | |
Third Quarter | | | $ | 6.70 | | | $ | 5.75 | |
Fourth Quarter | | | $ | 8.35 | | | $ | 5.90 | |
| | | | | | | | | |
Fiscal Year 2016 | High | | Low | | | High | | | Low | |
First Quarter | | $ | 6.10 | | | $ | 4.03 | | | $ | 6.10 | | | $ | 4.03 | |
Second Quarter | | $ | 9.40 | | | $ | 5.87 | | | $ | 9.40 | | | $ | 5.87 | |
Third Quarter | | $ | 8.48 | | | $ | 5.08 | | | $ | 8.48 | | | $ | 5.08 | |
Fourth Quarter | | $ | 7.45 | | | $ | 6.10 | | | $ | 7.45 | | | $ | 6.10 | |
| | | | | | |
Fiscal Year 2015 | High | | Low | | |
First Quarter | | $ | 4.20 | | | $ | 3.47 | | |
Second Quarter | | $ | 5.25 | | | $ | 4.00 | | |
Third Quarter | | $ | 5.20 | | | $ | 3.33 | | |
Fourth Quarter | | $ | 5.53 | | | $ | 3.90 | | |
Holders
As of March 3, 2017,5, 2018, there were approximately 2,0301,590 record owners of our common stock (including nominee holders such as banks and brokerage firms who hold shares for beneficial owners).
Dividends
The Company has never paid cash dividends on its common stock and has no plans to do so in the foreseeable future. Any future declaration of dividends will be determined by our Board of Directors in its sole discretion and will depend on, among other things, our earnings, capital requirements, financial condition, prospects and any other factors the Board of Directors may deem relevant.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the year ended December 31, 20162017 that were not previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 10-K.8-K.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the fourth quarter of the fiscal year ended December 31, 2016.2017.
ITEM 6. | SELECTED FINANCIAL DATA |
The Followingfollowing selected consolidated financial data were derived from our audited consolidated financial statements and should be read in connectionconjunction with, and are qualified by reference to, Item 7 - "Management's7. Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations and the consolidated financial statements and notes that arethereto included elsewhere in this Annual Report on Form 10-K. The financial information presented may not be indicative of our future performance.
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES | CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES | | CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES | |
SELECTED HISTORICAL FINANCIAL DATA | SELECTED HISTORICAL FINANCIAL DATA | | SELECTED HISTORICAL FINANCIAL DATA | |
As of and For the Years Ended | | |
As of and For the Years Ended December 31, | | As of and For the Years Ended December 31, | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | | | | | December 31, 2015 | | | | | | December 31, 2014 | | | | | | December 31, 2013 | | | | | | December 31, 2012 | | | | | | 2017 (1) | | | (2 | ) | | 2016 (3) | | | (2 | ) | | 2015 | | | (2 | ) | | 2014 | | | (2 | ) | | 2013 | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL REVENUES | | $ | 17,868,841 | | | | | | $ | 24,255,485 | | | | | | $ | 27,645,284 | | | | | | $ | 29,549,609 | | | | | | $ | 25,610,595 | | | | | | $ | 24,015,427 | | | | | | $ | 17,868,841 | | | | | | $ | 24,255,485 | | | | | | $ | 27,645,284 | | | | | | $ | 29,549,609 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
GROSS MARGIN(1) | | | 8,451,336 | | | | 47 | % | | | 10,486,827 | | | | 43 | % | | | 10,814,023 | | | | 39 | % | | | 12,300,159 | | | | 42 | % | | | 10,789,991 | | | | 42 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
OPERATING COSTS: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development expenses(1) | | | 8,427,554 | | | | 47 | % | | | 6,377,839 | | | | 26 | % | | | 4,832,537 | | | | 17 | % | | | 5,834,249 | | | | 20 | % | | | 4,486,302 | | | | 18 | % | |
Selling, general and administrative expenses(1) | | | 7,595,559 | | | | 43 | % | | | 7,663,035 | | | | 32 | % | | | 7,531,739 | | | | 27 | % | | | 5,461,083 | | | | 18 | % | | | 4,851,587 | | | | 19 | % | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of product sales | | | | 12,921,157 | | | | | | | 9,417,505 | | | | | | | 13,768,658 | | | | | | | 16,831,261 | | | | | | | 17,249,450 | | | | |
Research and development expenses | | | | 8,555,381 | | | 36 | % | | | 8,427,554 | | | 47 | % | | | 6,377,839 | | | 26 | % | | | 4,832,537 | | | 17 | % | | | 5,834,249 | | | 20 | % |
Selling, general and administrative expenses | | | | 9,021,439 | | | 38 | % | | | 7,595,559 | | | 43 | % | | | 7,663,035 | | | 32 | % | | | 7,531,739 | | | 27 | % | | | 5,461,083 | | | 18 | % |
| | | 16,023,113 | | | | | | | | 14,040,874 | | | | | | | | 12,364,276 | | | | | | | | 11,295,332 | | | | | | | | 9,337,889 | | | | | | | | 30,497,977 | | | | | | | 25,440,618 | | | | | | | 27,809,532 | | | | | | | 29,195,537 | | | | | | | 28,544,782 | | | | |
INCOME (LOSS) FROM OPERATIONS | | | (7,571,777 | ) | | | | | | | (3,554,047 | ) | | | | | | | (1,550,253 | ) | | | | | | | 1,004,827 | | | | | | | | 1,452,102 | | | | | | | | (6,482,550 | ) | | | | | | (7,571,777 | ) | | | | | | (3,554,047 | ) | | | | | | (1,550,253 | ) | | | | | | 1,004,827 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
OTHER INCOME (EXPENSES): | | | 25,548 | | | | | | | | (3,238 | ) | | | | | | | 132 | | | | | | | | 12,943 | | | | | | | | (1,584 | ) | | | | | | | 22,485 | | | | | | | 25,548 | | | | | | | (3,238 | ) | | | | | | 132 | | | | | | | 12,943 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
INCOME (LOSS) BEFORE INCOME TAXES(1) | | | (7,546,229 | ) | | | (42 | )% | | | (3,557,285 | ) | | | (15 | )% | | | (1,550,121 | ) | | | (6 | )% | | | 1,017,770 | | | | 3 | % | | | 1,450,518 | | | | 6 | % | |
INCOME (LOSS) BEFORE INCOME TAXES | | | | (6,460,065 | ) | | (27 | )% | | | (7,546,229 | ) | | (42 | )% | | | (3,557,285 | ) | | (15 | )% | | | (1,550,121 | ) | | (6 | )% | | | 1,017,770 | | | 3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax provision (benefit) | | | 5,800,818 | | | | | | | | (1,160,243 | ) | | | | | | | (412,918 | ) | | | | | | | 486,952 | | | | | | | | 509,237 | | | | | | | | (88,305 | ) | | | | | | 5,800,818 | | | | | | | (1,160,243 | ) | | | | | | (412,918 | ) | | | | | | 486,952 | | | | |
NET INCOME (LOSS) | | $ | (13,347,047 | ) | | | | | | $ | (2,397,042 | ) | | | | | | $ | (1,137,203 | ) | | | | | | $ | 530,818 | | | | | | | $ | 941,281 | | | | | | | $ | (6,371,760 | ) | | | | | $ | (13,347,047 | ) | | | | | $ | (2,397,042 | ) | | | | | $ | (1,137,203 | ) | | | | | $ | 530,818 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic income (loss) per share | | $ | (1.26 | ) | | | | | | $ | (0.25 | ) | | | | | | $ | (0.12 | ) | | | | | | $ | 0.06 | | | | | | | $ | 0.12 | | | | | | | $ | (0.52 | ) | | | | | $ | (1.26 | ) | | | | | $ | (0.25 | ) | | | | | $ | (0.12 | ) | | | | | $ | 0.06 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted income (loss) per share | | $ | (1.26 | ) | | | | | | $ | (0.25 | ) | | | | | | $ | (0.12 | ) | | | | | | $ | 0.06 | | | | | | | $ | 0.11 | | | | | | | $ | (0.52 | ) | | | | | $ | (1.26 | ) | | | | | $ | (0.25 | ) | | | | | $ | (0.12 | ) | | | | | $ | 0.06 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average number of shares outstanding, basic | | | 10,622,331 | | | | | | | | 9,626,028 | | | | | | | | 9,530,320 | | | | | | | | 8,994,080 | | | | | | | | 7,986,030 | | | | | | | | 12,300,031 | | | | | | | 10,622,331 | | | | | | | 9,626,028 | | | | | | | 9,530,320 | | | | | | | 8,994,080 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average number of shares outstanding, diluted | | | 10,622,331 | | | | | | | | 9,626,028 | | | | | | | | 9,530,320 | | | | | | | | 9,519,968 | | | | | | | | 8,614,944 | | | | | | | | 12,300,031 | | | | | | | 10,622,331 | | | | | | | 9,626,028 | | | | | | | 9,530,320 | | | | | | | 9,519,968 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Working capital | | $ | 14,707,876 | | | | | | | $ | 9,479,968 | | | | | | | $ | 12,372,169 | | | | | | | $ | 14,221,011 | | | | | | | $ | 7,630,368 | | | | | | |
Working capital (4) | | | $ | 7,757,340 | | | | | | $ | 14,707,876 | | | | | | $ | 9,479,968 | | | | | | $ | 12,372,169 | | | | | | $ | 14,221,011 | | | | |
Total assets | | | 20,575,236 | | | | | | | | 20,816,344 | | | | | | | | 25,010,192 | | | | | | | | 24,486,592 | | | | | | | | 17,335,150 | | | | | | | | 16,616,021 | | | | | | | 20,575,236 | | | | | | | 20,816,344 | | | | | | | 25,010,192 | | | | | | | 24,486,592 | | | | |
Total liabilities | | | 3,405,650 | | | | | | | | 3,154,838 | | | | | | | | 5,286,030 | | | | | | | | 4,309,490 | | | | | | | | 3,460,630 | | | | | | | | 3,536,825 | | | | | | | 3,405,650 | | | | | | | 3,154,838 | | | | | | | 5,286,030 | | | | | | | 4,309,490 | | | | |
Shareholders' equity | | | 17,169,586 | | | | | | | | 17,661,506 | | | | | | | | 19,724,162 | | | | | | | | 20,177,102 | | | | | | | | 13,874,520 | | | | | | | | 13,079,196 | | | | | | | 17,169,586 | | | | | | | 17,661,506 | | | | | | | 19,724,162 | | | | | | | 20,177,102 | | | | |
(1) percentage shown reflects the percentage of total revenues
(1) | On January 9, 2017, we completed the acquisition of RVR Diagnostics Sdn Bhd, a Malaysia manufacturer and distributor of rapid medical assays, which subsequently changed its name to Chembio Diagnostic Malaysia Sdn Bhd. Accordingly, the acquisition impacts comparability to the results in prior years. |
(2) | Percentage shown reflects the percentage of Total Revenues. |
(3) | In 2016, we completed an underwritten public equity offering and issued 2.3 million common shares that raised approximately $12.5 million, net of underwriting commissions and other expenses. |
(4) | Working capital is calculated as total current assets minus total current liabilities. |
ITEM 7. | MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
ThisThe following management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to help you understand the business operations and financial condition of the Company for the three-year period ended December 31, 2017. This discussion should be read in conjunction with the accompanying ConsolidatedItem 8. Financial Statements and related notes.Supplementary Data. Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been preparedMD&A is presented 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.six sections:
| ● | Consolidated Results of Operations |
| ● | Liquidity and Capital Resources |
| ● | Significant Accounting Policies and Critical Accounting Estimates |
| ● | Recently Issued Accounting Pronouncements |
Executive Overview
In addition, certain statements made in this report may constitute "forward-looking statements" Our Business
These forward-looking statements involve knownThrough our wholly-owned subsidiaries, Chembio Diagnostic Systems Inc. and Chembio Diagnostics Malaysia Sdn Bhd, we develop, manufacture, and commercialize point-of-care (“POC”) diagnostic tests that are used to detect or unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These factors include, among others, 1) our ability to obtain necessary regulatory approvals for our products; and 2) our ability to increase revenues and operating income, which is dependent upon our ability to develop and sell our products, general economic conditions, demand for our products, and other factors. You can identify forward-looking statements by terminology such as "may," "could", "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues" or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.
monitor diseases. All of the Company's future products that are currently being developed are based on itsthe Company’s patented Dual Path Platform (DPP®)DPP® technology, a novel POC diagnostic platform that offers certain customer advantages as compared to traditional lateral flow technology. Chembio was formed in 1985.
Business Strategy
Recent accomplishments and highlights:
● | Achieved total revenue of $24.0 million for full year 2017, an increase of 34% over prior year |
● | Achieved product sales of $19.3 million for full year 2017, an increase of 41% over prior year |
● | Received purchase commitment from Bio-Manguinhos related to DPP® HIV Assays and DPP® Leishmania Assays in Brazil, with a total value of $8.5 million in 2018 |
● | Received conditional award from UNICEF to purchase DPP® Zika System, for a total value of $1.5 million to $4.9 million, in 2018-2019 |
● | Submitted PMA Application to the FDA for the DPP® HIV-Syphilis Assay and DPP® Micro Reader following completion of U.S. clinical trials |
● | Entered collaboration with AstraZeneca to develop a quantitative DPP® Assay to detect an undisclosed biomarker, from which Chembio will receive up to $2.9 million in R&D funding over 18 months |
● | Won three-year tender from the Ethiopian Pharmaceuticals Fund and Supply Agency to deliver HIV STAT-PAK® Assay, with a total contract value of $15.8 million between 2018-2020 |
In addition, in February 2018, we strengthened our balance sheet with net proceeds of $11.0 million in capital from an underwritten public offering, which is more fully discussed under “Recent Developments”.
Our product commercialization and product development efforts are focused in three areas: sexually transmitted disease, tropical & fever disease, and technology collaborations. In sexually transmitted disease, we are commercializing tests for HIV and Syphilis. In tropical and fever disease, we are commercializing a uniquetest for Zika virus, dengue virus, and chikungunya virus, and developing tests for malaria, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi, individually or as part of a fever panel test. Through technology collaborations, we are developing tests for a specific form of cancer, concussion, bovine tuberculosis, and for an undisclosed biomarker, the latter in collaboration with global biopharmaceutical company AstraZeneca.
Large and growing markets have been established for these kinds of tests, initially in high prevalence regions where they are indispensable for large scale prevention and treatment programs. Our product development is focused on areas where the availability of rapid POC screening, diagnostic, point-of-care platform that has certain advantages over lateral flow technology. The Company has completed development of severalor confirmatory results can improve health outcomes. More generally, we believe there is and will continue to be a growing demand for diagnostic products that employcan provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the DPP® technology. Thesepoint of care.
Our products are currently marketedsold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally, under Chembio's label (DPP® HIV 1/2 Screening Assay and DPP® HIV 1/2 –Syphilis Assay)our STAT-PAK®, SURE CHECK®, STAT-VIEW®or which may be marketed pursuant toDPP® registered trademarks, or under the private label license or distribution agreements such as those with the Oswaldo Cruz Foundation ("FIOCRUZ"), and Bio-Rad.labels of our marketing partners.
Consolidated Results of Operations
Research and development ("R&D"), milestone, and grant and royalty revenues2017 compared to 2016
The results of operations for the years ended December 31, 2017 and 2016 2015 and 2014 were $4.19 million, $2.37 million and $1.70 million, respectively, which was the result of grants awarded in 2016, 2015 and 2014. R&D expensesas follows:
| | December 31, 2017 | | | December 31, 2016 | |
| | | | | | | | | | | | |
TOTAL REVENUES | | $ | 24,015,427 | | | 100 | % | | $ | 17,868,841 | | | 100 | % |
| | | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | |
Cost of product sales | | | 12,921,157 | | | 54 | % | | | 9,417,505 | | | 53 | % |
Research and development expenses | | | 8,555,381 | | | 36 | % | | | 8,427,554 | | | 47 | % |
Selling, general and administrative expenses | | | 9,021,439 | | | 38 | % | | | 7,595,559 | | | 43 | % |
| | | 30,497,977 | | | | | | | 25,440,618 | | | | |
LOSS FROM OPERATIONS | | | (6,482,550 | ) | | | | | | (7,571,777 | ) | | | |
| | | | | | | | | | | | | | |
OTHER INCOME | | | 22,485 | | | | | | | 25,548 | | | | |
| | | | | | | | | | | | | | |
LOSS BEFORE INCOME TAXES | | | (6,460,065 | ) | | (27 | )% | | | (7,546,229 | ) | | (42 | )% |
| | | | | | | | | | | | | | |
Income tax (benefit) provision | | | (88,305 | ) | | | | | | 5,800,818 | | | | |
NET LOSS | | $ | (6,371,760 | ) | | | | | $ | (13,347,047 | ) | | | |
Percentages in the yearstable reflect the percent of total revenues.
Total Net Revenues
Total net revenues during the year ended December 31, 2016, 2015 and 20142017 were $8.43$24.0 million, $6.38an increase of $6.1 million, and $4.83 million, respectively.
Research & Development Activities
Sexually Transmitted Disease
or 34% compared to 2016. The increase in total net revenues was comprised of the following:
| ·● | $5.6 million, or 41.2% increase in net product sales, reflecting gains in every region of the world except North America, which in 2016 benefited on a one-time basis from a former U.S. distributor's "end-of-contract purchase" of certain products following our notice of termination of that distribution agreement. The last of those products reached their normal expiration date in February 2018, and the Company has been building its own distribution channels consistent with our commercial strategy. As part of these regional successes and as highlighted above, during 2017, the Company re-secured its DPP® HIV-SyphilisHIV Assay: The and DPP® HIV-SyphilisLeishmania Assay issales to Brazil and established both a rapid, point-of-care (POC), multiplex testcommercial and lower cost manufacturing footprint with its acquisition of RVR Diagnostics Sdn Bhd (now Chembio Diagnostics Malaysia Sdn Bhd). Refer to Note 2 – Acquisition to the audited consolidated financial statements included herein for 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 officialsfurther information regarding the rising co-infection rates of HIV and syphilis as well as mother-to-child transmission (MTCT) of HIV and syphilis. The product received approval by the Mexican regulatory agency (Cofepris) in 2014, received approval by the Brazilian regulatory agency, Agência Nacional de Vigilância Sanitária (ANVISA) in 2015, and received CE mark approval in 2017. We are developing a U.S. version of the DPP® HIV-Syphilis Assay, designed to meet the performance requirements for the "reverse" algorithm that is currently in clinical use for syphilis testing in the United States. The DPP® HIV-SYP Assay clinical trial is on schedule; initiated in the first quarter of 2016 and, at the current enrollment rate, we expect to complete the trial in the first quarter of 2017. Following the completion of the clinical trial, we will file a Premarket Approval Application with the U.S. Food and Drug Administration.acquisition. |
Fever & Tropical Disease
| ·● | DPP® Malaria Assay: The DPP® Malaria Assay is a rapid, POC, multiplex test for$0.5 million, or 12.0% increase in R&D milestone and grant, and license and royalty revenues compared to 2016, reflecting the simultaneous detection of plasmodium falciparumCompany’s continued success in securing governmental, non-governmental, 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 completed this project, which compared the newcommercial partnerships, in particular associated with our DPP® Malaria Assay to the world's leading currently-available POC malaria assay with favorable results: a ten-fold improvement in sensitivity. In April 2016, we received a second Malaria grant from the Bill & Melinda Gates Foundation to expedite the feasibility testing and development of the world's first oral fluid/saliva POC diagnostic test to simply and accurately identify individuals infected with all species of malaria. We recently completed the feasibility and plan to deliver DPP® Malaria Assays to a partner of the Bill & Melinda Gates Foundation in March 2017, to commence field evaluation.technology platform.
|
Gross Product Margin
Cost of sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross product margin percentage is gross product margin as a percentage of net product sales.
Gross product margin increased by $2.1 million, or 50.2% compared to 2016. The following schedule calculates gross product margin:
| | For the years ended | | | | | | | |
| | December 31, 2017 | | | December 31, 2016 | | | | | | % Change | |
| | | | | | | | | | | | |
Net product sales | | $ | 19,322,302 | | | $ | 13,680,107 | | | $ | 5,642,195 | | | | 41.2 | % |
Less: Cost of product sales | | | (12,921,157 | ) | | | (9,417,505 | ) | | | (3,503,652 | ) | | | 37.2 | % |
Gross product margin | | $ | 6,401,145 | | | $ | 4,262,602 | | | $ | 2,138,543 | | | | 50.2 | % |
Gross product margin % | | | 33.13 | % | | | 31.16 | % | | | | | | | | |
The $2.1 million increase in gross product margin was comprised of the following:
| ·● | DPP® Zika Assay: The DPP® Zika Assay is a rapid POC stand-alone test for the simultaneous detection of IgM/IgG antibodies. In February 2016, we received a grant$1.7 million from The Paul G. Allen Family Foundation to initiate development of the DPP® Zika Assay. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the developmentfavorable product sales volume as described above, and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Zika Assay. In August 2016, the Company received an award from the U.S. Government (HHS/ASPR/BARDA), granting the Company up to $13.2 million ($5.9 million to develop DPP® Zika Assay and obtain U.S. regulatory approval). The Company filed the following regulatory submissions: U.S. Food and Drug Administration Emergency Use Authorization (EUA), World Health Organization EUA, Brazil's regulatory agency ANVISA, Mexico's regulatory agency Cofepris, and CE mark. The Company obtained CE mark in July 2016, and then began selling in the Caribbean region via its distribution partner, Isla Lab, LLC. In September 2016, the Company received a contract award from CDC to initiate a Zika surveillance program in India, Peru, Guatemala and Haiti, and we began selling the DPP® Zika IgM/IgG Assay to CDC for field testing purposes during the first quarter of 2017. The Company received ANVISA approval (Brazil) for the DPP® Zika IgM/IgG Assay in November 2016 and is working with our Brazilian partner, Bio-Manguinhos, to obtain ANVISA approval for the DPP® Micro Reader.
|
| ·● | DPP® Dengue Fever Assay: The DPP® Dengue Fever Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM and NS1 antigens. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system$0.4 million from favorable product margins, principally related to the DPP® Dengue Fever Assay. We completed verification and validation studies, and production of pilot lots, to support preclinical studies. Also during 2016, we initiated registration to begin initial commercialization in Southeast Asia, and we believe initial DPP® Dengue Assay sales will occur in Southeast Asia during Q1 2017. favorable overhead application. |
| · | DPP® Chikungunya Assay: The DPP® Chikungunya Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM antibodies. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Chikungunya Assay.
|
| · | DPP® Zika/Dengue/Chikungunya Assay: The DPP® Zika/Dengue/Chikungunya Assay is a rapid, POC, multiplex test for the simultaneous detection of IgM/IgG antibodies. In February 2016, we received a grant from The Paul G. Allen Family Foundation to initiate development of the DPP® Zika/Dengue/Chikungunya Assay. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Zika/Dengue/Chikungunya Assay. In August 2016, the Company received an award from the U.S. Government (HHS/ASPR/BARDA), granting the Company up to $13.2 million (including an option of $7.3 million to develop DPP® Zika/Dengue/Chikungunya Assay and obtain U.S. regulatory approval). In September 2016, the Company received a contract award from CDC, to initiate a Zika, Dengue, and Chikungunya surveillance program in India, Peru, Guatemala and Haiti and we began selling the DPP® Zika/Dengue/Chikungunya IgM/IgG Assay to CDC for field test purposes during the first quarter of 2017.
|
| · | DPP® Fever Panel Assay: The DPP® Fever Panel Assay is a rapid, POC, multiplex test for the simultaneous detection of Malaria, Dengue, Chikungunya, Zika, Ebola, Lassa, and Marburg. In October 2015, we received a $2.1 million grant from the Paul G. Allen Ebola Program, to develop the DPP®Fever Panel Assay and a $0.55 million follow-on grant to add a test for the detection of Zika virus. We completed the development of the DPP® Fever Panel Assay in 2016, including the addition of Zika, and we supplied 10,000 tests to FIND, who will initiate evaluation in Peru and Nigeria.
|
| · | DPP® Ebola Assay and DPP®Malaria-Ebola Assay: The DPP® Ebola Assay is a rapid POC test for the detection of Ebola, and the DPP® Malaria-Ebola Assay is a rapid, POC, multiplex test for the simultaneous detection of Malaria and Ebola. In October 2014, we announced plans to develop, validate, and commercialize POC DPP® Assays for Ebola and Febrile Illness. We completed the development of the DPP® Ebola Assay and submitted it for Emergency Use Authorization (EUA) with the Food & Drug Administration (FDA) and World Health Organization (WHO), and we are actively engaged with these regulatory agencies. During the third and fourth quarters of 2015, we sold DPP® Ebola and DPP® Malaria-Ebola Assays to the Centers for Disease Control & Prevention (CDC) for field studies in West Africa, which is ongoing.
|
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 this partner. However, under the terms of the agreement, neither Chembio's partner nor the specific type of cancer is being disclosed. The cancer project represents an application of the DPP® technology outside of the infectious disease field, and the scope of the agreement involves product development of a quantitative, reader-based cancer assay for two cancer markers, utilizing Chembio's DPP® technology and its DPP® Micro Reader. During the third quarter of 2015, we completed successful feasibility, and our partner agreed to fund continued development of the DPP® Cancer Assay, which development and verification is ongoing.
|
| · | 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. The DPP® Traumatic Brain Injury Assay is in the feasibility and pre-clinical stage. Under institutional review board (IRB) agreements with multiple hospitals, we are conducting pre-clinical studies of the prototype DPP® Traumatic Brain Injury Assay using patient samples.
|
| · | DPP® Bovine Tuberculosis: The DPP® BovidTB Assay is a rapid POC test for the detection of bovine tuberculosis (TB). In September 2016, the Company was awarded a $600,000 grant from the United States Department of Agriculture (USDA) to develop the DPP® BovidTB Assay. The grant will be managed by the Small Business Innovation Research Program (SBIR) of the National Institute of Food and Agriculture (NIFA), a federal agency within the USDA and the assay will be developed in collaboration with National Animal Disease Center (NADC) and Infectious Disease Research Institute (IDRI). Under the two-year grant, Chembio will use its patented DPP® technology to undertake to develop a simple, rapid, accurate and cost-effective test for bovine TB in cattle. The DPP® BovidTB Assay will be designed to provide results within 20 minutes, thereby significantly improving on the time-consuming, tedious and inadequate diagnostic methods currently in use.
|
Regulatory Activities
| · | DPP® HIV-Syphilis Assay: We have developed a U.S. 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. The clinical trial to support the FDA application for approval of the DPP® HIV-Syphilis Assay was initiated during first quarter of 2016 and is expected to be completed in the first quarter of 2017. Following the completion of the clinical trial, we will file a Premarket Approval Application with the U.S. Food and Drug Administration. In January 2017, we received CE mark approval for the DPP® HIV-Syphilis Assay.
|
| · | DPP® Zika IgM/IgG System: In July of 2016 Chembio obtained a CE Mark for the DPP® Zika IgM/IgG Assay. The DPP® Zika IgM/IgG System, which includes an assay utilizing the patented DPP® technology as well as a digital reader (DPP® Micro Reader), are now cleared for commercialization in European countries as well as the majority of the Caribbean nations, not including U.S. territories. In November of 2016, we received approval from ANVISA, Brazil's regulatory Agency and we are working with our Brazilian partner, Bio-Manguinhos, to obtain ANVISA approval for the DPP® Micro Reader. We have also filed regulatory submissions to U.S. Food and Drug Administration (Emergency Use Authorization), the World Health Organization (Emergency Use Assessment and Listing), and Cofepris (Mexico), and we are actively engaged with these organizations.
|
There can be no assurance that any of the aforementioned Research &and 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.
This category includes costs incurred for clinical & regulatory affairs and other research & development, as follows:
| | For the years ended | | | | | | | |
| | December 31, 2017 | | | December 31, 2016 | | | | | | % Change | |
Clinical & regulatory affairs | | $ | 2,298,206 | | | $ | 1,444,410 | | | $ | (853,796 | ) | | | (59.1 | %) |
Other research & development | | | 6,257,175 | | | | 6,983,144 | | | | 725,969 | | | | 10.4 | % |
Total Research and Development | | $ | 8,555,381 | | | $ | 8,427,554 | | | $ | (127,827 | ) | | | (1.5 | %) |
Recent EventsThe increase in clinical & regulatory affairs costs for the year ended December 31, 2017 as compared to 2016 is primarily associated with the Company’s U.S. clinical trial evaluating its DPP® HIV-Syphilis System, which it completed in December 2017, as discussed above. The decrease in other research & development costs is primarily associated with a reduction in spending on materials & supplies associated with R&D milestone and grant revenue-related projects.
On January 9,Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A”) includes administrative expenses, sales and marketing costs including commissions, and other corporate items.
The $1.4 million, or 18.8%, increase in SG&A for the year ended December 31, 2017 as compared to 2016 is primarily associated with increases in the Company announced it completedfollowing: $0.7 million compensation, travel, entertainment, and trade show costs associated with the growth in our sales and commercial team, $0.4 million intangible asset amortization related to the acquisition of RVR Diagnostics Sdn Bhd, a Malaysia corporation ("RVR"), pursuant to the previously reported Amended And Restated Stock Purchase Agreement, dated as of December 7, 2016 (the "Stock Purchase Agreement"), byin January 2017, and among Chembio, RVR, Avijit Roy and Magentiren Vajuram. See footnote 16 to Chembio's Consolidated Financial Statements included in this Form 10-K for more information.$0.3 million corporate regulatory costs.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBEROther Income and Expense
Other income and expenses are principally interest income earned on the Company's deposits, which decreased by approximately $3,000 for the year ended December 31, 2016 AS COMPARED WITH THE YEAR ENDED DECEMBER 31, 20152017 as compared to 2016.
Income: Tax Provision
For the year ended December 31, 2017 the Company recognized a tax benefit of $88,000 associated with anticipated refunds of accumulated alternative minimum tax (AMT) credits to be received between 2019 and 2021 pursuant to recently enacted tax legislation net of state tax provisions. Accordingly, the benefit had no cash impact in 2017. In 2016, Loss beforethe Company recorded a non-cash income taxes was $7,546,000 compared to Loss before income taxestax provision and decreased its deferred tax assets by $5.8 million as the Company took a full valuation allowance against its carryforward losses.
$3,557,0002016 versus 2015
The results of operations for the years ended December 31, 2016 and 2015 were as follows:
| | December 31, 2016 | | | December 31, 2015 | |
| | | | | | | | | | | | |
TOTAL REVENUES | | $ | 17,868,841 | | | 100 | % | | $ | 24,255,485 | | | 100 | % |
| | | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | |
Cost of product sales | | | 9,417,505 | | | 53 | % | | | 13,768,658 | | | 57 | % |
Research and development expenses | | | 8,427,554 | | | 47 | % | | | 6,377,839 | | | 26 | % |
Selling, general and administrative expenses | | | 7,595,559 | | | 43 | % | | | 7,663,035 | | | 32 | % |
| | | 25,440,618 | | | | | | | 27,809,532 | | | | |
LOSS FROM OPERATIONS | | | (7,571,777 | ) | | | | | | (3,554,047 | ) | | | |
| | | | | | | | | | | | | | |
OTHER INCOME | | | 25,548 | | | | | | | (3,238 | ) | | | |
| | | | | | | | | | | | | | |
LOSS BEFORE INCOME TAXES | | | (7,546,229 | ) | | (42 | %) | | | (3,557,285 | ) | | (15 | %) |
| | | | | | | | | | | | | | |
Income tax provision (benefit) | | | 5,800,818 | | | | | | | (1,160,243 | ) | | | |
NET LOSS | | $ | (13,347,047 | ) | | | | | $ | (2,397,042 | ) | | | |
| | | | | | | | | | | | | | |
Percentages in the table reflect the percent of total revenues.
Total Net Revenues
Total net revenues during the year ended December 31, 2016 were $17.9 million, a decrease of $6.4 million, or 26.3% compared to 2015. Net LossThe decrease in total net revenues was comprised of the following:
| ● | $8.2 million, or 37.5% decrease in net product sales compared to 2015, reflecting decreased sales in Brazil and Mexico, partially offset by increased sales in the U.S., which in 2016 benefited on a one-time basis from a former U.S. distributor's "end-of-contract purchase" of certain products following our termination of that distribution agreement. |
| ● | $1.8 million, or 76.8% increase in R&D milestone and grant revenues compared to 2015, reflecting the Company’s continued success in securing governmental, non-governmental, and commercial partnerships, in particular associated with our DPP® technology platform. |
Gross Product Margin
Cost of sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross product margin percentage is gross product margin as a percentage of net product sales.
Gross product margin fell by $3.9 million, or 47.5% compared to 2015. The following schedule calculates gross product margin:
| | For the years ended | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | Favorable/ (unfavorable) | | | % Change | |
| | | | | | | | | | | | |
Net product sales | | $ | 13,680,107 | | | $ | 21,886,688 | | | $ | (8,206,581 | ) | | | (37.5 | )% |
Less: Cost of product sales | | | (9,417,505 | ) | | | (13,768,658 | ) | | | 4,351,153 | | | | (31.6 | )% |
Gross product margin | | $ | 4,262,602 | | | $ | 8,118,030 | | | $ | (3,855,428 | ) | | | (47.5 | )% |
Gross product margin % | | | 31.16 | % | | | 37.09 | % | | | | | | | | |
The $3.9 million decrease in gross product margin was comprised of the following:
| ● | $3.0 million from unfavorable product sales volume as described above, and |
| ● | $0.9 million from unfavorable product margins, reflecting the increased absorption of overhead at lower unit volumes. |
Research and Development
This category includes costs incurred for clinical & regulatory affairs and other research & development, as follows:
| | For the years ended | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | | | | % Change | |
Clinical & regulatory affairs | | $ | 1,444,410 | | | $ | 982,366 | | | $ | (462,044 | ) | | | (47.0 | )% |
Other research development | | | 6,983,144 | | | | 5,395,473 | | | | (1,587,671 | ) | | | (29.4 | )% |
Total Research and Development | | $ | 8,427,554 | | | $ | 6,377,839 | | | $ | (2,049,715 | ) | | | (32.1 | )% |
Expenses for Clinical & Regulatory Affairs increased by $0.5 million for the year ended December 31, 2016, consists not only of the $7,546,000 Loss before income tax described above, but also of the $5,801,000 non-cash income tax provision described below under "Income tax provision (benefit)". Net Loss for the year ended December 31,as compared to 2015, consists not only of the $3,557,000 Loss before income tax described above, but also of the $1,160,000 non-cash income tax benefit described below under "Income tax provision (benefit)". The changeprimarily related to an increase in Loss before income taxes is primarily attributable to decreased revenueclinical trial expenses and gross margin,additional wages and related costs.
Other R&D expenses increased operating expenses. Gross margin decreasedby $1.6 million in the year ended December 31, 2016, as compared with the year ended December 31, 2015, by $2,035,000, or (19.4)%.to 2015. The increased operating expenses, the most significant of which were an increase materials and supplies for R&D of $1,512,000, increased clinical trial expenses of $412,000, andis primarily related to an increase in wages, benefits, materials, and related expensessupplies to support the growth in sponsored research and internal development programs.
Selling, General and Administrative Expense
Revenues:
Selected Product Categories: | | For the years ended | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Lateral Flow HIV Tests and Components | | $ | 7,943,224 | | | $ | 9,957,882 | | | $ | (2,014,658 | ) | | | -20.23 | % |
DPP® Tests and Components | | | 5,400,893 | | | | 11,265,876 | | | | (5,864,983 | ) | | | -52.06 | % |
Other | | | 335,990 | | | | 662,930 | | | | (326,940 | ) | | | -49.32 | % |
Net Product Sales | | | 13,680,107 | | | | 21,886,688 | | | | (8,206,581 | ) | | | -37.50 | % |
License and royalty revenue | | | 449,685 | | | | 52,753 | | | | 396,932 | | | | 752.43 | % |
R&D, milestone and grant revenue | | | 3,739,049 | | | | 2,316,044 | | | | 1,423,005 | | | | 61.44 | % |
Total Revenues | | $ | 17,868,841 | | | $ | 24,255,485 | | | $ | (6,386,644 | ) | | | -26.33 | % |
Revenues for our lateral flow HIV testsSelling, general and related components during the year ended December 31, 2016 decreased by approximately $2,015,000 from the same period in 2015. This was primarily attributable to decreasedadministrative expense (“SG&A”) includes administrative expenses, sales to Africa of approximately $1,436,000, decreased sales to Europe of $40,000, decreased sales to the U.S. of $1,580,000, partially offset by increased sales to Mexico of $123,000. Revenues for our DPP® products during the year ended December 31, 2016 decreased by approximately $5,865,000 over the same period in 2015, primarily for decreases in sales in Brazil to FIOCRUZ of $5,340,000. The increase in R&D, and in milestonemarketing costs including commissions, and grant revenue, was primarily due to revenues from certain development projects that were awarded during the period. R&D revenues include funds, recognized on an "as expenses are incurred" basis or on a proportonial performance basis, from various grants, see footnote 14 of our financial statements.other corporate items.
Gross Margin:
Gross Margin related to Net Product Sales: | | For the years ended | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Gross Margin per Statement of Operations | | $ | 8,451,336 | | | $ | 10,486,827 | | | $ | (2,035,491 | ) | | | -19.41 | % |
Less: R&D, milestone, grant, license and royalties | | | 4,188,734 | | | | 2,368,797 | | | | 1,819,937 | | | | 76.83 | % |
Gross Margin from Net Product Sales | | | 4,262,602 | | | | 8,118,030 | | | $ | (3,855,428 | ) | | | -47.49 | % |
Product Gross Margin % | | $ | 31.16 | % | | $ | 37.09 | % | | | | | | | | |
The overall gross margin dollar decrease of 2,035,000 consisted of a $3,855,000$0.1 million decrease in gross margin from net product sales and a $1,820,000 increase in non-product revenues. The decrease in net product sales gross margin of $3,855,000 is primarily attributable to the change in product sales compared to 2015. The net product sales gross margin decrease is comprised of two components, one is the decrease in product sales of $8,207,000, which at the 37.1% margin contributed $3,044,000 to the decrease, and the other is the decreased change in margin percentage of 5.9% which contributed the balance of $812,000. The 5.9% decrease in the percentage, from 37.1% in 2015 to 31.2% in 2016, was primarily due to increased overhead as a percentage of products produced, due to the lower volume of sales.
Research and Development:
This category includes costs incurredSG&A for clinical and regulatory affairs and for product research and development.
Selected expense lines: | | For the years ended | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | |
Clinical and Regulatory Affairs: | | | | | | | | | | | | |
Wages and related costs | | $ | 569,664 | | | $ | 490,802 | | | $ | 78,862 | | | | 16.07 | % |
Consulting | | | 40,974 | | | | 44,135 | | | | (3,161 | ) | | | -7.16 | % |
Stock-based compensation | | | - | | | | - | | | | - | | | | 100.00 | % |
Clinical trials | | | 778,921 | | | | 366,469 | | | | 412,452 | | | | 112.55 | % |
Other | | | 54,851 | | | | 80,960 | | | | (26,109 | ) | | | -32.25 | % |
Total Regulatory | | | 1,444,410 | | | | 982,366 | | | | 462,044 | | | | 47.03 | % |
| | | | | | | | | | | | | | | | |
R&D Other than Regulatory: | | | | | | | | | | | | | | | | |
Wages and related costs | | | 2,951,456 | | | | 2,896,226 | | | | 55,230 | | | | 1.91 | % |
Consulting | | | 143,321 | | | | 128,117 | | | | 15,204 | | | | 11.87 | % |
Stock-based compensation | | | 89,246 | | | | 62,713 | | | | 26,533 | | | | 42.31 | % |
Materials and supplies | | | 3,290,868 | | | | 1,779,046 | | | | 1,511,822 | | | | 84.98 | % |
Other | | | 508,253 | | | | 529,371 | | | | (21,118 | ) | | | -3.99 | % |
Total other than Regulatory | | | 6,983,144 | | | | 5,395,473 | | | | 1,587,671 | | | | 29.43 | % |
| | | | | | | | | | | | | | | | |
Total Research and Development | | $ | 8,427,554 | | | $ | 6,377,839 | | | $ | 2,049,715 | | | | 32.14 | % |
Expenses for Clinical and Regulatory Affairs for the year ended December 31, 2016 increased by $462,000 as compared to the same period in 2015. This was due to an increase of $412,000 in clinical trial expenses and increased wages and related costs of $79,000.
R&D expenses other than Clinical & Regulatory Affairs increased by $1,588,000 in the year ended December 31, 2016 as compared with the same periodto 2015 reflects reduced commissions (principally for lower sales in 2015. The increases were primarilyBrazil) and other selling costs related to an increasethe lower 2016 sales volume, somewhat offset by increases in wages and relatedtravel costs associated with the growth in our sales and in material and supplies, to support our sponsored research and internal development programs.commercial team.
Selling, GeneralOther Income and Administrative Expense:Expense
Selected expense lines: | | For the years ended | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Wages and related costs | | $ | 3,559,482 | | | $ | 3,060,407 | | | $ | 499,075 | | | | 16.31 | % |
Consulting | | | 128,992 | | | | 311,488 | | | | (182,496 | ) | | | -58.59 | % |
Commissions | | | 680,545 | | | | 1,291,453 | | | | (610,908 | ) | | | -47.30 | % |
Stock-based compensation | | | 214,913 | | | | 271,674 | | | | (56,761 | ) | | | -20.89 | % |
Marketing materials | | | 375,739 | | | | 223,445 | | | | 152,294 | | | | 68.16 | % |
Investor relations/investment bankers | | | 298,675 | | | | 204,198 | | | | 94,477 | | | | 46.27 | % |
Legal, accounting and compliance | | | 1,086,212 | | | | 879,887 | | | | 206,325 | | | | 23.45 | % |
Travel, entertainment and trade shows | | | 446,541 | | | | 448,599 | | | | (2,058 | ) | | | -0.46 | % |
Bad debt allowance (recovery) | | | - | | | | - | | | | - | | | | 100.00 | % |
Other | | | 804,460 | | | | 971,884 | | | | (167,424 | ) | | | -17.23 | % |
Total S, G &A | | $ | 7,595,559 | | | $ | 7,663,035 | | | $ | (67,476 | ) | | | -0.88 | % |
Selling, generalOther income and administrative expenses are principally interest income earned on the Company's deposits, which increased by approximately $29,000 for the year ended December 31, 2016 decreased by $67,000 as compared withto 2015, reflecting interest on funds raised in the same period in 2015, a 0.9% decrease. This decrease resulted primarily from decreases in consulting, commissions (due to decreased sales to Brazil), and stock-based compensation, which were partially offset by increases in wages and related costs and travel expenses which for 2016 included the continued development of a sales and marketing team over 2015, marketing materials, professional fees and in investor relations/investment bankers.public offering.
Other Income and Expense:
| | For the years ended | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Other income (expense) | | $ | - | | | $ | (4,814 | ) | | $ | 4,814 | | | | -100.00 | % |
Interest income | | | 25,548 | | | | 2,412 | | | | 23,136 | | | | 959.20 | % |
Interest expense | | | - | | | | (836 | ) | | | 836 | | | | -100.00 | % |
Total Other Income and (Expense) | | $ | 25,548 | | | $ | (3,238 | ) | | $ | 28,786 | | | | 889.01 | % |
Other income (expense) for the year ended December 31, 2016 increased approximately $29,000, primarily due to interest income, compared to the same period in 2015.
Income tax provision (benefit):Tax Provision
For the year ended December 31, 2016, the Company recognized a $5,801,000$5.8 million non-cash income tax provision and decreased its deferred tax assets by $5,801,000 as the Company tooka corresponding amount, together with a full valuation allowance against its carryforward losses in the second quarter. Forallowance. By comparison, for the year ended December 31, 2015, the Company recognized a $1,160,000$1.2 million non-cash income tax benefit and increased its deferred tax assets by $1,160,000. The effective tax rate useda corresponding amount.
Liquidity and Capital Resources
Overview
Our liquidity requirements are primarily to recognizefund our business operations, including capital expenditures and working capital requirements, as well as to fund opportunistic investments that align with our focused business strategy. Our primary sources of liquidity are cash flows from operations, our existing cash balance, and as necessary, additional capital. We will continually explore ways to enhance our capital structure.
Acquisition
On January 9, 2017, Chembio acquired 100% of the benefitequity interests of RVR Diagnostics Sdn Bhd, a Malaysia manufacturer and distributor of rapid medical assays, for $1.4 million in 2015cash and for common shares with a value at closing of approximately $1.7 million. As further described in Note 2 – Acquisition to the audited consolidated financial statements contained herein, the acquisition was 32.0% to record the amount charged. In the 2015 year, non-deductible expenses for tax purposes accounted for mostas a business combination, with the operating results of RVR Diagnostics included within the Company’s operating results from the date of acquisition. The Company financed the cash portion of the difference fromacquisition with funds raised in its 2016 public equity offering. After the standard 34% U.S. tax rate. The Company still maintains a full valuation allowance onacquisition, RVR Diagnostics Sdn Bhd changed its name to Chembio Diagnostics Malaysian Sdn Bhd.
Government, Non-Governmental Organization, and Non-Profit Programs
Chembio commonly seeks research and development tax credits
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2015 AS COMPARED WITH THE YEAR ENDED DECEMBER 31, 2014
Income:
For the year ended December 31, 2015, Loss before income taxes was $3,557,000 compared to Loss before income taxes of $1,550,000 for the year ended December 31, 2014. Net Loss for the year ended December 31, 2015 consists not onlyprograms that may be awarded by government, non-governmental organization (“NGO”), and non-profit entities including private foundations. Chembio currently has or has recently undertaken development programs that are competitively awarded from agencies of the
$3,557,000 Loss before income tax described above, but also of the $1,160,000 non-cash income tax benefit described below under "Income tax provision (benefit)". Net Loss for the year ended December 31, 2014 consists not only of the $1,550,000 Loss before income tax described above, but also of the $413,000 non-cash income tax benefit described below under "Income tax provision (benefit)". The change in Loss before income taxes is primarily attributable to decreased revenue and gross margin, and increased operating expenses. Gross margin decreased in the year ended December 31, 2015 as compared with the year ended December 31, 2014, by $327,000, or 3.0%. The increased operating expenses, the most significant of which were an increase in wages and related expenses of $779,000, an increase in materials and supplies for R&D of $758,000, and increased clinical trial expenses of $161,000, partially offset by decreased commission expenses of $141,000, accounted for most of the change in Loss before income taxes.
Revenues:
Selected Product Categories: | | For the years ended | | | | | | | |
| | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Lateral Flow HIV Tests and Components | | $ | 9,957,882 | | | $ | 9,518,242 | | | $ | 439,640 | | | | 4.62 | % |
DPP® Tests and Components | | | 11,265,876 | | | | 15,655,680 | | | | (4,389,804 | ) | | | -28.04 | % |
Other | | | 662,930 | | | | 775,847 | | | | (112,917 | ) | | | -14.55 | % |
Net Product Sales | | | 21,886,688 | | | | 25,949,769 | | | | (4,063,081 | ) | | | -15.66 | % |
License and royalty revenue | | | 52,753 | | | | 23,257 | | | | 29,496 | | | | 126.83 | % |
R&D, milestone and grant revenue | | | 2,316,044 | | | | 1,672,258 | | | | 643,786 | | | | 38.50 | % |
Total Revenues | | $ | 24,255,485 | | | $ | 27,645,284 | | | $ | (3,389,799 | ) | | | -12.26 | % |
| | | | | | | | | | | | | | | | |
Revenues for our lateral flow HIV tests and related components during the year ended December 31, 2015 increased by approximately $440,000 from the same period in 2014. This was primarily attributable to increased sales to Africa, of approximately $1,576,000 and increased sales to Europe of $973,000, partially offset by decreased sales to the U.S. of $1,604,000, and decreased sales to Mexico of $458,000. Revenues for our DPP® products during the year ended December 31, 2015 decreased by approximately $4,390,000 over the same period in 2014, primarily for decreases in sales in Mexico of $3,455,000 and decreases in sales in Brazil to FIOCRUZ of $2,112,000, partially offset by increased sales in the U.S. of $1,011,000. The increase in R&D, and in milestone and grant revenue, was primarily due to revenues from certain development projects that were awarded during the period. R&D revenues include funds, recognized on an "as expenses are incurred" basis or on a milestone basis, from various grants, see footnote 14 of our financial statements.
Gross Margin:
Gross Margin related to Net Product Sales: | | For the years ended | | | | | | | |
| | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Gross Margin per Statement of Operations | | $ | 10,486,827 | | | $ | 10,814,023 | | | $ | (327,196 | ) | | | -3.03 | % |
Less: R&D, milestone, grant, license and royalties | | | 2,368,797 | | | | 1,695,515 | | | | 673,282 | | | | 39.71 | % |
Gross Margin from Net Product Sales | | $ | 8,118,030 | | | $ | 9,118,508 | | | $ | (1,000,478 | ) | | | -10.97 | % |
Product Gross Margin % | | | 37.09 | % | | | 35.14 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
The overall gross margin dollar decrease of $327,000 included a $1,000,000 decrease in gross margin from net product sales and a $673,000 increase in non-product revenues. The decrease in net product sales gross margin of $1,000,000 is primarily attributable to the change in product sales compared to 2014. The net product sales gross margin decrease is comprised of two components, one is the decrease in product sales of $4,063,000, which at the 35.1% margin contributed $1,428,000 to the decrease, and the other is the increased change in margin percentage of 2.0% which contributed the balance of $427,000. The 2.0% increase in the percentage, from 35.1% in 2014 to 37.1% in 2015, was primarily due to increased efficiencies from our operations excellence program.
Research and Development:
This category includes costs incurred for clinical and regulatory affairs and for product research and development.
Selected expense lines: | | For the years ended | | | | | | | |
| | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | |
Clinical and Regulatory Affairs: | | | | | | | | | | | | |
Wages and related costs | | $ | 490,802 | | | $ | 448,852 | | | $ | 41,950 | | | | 9.35 | % |
Consulting | | | 44,135 | | | | 29,741 | | | | 14,394 | | | | 48.40 | % |
Stock-based compensation | | | - | | | | 3,231 | | | | (3,231 | ) | | | -100.00 | % |
Clinical trials | | | 366,469 | | | | 205,589 | | | | 160,880 | | | | 78.25 | % |
Other | | | 80,960 | | | | 93,780 | | | | (12,820 | ) | | | -13.67 | % |
Total Regulatory | | | 982,366 | | | | 781,193 | | | | 201,173 | | | | 25.75 | % |
| | | | | | | | | | | | | | | | |
R&D Other than Regulatory: | | | | | | | | | | | | | | | | |
Wages and related costs | | | 2,896,226 | | | | 2,456,514 | | | | 439,712 | | | | 17.90 | % |
Consulting | | | 128,117 | | | | 123,965 | | | | 4,152 | | | | 3.35 | % |
Stock-based compensation | | | 62,713 | | | | 41,306 | | | | 21,407 | | | | 51.83 | % |
Materials and supplies | | | 1,779,046 | | | | 1,021,516 | | | | 757,530 | | | | 74.16 | % |
Other | | | 529,371 | | | | 408,043 | | | | 121,328 | | | | 29.73 | % |
Total other than Regulatory | | | 5,395,473 | | | | 4,051,344 | | | | 1,344,129 | | | | 33.18 | % |
| | | | | | | | | | | | | | | | |
Total Research and Development | | $ | 6,377,839 | | | $ | 4,832,537 | | | $ | 1,545,302 | | | | 31.98 | % |
| | | | | | | | | | | | | | | | |
Expenses for Clinical and Regulatory Affairs for the year ended December 31, 2015 increased by $201,000 as compared to the same period in 2014. This was primarily due to an increase of $161,000 in clinical trial expenses and increased wages and related costs of $42,000.
R&D expenses other than Clinical & Regulatory Affairs increased by $1,344,000 in the year ended December 31, 2015, as compared with the same period in 2014. The increases were primarily related to an increase in wages and related costs, and in material and supplies, to support our sponsored research and internal development programs.
Selling, General and Administrative Expense:
Selected expense lines: | | For the years ended | | | | | | | |
| | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Wages and related costs | | $ | 3,060,407 | | | $ | 2,763,370 | | | $ | 297,037 | | | | 10.75 | % |
Consulting | | | 311,488 | | | | 456,658 | | | | (145,170 | ) | | | -31.79 | % |
Commissions | | | 1,291,453 | | | | 1,432,567 | | | | (141,114 | ) | | | -9.85 | % |
Stock-based compensation | | | 271,674 | | | | 399,334 | | | | (127,660 | ) | | | -31.97 | % |
Marketing materials | | | 223,445 | | | | 345,426 | | | | (121,981 | ) | | | -35.31 | % |
Investor relations/investment bankers | | | 204,198 | | | | 168,410 | | | | 35,788 | | | | 21.25 | % |
Legal, accounting and compliance | | | 879,887 | | | | 662,522 | | | | 217,365 | | | | 32.81 | % |
Travel, entertainment and trade shows | | | 448,599 | | | | 320,280 | | | | 128,319 | | | | 40.06 | % |
Bad debt allowance (recovery) | | | - | | | | 28,000 | | | | (28,000 | ) | | | -100.00 | % |
Other | | | 971,884 | | | | 955,172 | | | | 16,712 | | | | 1.75 | % |
Total S, G &A | | $ | 7,663,035 | | | $ | 7,531,739 | | | $ | 131,296 | | | | 1.74 | % |
| | | | | | | | | | | | | | | | |
Selling, general and administrative expenses for the year ended December 31, 2015, increased by $131,000 as compared with the same period in 2014, a 1.7% increase. This increase resulted primarily from increases in wages and related costs and travel expenses, which for 2015 included the continued development of a sales and marketing team over 2014, professional fees and in investor relations/investment bankers, which were partially offset by decreases in consulting, commissions (due to decreased sales to Brazil), stock-based compensation, and marketing materials.
Other Income and Expense:
| | For the years ended | | | | | | | |
| | December 31, 2015 | | | December 31, 2014 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Other (expense) | | $ | (4,814 | ) | | $ | (5,707 | ) | | $ | 893 | | | | 15.65 | % |
Interest income | | $ | 2,412 | | | $ | 5,839 | | | $ | (3,427 | ) | | | -58.69 | % |
Interest expense | | | (836 | ) | | | - | | | | (836 | ) | | | 100.00 | % |
Total Other Income and (Expense) | | $ | (3,238 | ) | | $ | 132 | | | $ | (3,370 | ) | | | -2,553.03 | % |
| | | | | | | | | | | | | | | | |
Other (expense) for the year ended December 31, 2015 decreased approximately $3,400, primarily due to decreased interest income, compared to the same period in 2014.
Income tax provision (benefit):
For the year ended December 31, 2015 the Company recognized a $(1,160,000) non-cash income tax benefit and increased its deferred tax assets by $(1,160,000). For the year ended December 31, 2014, the Company recognized a $(413,000) non-cash income tax benefit and increased its deferred tax assets by $(413,000). The effective tax rate used to recognize the benefit in 2015 was 32.0% compared to a 26.6% rate used in 2014 to record the amount charged. In both years non-deductible expenses for tax purposes accounted for most of the difference from the standard 34% U.S. tax rate. The Company maintains a full valuation allowance on research and development tax credits.
MATERIAL CHANGES IN FINANCIAL CONDITION
Selected Changes in Financial Condition | | As of | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | |
Cash and cash equivalents | | $ | 10,554,464 | | | $ | 5,376,931 | | | $ | 5,177,533 | | | | 96.29 | % |
Accounts receivable, net of allowance for doubtful accounts of $52,000 and $52,000 at December 31, 2016 and 2015, respectively | | | 3,383,729 | | | | 2,422,971 | | | | 960,758 | | | | 39.65 | % |
Prepaid expenses and other current assets | | | 840,145 | | | | 1,256,879 | | | | (416,734 | ) | | | -33.16 | % |
Fixed assets, net of accumulated depreciation | | | 1,709,321 | | | | 2,374,308 | | | | (664,987 | ) | | | -28.01 | % |
Deferred tax asset, net of valuation allowance | | | - | | | | 5,467,143 | | | | (5,467,143 | ) | | | -100.00 | % |
Deposits and other assets | | | 720,489 | | | | 209,169 | | | | 511,320 | | | | 244.45 | % |
Accounts payable and accrued liabilities | | | 3,013,133 | | | | 2,801,432 | | | | 211,701 | | | | 7.56 | % |
Deferred revenue | | | 392,517 | | | | 353,406 | | | | 39,111 | | | | 11.07 | % |
Additional paid-in capital | | | 60,721,783 | | | | 47,890,642 | | | | 12,831,141 | | | | 26.79 | % |
Cash increased by $5,178,000 from December 31, 2015, primarily due to net cash provided by financing activities for the year of 2016. The Company raised, net of expenses, approximately $12,500,000 which was partially offset by cash used in operating activities for the year of 2016. In addition there were increases in accounts receivable, net of allowance, of $961,000, deposits, accounts payable and accrued liabilities of $212,000 and other assets of $511,000, deferred revenue of $39,000, and decreases in fixed assets of $665,000 after depreciation, prepaid expenses of $417,000, non-current deferred tax asset of $5,467,000, and an increase in additional paid-in-capital of $12,831,000.
The accounts receivable increase from December 31, 2015, is primarily due to an increase in December 2016 versus December 2015 sales of approximately $1.50 million, partially offset by lower sales in prior months. The decrease in fixed assets is primarily due to depreciation for the year ending December 2016 versus December 2015. Deferred tax asset decrease is related to recording of a full valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
| | For the years ended | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | (6,704,734 | ) | | $ | 1,792,978 | | | $ | (8,497,712 | ) | | | -473.94 | % |
Net cash used in investing activities | | | (668,706 | ) | | | (1,030,585 | ) | | | 361,879 | | | | 35.11 | % |
Net cash provided by financing activities | | | 12,550,973 | | | | - | | | | 12,550,973 | | | | 100.00 | % |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | $ | 5,177,533 | | | $ | 762,393 | | | $ | 4,415,140 | | | | 579.12 | % |
The Company's cash increased as of December 31, 2016 by $5,178,000 from December 31, 2015, primarily due to net cash provided by operating activities and partially offset by cash used in investing activities for 2016.
The cash used in operations in 2016 was $6,705,000, primarily due to the net loss net of non-cash items of $6,103,000 and with an increase in accounts receivable of $961,000, increase in prepaid and other current assets of $136,000, and a decrease in accounts payable and other accrued liabilities of $212,000, partially offset by a decrease in inventories of $243,000, decrease in deposits and other assets of $1,000, and an increase in deferred revenue of $39,000. Net loss net of non-cash items includes net loss of $13,347,000 partially offset by $5,801,000 in income tax provision, $1,139,000 in depreciation and amortization, and $304,000 in share-based compensation. The use of cash from investing activities is primarily the purchase of fixed assets and acquisition of licenses.
Fixed Asset Commitments
As of December 31, 2016, the Company had paid deposits on various pieces of equipment aggregating $31,900 which is reflected in Deposits on manufacturing equipment on the balance sheet. As of December 31, 2016, the Company was not committed to additional equipment-purchase obligations.
RECENT DEVELOPMENTS AND CHEMBIO'S PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
During 2016, Chembio took three important strategic steps which management believes will position the Company for growth. First, the Company continued to expand its product portfolio, leveraging its patented DPP® technology platform. Second, the Company expanded its global sales and marketing infrastructure, strengthening its U.S. sales leadership and building its first international sales team. Third, the Company expanded its operational capabilities, acquiring a Malaysia-based operation.
Expanding Chembio's Product Portfolio
For nearly fifteen years, Chembio was primarily focused on POC HIV testing and succeeded in commercializing multiple FDA-approved and CLIA-Waived POC HIV tests. In 2014, the Company made the strategic decision to expand its product portfolio and focus on three initiatives: 1) strengthening its core sexually transmitted disease business, 2) building a highly-differentiated fever and tropical disease business, and 3) establishing technology collaborations to further leverage its patented DPP® technology platform.
1. Strengthening the Company's core sexually transmitted disease business began with the decision to terminate its U.S. distribution agreements for HIV 1/2 Stat-Pak® Assay in 2014 and SURE CHECK HIV® 1/2 Assay in 2016, which provided the Company with worldwide commercial control of its legacy POC HIV tests, which are FDA-approved, CLIA-waived, WHO Prequalified and CE marked. The Company leveraged its DPP® technology platform to develop a DPP® HIV 1/2 Assay, which became FDA-Approved and CLIA-Waived in October 2014 for use with blood and oral fluid, the second such entrant in the U.S. market. Finally, following the introduction of its DPP® HIV-Syphilis Assay in Latin America, the Company has prioritized the development of a DPP® HIV-Syphilis Assay for the U.S. market to address the rise in HIV and Syphilis co-infection.
2. Building a highly-differentiated fever and tropical disease business began as a response to the 2014-2015 Ebola outbreak in West Africa, which led to the Company's decision to enter the fever and tropical disease market. Today, the Company is developing eight POC fever and tropical disease tests, specifically the following: DPP® Malaria Assay, DPP® Zika Assay, DPP® Dengue Fever Assay, DPP® Chikungunya Assay, DPP® Zika/Dengue/Chikungunya Assay, DPP® Fever Assay (Malaria, Zika, Dengue, Chikungunya, Ebola, Lassa, Marburg), DPP® Ebola Assay, and DPP® Ebola-Malaria Assay. The Company's fever and tropical disease products are being developed through collaborations and/or funding's from the Bill & Melinda Gates Foundation, the Paul G. Allen Family Foundation, the Centers for Disease Control and Prevention (CDC),Federal Government including the U.S. Department of Health and Human Services (HHS), the Officeand U.S. Department of the Assistant Secretary for Preparedness and Response, and the Biomedical Advanced Research and Development Authority (BARDA).
3. Establishing technology collaborations to further leverage the Company's patented DPP® technology platform has allowed the Company to advance the development of novel POC tests in areas with unmet medical needs, such as traumatic brain injury (concussion), a specific form or cancer, and bovine tuberculosis in cattle. The collaborations and external funding can be attributed to the unique characteristics of the Company's DPP® technology platform as compared to traditional lateral flow technology, such as enhanced sensitivity and specificity, the ability to multiplex, and the ability to provide a semi-quantitative result when combined with Chembio's DPP® Micro Reader.
Expanding Chembio's Sales & Marketing Infrastructure
Prior to 2014, Chembio's HIV products were sold through a single, exclusive distribution partner in the U.S. market, the majority of the Company's international sales were limited to a few countries, and the Company had no internal commercialization infrastructure. Between 2014 and 2016, Chembio took important steps to gain control of its HIV products in the U.S. market, ending the longstanding relationship with its previous distribution partner and building its own U.S. sales and marketing team to sell its DPP® HIV, STAT-PAK® HIV, and SURE CHECK® HIV products in the U.S. market. In addition, the Company has partnered with professional distributors such as Fisher, McKesson/PSS, Henry Schein and Medline to establish a geographic coverage model in the U.S. market.
To lead this growing infrastructure, Chembio recently appointed two senior executives to direct the expansion of the Company's global commercial operations. Robert Passas, Ph.D., joined the Company in October 2016 as President, EMEA and APAC regions, and is responsible for commercial operations in Europe, the Middle East, Africa, and Asia. Prior to joining the Company, Dr. Passas held positions of increasing responsibility at Abbott, Quidel, The Binding Site, and Trinity Biotech. In his most recent position, he was responsible for worldwide marketing and international sales at Trinity Biotech.
Sharon Klugewicz, who most recently served as Chembio's Chief Operating Officer, was promoted to President, Americas region in October 2016, with responsibility for commercial operations in the United States, Latin America, and Canada. Ms. Klugewicz is responsible for sales, marketing, customer support, clinical and regulatory affairs, and quality systems in the Americas, and will be tasked with leading the U.S. commercial team and expanding commercial operations throughout Latin America, the U.S. and Canada. Prior to joining the Company in 2012, she spent 20 years at Pall Corporation where she held positions of increasing responsibility, including Senior Vice President, Scientific and Laboratory Services.
In addition, Chembio has recently hired three international sales executives to oversee commercial expansion in specific regions. Javier Gutman was named Regional Director, Latin America; Kenneth Burns was named Regional Director, Africa; and Mohan Anasalam was named Regional Director, Asia Pacific. Each of these sales executives brings considerable experience to Chembio, and each will focus on increasing product sales, strengthening and expanding the Company's distribution channels, and providing local support to customers and commercial partners in their respective areas of Latin America, Africa and Asia Pacific.
Today, led by experienced executives with extensive experience in global diagnostic sales, Chembio is building a world-class commercialization organization with focus on the U.S., Europe, Africa, Asia Pacific and Latin America.
Expanding Chembio's Operational Capabilities
In November 2016, Chembio announced plans to acquire Malaysia-based RVR Diagnostics ("RVR"), a strategic decision to expand the Company's operational capabilities, increasing manufacturing capacity and establishing a physical presence in Southeast Asia.
Previously, in 2014, Chembio entered into two agreements with RVR, a privately-held company in Malaysia. The agreements were intended to build a Chembio presence in Asia and establish RVR as a licensee, distributor and contract manufacturer. Through these agreements, RVR acquired rights to license, manufacture and distribute certain Chembio products in Southeast Asia. Between 2014 and 2016, RVR achieved a number of important milestones under the agreements, including the following:
• | completed a manufacturing facility capable of producing DPP® Assays and obtained ISO 13485 certification; |
• | provided funding to accelerate the development of Chembio's DPP® Dengue Assay; |
• | received regulatory approval to market and sell products in certain Southeast Asia countries; |
• | obtained RVR Dengue tender award in Malaysia, which resulted in 2016 revenue in excess of US$1 million. |
In light of the considerable progress made by RVR, and to further support Chembio's global product and commercialization strategies, Chembio acquired RVR in January 2017. As a subsidiary of Chembio, RVR provides an important base of operations, providing additional revenue, a strategically located and cost-effective manufacturing facility, and a path to regulatory access in Southeast Asia that management believes will be an important growth driver.
Overview of Chembio's Business
Sexually Transmitted Disease:
Chembio's sexually transmitted disease product sales decreased during 2016, primarily due to the Company's loss of ongoing DPP® HIV and DPP® Syphilis product sales as a result of a previously disclosed tender offer in Brazil having been awarded to a competitor at an extremely low price pointAgriculture, as well as lower sales of HIV products in Africa. Despite the loss of the HIV and Syphilis tender in Brazil, Chembio continues to supply other novel DPP® products to Bio-Manguinhos/Fiocruz, and the Ministry of Health in Brazil. These products include DPP® HIV Confirmatory Assay and DPP® Leishmania Assay. Given Chembio's product portfolio in sexually transmitted disease, coupled with the expansion of our global commercial resources, the Company believes the Unites States, Latin America, Africa, and Asia Pacific will be important current and future markets for its sexually transmitted disease products.
In the U.S., sales of the Company's POC HIV Assays showed positive trends. During 2016, U.S. sales of the HIV 1/2 STAT-PAK® Assay increased 34.7% as compared to 2015. We are also seeing very encouraging U.S. sales of the SURE CHECK® HIV 1/2 Assay. During the fourth quarter of 2016, U.S. sales of the SURE CHECK® HIV 1/2 Assay increased by approximately $516,000 or 230.5% as compared to the third quarter of 2016. Our U.S. HIV sales are bolstered by a receipt of a two-year HIV tender for the state of Florida, which the Company was awarded during the fourth quarter of 2016 and of a two-year HIV tender for another state, which the Company was awarded subsequent to the end of 2016. This growth provides evidence that we are effectively rebuilding the U.S. HIV STAT-PAK® and SURE CHECK® HIV business, after we took back the U.S. distribution rights to these products in June 2014 and June 2016 respectively.
Looking toward 2017 sales of Chembio's sexually transmitted disease products, the Company recently received CE Mark for the DPP® HIV-Syphilis Assay, clearing the product to be marketed and sold within the member states of the European Union and the Caribbean region, except for Puerto Rico and the U.S. Virgin Islands. The Company continued to advance the clinical trial for its DPP® HIV-Syphilis Assay for the U.S. market during 2016, which is expected to be completed as planned, in the first quarter of 2017. As we've stated previously, we are striving to be the first-to-market in the U.S. with an HIV-Syphilis combination test.
Fever Disease:
During 2016, Chembio significantly advanced the development of its fever disease products, including: DPP® Malaria Assay, DPP® Dengue Assay, DPP® Zika Assay, DPP® Chikungunya Assay, DPP® Zika/Dengue/Chikungunya Assay, DPP® Fever Panel Assay, DPP® Ebola Assay, and DPP® Malaria/Ebola Assay. Also during 2016, the Company pursued and received numerous grants which fund much of the fever disease development initiatives, including funding from the Paul G. Allen Family Foundation,FIND, the Bill & Melinda Gates Foundation, and the U.S. Government (HHS/ASPR/BARDA and CDC). In addition, during the first quarter of 2016, the Company also entered into a collaboration with Bio-Manguinhos/Fiocruz for the development of POC Zika diagnostic tests for Brazil.The Paul G. Allen Family Foundation.
Contractual Commitments
The following table summarizes the Company’s expected cash outflows resulting from financial contracts and commitments as of December 31, 2017, with amounts denominated in foreign currencies translated using foreign currency rates as of December 31, 2017.
| | Payments due by period | |
| | Total | | | Less than one year | | | 1 - 3 years | | | 3-5 years | | | Thereafter | |
Operating leases1 | | $ | 1,058,000 | | | $ | 603,000 | | | $ | 455,000 | | | $ | - | | | $ | - | |
Employment contracts2 | | | 1,341,000 | | | | 770,000 | | | | 571,000 | | | | - | | | | - | |
Purchase obligations3 | | | 548,000 | | | | 548,000 | | | | - | | | | - | | | | - | |
Minimum commitments under contracts4 | | | 239,000 | | | | 56,000 | | | | 112,000 | | | | 51,000 | | | | 20,000 | |
Total | | $ | 3,186,000 | | | $ | 1,977,000 | | | $ | 1,138,000 | | | $ | 51,000 | | | $ | 20,000 | |
1Represents payments required under our operating leases.
2Represents salary payments payable under the terms of employment agreements with certain executives with terms that extend beyond December 31, 2018.
3Represents payments required by non-cancellable purchase orders related to capital expenditures.
4Represents payments required pursuant to certain licensing agreements. Such agreements are cancellable within a specified number of days following notice by the Company.
Of particular
Cash Flows
As of December 31, 2017, we had cash and equivalents of $3.8 million and no outstanding debt except for a $0.1 million seller-financed note is thepayable associated with automated manufacturing equipment.
| | For the years ended | | | | | | | |
| | December 31, 2017 | | | December 31, 2016 | | | | | | % Change | |
| | | | | | | | | | | | |
Net cash used in operating activities | | $ | (5,034,515 | ) | | $ | (6,704,734 | ) | | $ | 1,670,219 | | | | 24.9 | % |
Net cash used in investing activities | | | (1,876,954 | ) | | | (668,706 | ) | | | (1,208,248 | ) | | | (180.7 | )% |
Net cash provided by financing activities | | | 134,280 | | | | 12,550,973 | | | | (12,416,693 | ) | | | (98.9 | )% |
Effect of exhange rate changes on cash | | | 13,027 | | | | - | | | | 13,027 | | | | 100.0 | % |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | $ | (6,764,162 | ) | | $ | 5,177,533 | | | $ | (11,941,695 | ) | | | (230.6 | )% |
The Company's workcash as of December 31, 2017 decreased by $6.8 million vs. December 31, 2016, primarily due to develop a much-needed alternative to currently available molecular tests for the Zika virus that have limited utility as they are accurate only during a narrow window of time, approximately one week, between initial Zika virus exposurenet cash used in operating and the patient's development of detectable antibodiesinvesting activities.
Cash used in operating activities in 2017 was $5.1 million, primarily due to the virus,net loss adjusted for non-cash items of $4.9 million and a process known as seroconversion. Following seroconversion, antibody tests are recommended$1.1 million increase in inventory, offset by a $1.3 million reduction in accounts receivable related to accurately identify Zika virus infections. The DPP® Zika IgM/IgG Assay is an antibody test that will provide timely results,favorable collections.
Cash used in investing activities during 2017 related to the patient consultation. The DPP® Zika System, which includes the DPP® Zika IgM/IgG Assayacquisition of RVR Diagnostics and DPP® Micro Reader, detects both IgM and IgG antibodies, uses a 10uL fingerstick blood sample, and provides semi-quantitative results in 15 minutes. Though Chembio's Zika program was only initiated in February 2016, by September 2016, the Company was awarded a contract by the CDC for the purchase of POC surveillance diagnostic assays for Zika, Denguemanufacturing equipment and Chikungunya. Under the terms of the contract, during the first quarter of 2017 Chembio will supply its DPP® Zika IgM/IgG Assay, DPP® Zika/Chikungunya/Dengue IgM/IgG Combination Assay, and DPP® Micro Reader to the CDC, for a surveillance testing pilot program in India, Peru, Guatemala and Haiti.other fixed assets.
Concurrent with this important development work, Chembio is moving expeditiously to complete regulatory filings that will ultimately determine the availability of our products to the regions in need. In July 2016, a CE Mark was obtained that allowed the Company to begin commercializing the DPP® Zika IgM/IgG System, which includes an assay utilizing the patented DPP® technology, as well as a digital reader, the DPP® Micro Reader, in 17 European countries, including the United Kingdom, Germany, and France, as well as a majority of the Caribbean nations. During the fourth quarter of 2016, Chembio initiated sales of the DPP® Zika system via its exclusive Caribbean distribution partner, Isla Labs.
In November 2016, the Company received approval for commercial use of its DPP® Zika IgM/IgG Assay by the Brazilian health regulatory agency, Agência Nacional de Vigilância Sanitária (ANVISA), and during the first quarter 2017, the Company was notified of the successful evaluation of the DPP® Zika system by INCQS, Brazil's National Institute for Quality Control in Health. Brazil has been hardest hit by the Zika virus, where it is estimated that 1.5 million people have been infected with Zika virus and approximately 2,000 babies have been born with microcephaly, a devastating birth defect linked to the Zika virus. For this reason the Company is particularly pleased to receive approval from Brazil's health regulatory agency, and we look forward to initiating sales of our DPP® Zika IgM/IgG Assay, following ANVISA approval of the DPP® Micro Reader. There is no assurance of the timing of this approval or that it will occur at all.
Beyond these approvals, the Company made multiple other regulatory filings during 2016 for the DPP® Zika IgM/IgG Assay, including an Emergency Use Authorization (EUA) submission with the U.S. Food and Drug Administration (FDA), an Emergency Use Assessment and Listing (EUAL) with the World Health Organization (WHO), and a submission with Cofepris in Mexico. Supplementing these filings, the Company is engaged fully with these agencies in the hope of facilitating the earliest possible approvals.
Technology Collaborations:
Chembio currently has the following ongoing technology collaborations: DPP® Cancer Assay for a specific form of cancer, DPP® Traumatic Brain Injury Assay, and DPP® BovidTB Assay. We are pleased to report that we made progress with each of these programs in 2016.
The DPP® Cancer Assay, which is funded by an undisclosed entity, targets a specific form of cancer. We have successfully completed the feasibility phase of the program and moved into the product development stage, which is also funded by the 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 2016. This project, which is funded by Perseus Science Group, LLC, is in the feasibility phase. We recently finalized institutional review board (IRB) agreements with several hospitals and began conducting initial studies of the DPP® Traumatic Brain Injury Assay using patient samples.
The DPP® BovidTB Assay is a rapid POC test for the detection of bovine tuberculosis (TB). In September 2016, the Company was awarded a $600,000 grant from the United States Department of Agriculture (USDA) to develop the DPP® BovidTB Assay. Under the two-year grant, Chembio will use its patented DPP® technology in an effort to develop a simple, rapid, accurate and cost-effective test for bovine TB in cattle. The DPP® BovidTB Assay will be designed to provide results within 20 minutes, thereby significantly improving on the time-consuming, tedious and inadequate diagnostic methods currently in use.
Conclusion
During 2016, the Company made significant advances to expand its product portfolio, its sales and marketing infrastructure, and its operational capabilities.
The product strategy includes three strategic initiatives: strengtheningcompleted an underwritten registered public offering, whereas no such offering occurred during 2017. Please see the Company's core sexually transmitted disease, building a highly-differentiated fever and tropical disease, and establishing technology collaborations to“Recent Developments” section, below, for further leverageinformation regarding the Company's patented DPP® technology platform. Though the Company only initiated its fever disease program in late 2014, sales of two fever disease products were initiated in 2015 (DPP® Ebola, DPP® Malaria-Ebola) and expanded in late 2016 (DPP® Zika Assay). The efficiency with which these products were developed, and regulatory clearances were obtained, speaks to the versatility of the Company's patented DPP® technology platform, the Company's scientific expertise, and its commitment to fever disease. It further highlights Chembio's ability to succeed with a range of new product opportunities.
The commercial strategy shifted from a product supply model, in which the Company relied on others to market and sell its products, to taking critical steps to build a global sales and marketing organization. Prior to 2014, the Company had no sales infrastructure. Today, Chembio has experienced sales leadership guiding the Company's global commercialization plan, with focus on the U.S., Europe, the Middle East, Africa, Asia, and Latin America. The new sales and marketing leadership joined Chembio starting in Q4 of 2016 with 2017 goals of increasing product sales, strengthening and expanding the Company's distribution channels, and providing local support to customers and commercial partners around the world. With several fever and HIV products receiving regulatory approvals in late 2016, there is great optimism for 2017 sales.
And the operational strategy was significantly expanded beyond Medford, NY to incorporate Malaysia-based RVR Diagnostics. The acquisition, of RVR provides Chembio with an important base of operations, providing additional revenue, a strategically located and cost-effective manufacturing facility, and a path to regulatory access in Southeast Asia that management believes will be an important growth driver.Company’s February 2018 underwritten registered public offering.
2016 was an important year for Chembio, but it was merely a starting point for this new global organization.
Contractual Obligations and Commercial Commitments
The following sets forth our approximate aggregate obligations as of December 31, 2016 for future payments under contracts and other contingent commitments, for the year 2017 and beyond:
| | Payments due by period | |
Contractual Obligations | | Total | | | Less than one year | | | 1 - 3 years | | | 3-5 years | | | More than 5 years | |
Operating leases1 | | $ | 370,085 | | | $ | 306,018 | | | $ | 64,067 | | | $ | - | | | $ | - | |
Employment contracts2 | | | 907,000 | | | | 516,200 | | | | 390,800 | | | | - | | | | - | |
Purchase obligations3 | | | 694,725 | | | | 694,725 | | | | - | | | | - | | | | - | |
Minimum commitments under contracts4 | | | 532,627 | | | | 333,627 | | | | 92,000 | | | | 77,000 | | | | 30,000 | |
| | | | | | | | | | | | | | | | | | | | |
Total contractual obligations | | $ | 2,504,437 | | | $ | 1,850,570 | | | $ | 546,867 | | | $ | 77,000 | | | $ | 30,000 | |
| | | | | | | | | | | | | | | | | | | | |
1
| Represents payments required under our operating leases. See Note 13 of the Notes to the consolidated financial statements included herein. | | |
2
| Represents salary payments payable under the terms of employment agreements executed by us with certain executives. See Note 13 of the Notes to the consolidated financial statements included herein. | | |
3 | Represents payments required by non-cancellable purchase orders related to inventory, capital expenditures and other goods or services. | | |
4 | Represents payments required pursuant to certain licensing agreements executed by the Company. These agreements are cancellable within a specified number of days after communication by the Company of its intent to terminate. | | |
Off-Balance Sheet Arrangements.
We doThe Company does 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, as amended.
Recent Developments
41As described in Note 16 – Subsequent Event to the audited consolidated financial statements included herein, on February 13, 2018, the Company consummated an underwritten registered public offering of 1,783,760 shares of its common stock at a public offering price of $6.75 per share for gross proceeds of approximately $12.0 million. The net proceeds, after underwriting discounts and commissions, and estimated expenses, are approximately $11.0 million.
CriticalSignificant Accounting Policies and Critical Accounting Estimates
Our significant accounting policies are described in Note 3 – Significant Accounting Policies to the audited consolidated financial statements included herein. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:
| ● | It requires us to make assumptions about matters that were uncertain at the time we were making the estimate, and |
| ● | Changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations. |
The preparationfollowing listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the financial statements in conformity withaccounting treatment of a particular transaction is specifically dictated by 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.
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.different result.
Revenue Recognition –
We recognize revenue for product sales in accordance with ASC 605. Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.
For certain contracts, we recognize revenue from R&D, milestone and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned.
For certain collaborative research projects, we recognize revenue by defining milestones at the inception of the agreement and applying the milestone method of revenue recognition for relevant contracts.
Stock-Based Compensation –
We recognize the fair value of equity-based awards as compensation expense in our statement of operations. The fair value of our stock option awards was estimated using a Black-Scholes option valuation model. This valuation model'smodel’s computations incorporate highly subjective assumptions, such as the expected stock price volatility and the estimated life of each award. The fair value of the options, after considering the effect of expected forfeitures, is then amortized, generally on a straight-line basis, over the related vesting period of the option. The fair value of our restricted shares is based on the market value of the shares at the date of grant and is recognized on a straight-line basis over the related vesting period of the award.
Research & Development Costs –
Research and development activities consist primarily of new product development, continuing engineering for existing products, and regulatory and clinical trial costs. Costs related to research and development efforts on existing or potential products are expensed as incurred.
Inventories –
Inventories are stated at the lower of cost or market, using the first-in, first-out method (FIFO) to determine cost. Our policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a reserve for any inventory considered slow moving or obsolete. For example, each additional 1% of obsolete inventory would reduce such inventory by approximately $35,000.$44,000.
Allowance for doubtful accounts –Accounts Receivable
Our policy is to review our accounts receivable on a periodic basis, no less frequently than monthly. On a quarterly basis an analysis is made of the adequacy of our allowance for doubtful accounts and adjustments are made accordingly. The current allowance is approximately 2% of accounts receivable. For example, each additional 1% of accounts receivable that becomes uncollectible would reduce such balance of accounts receivable by approximately $32,000.$21,000.
Acquisitions
In accordance with accounting guidance for the provisions in FASB ASC 805, Business Combinations, we allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. In addition, an acquisition may include a contingent consideration component, such as our acquisition agreements for RVR Diagnostics. The fair value of the contingent consideration is estimated as of the date of the acquisition and is recorded as part of the purchase price. This estimate is updated in future periods and any changes in the estimate, which are not considered an adjustment to the purchase price, are recorded in our consolidated statements of operations.
We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed.
Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
Other estimates used in determining fair value include, but are not limited to, future cash flows or income related to intangibles, market rate assumptions, actuarial assumptions for benefit plans and appropriate discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but that are inherently uncertain, and therefore, may not be realized. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
Goodwill and Intangible Assets
We periodically review goodwill for impairment indicators. We review goodwill for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company performs the goodwill impairment review at the reporting unit level. We perform a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If so, we perform the step discussed hereafter. Our qualitative assessment involves significant estimates, assumptions, and judgments, including, but not limited to, macroeconomic conditions, industry and market conditions, financial performance of the Company, reporting unit specific events and changes in the Company's share price.
If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered to be impaired. We would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. We review indefinite-lived intangible assets for impairment annually or more frequently if events or changes in circumstances indicate the assets might be impaired. Similar to the goodwill assessment described above, the Company first performs a qualitative assessment of whether it is more likely than not that an indefinite-lived intangible asset is impaired. If necessary, the Company then performs a quantitative impairment test by comparing the estimated fair of the asset, based upon its forecasted cash flows, to its carrying value. Other intangible assets with definite lives are amortized over their useful lives and are subject to impairment testing only if events or circumstances indicate that the asset might be impaired, as described above.
Income Taxes –
Income taxes are accounted for under ASC 740 authoritative guidance ("Guidance"(“Guidance”), which requires the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
The Guidance also requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including a company'scompany’s current and past performance, the market environment in which the company operates, length of carryback and carryforward periods and existing contracts that will result in future profits. The Company believes that it likely will not be able to utilize its net operating loss carryforwards and maintains a full valuation allowance. The Company still maintains a full valuation allowance on research and development tax credits.
The Guidance also prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the consolidated financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction.
The above listing is not intended to be a comprehensive list30
Recently Issued Accounting Pronouncements
RecentRefer to Note 3 – Significant Accounting Pronouncements –
In May 2014,Policies to the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on ouraudited consolidated financial statements andincluded herein for a complete description of recent accounting standards which we have not yet determinedbeen required to implement which may be applicable to our operations. Additionally, the method by which we will adoptsignificant accounting standards that have been adopted during the standard in 2018. The Company has conducted a preliminary analysis of its sales contracts whichyear ended December 31, 2017 are based on the shipment of goods to the customer, and currently this new accounting standard will not have a material impact on its consolidated financial statement for our sales contracts. The Company has conducted a preliminary analysis of its current R&D contracts which are currently based on "as expenses are incurred" basis, and currently this new accounting standard will not have a material impact on its consolidated financial statement for our current R&D contracts.described.
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under the new guidance. This guidance will be effective for Chembio beginning in 2018, with early adoption permitted. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, which amends the ASC and creates Topic 842, Leases. Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous US GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. We are in the initial stages of evaluating the effect of the standard on our financial statements and will continue to evaluate. While not yet in a position to assess the full impact of the application of the new standard, the Company expects that the impact of recording the lease liabilities and the corresponding right-to-use assets will have a significant impact on its total assets and liabilities with a minimal impact on equity.
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will change certain aspects of accounting for share-based payments to employees. ASU 2016-09 is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2016. The Company is currently in the initial stages of evaluating the impact of the provisions of ASU 2016-09. We are still evaluating this standard and currently the Company does not believe this new accounting standard will have a material impact on its consolidated financial statement.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
We doThe Company does not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, we havehas no material derivative risk to report under this Item.
As of December 31, 2016, we2017, the Company did not have any foreign currency exchange contracts ornor purchase currency options to hedge local currency cash flows.
We are exposed to market risks from changes in currency exchange rates and certain commodity prices. All sales from our U.S. subsidiary, regardless of the customer location, are denominated in U.S. dollars. Sales denominated in foreign currencies are associated with a portion of the sales from our subsidiary Chembio Diagnostics Malaysia and comprised approximately 6.1% of our total net revenues for the year ended December 31, 2016 are in U.S. Dollars (USD).2017.
ITEM 8. | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Consolidated Financial Statements and schedules that constitute Item 8 are attached at the end of this Annual Report on Form 10-K. An index to these Financial Statements and schedules is also included on page F-1 of this Annual Report on Form 10-K.
ITEM 9. | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not Applicable.
ITEM 9A. | ITEM 9A. CONTROLS AND PROCEDURES |
(a) Disclosure Controls and Procedures. Under the supervision and with the participation of our senior management, consisting of our chief executive officer and our chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”)), as of the end of the period covered by this report (the "Evaluation Date"). Based on that evaluation, the Company'sCompany’s management, including our chief executive officer and chief financial officer, concluded that as of the Evaluation Date our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our Exchange Act reports is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Our internal control over financial reporting is a process, under the supervision of our chief executive officer and chief financial officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. These internal controls over financial reporting processes include policies and procedures that:
| a. | a. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| b. | b. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| c. | c. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management'sManagement’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company has designed its internal control over financial reporting to provide reasonable assurance on the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles.
The Company'sCompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company'sCompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016,2017, based on the framework and criteria in the 2013 Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management'smanagement’s evaluation and those criteria, the CEO and CFO concluded that its system of internal control over financial reporting was effective as of December 31, 2016.2017.
TheBDO USA, LLP, the Company's independent registered public accounting firm that audited the Company's consolidated financial statements included in this report, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting.
reporting, a copy of which appears on the following page.
Dated: March 7, 2017 /s/ John J. Sperzel
Chief Executive Officer
Dated: March 7, 2017 /s/ Richard J. Larkin
Richard J. Larkin
Chief Financial Officer
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors and Stockholders of
Chembio Diagnostics, Inc.
Medford, New York
Opinion on Internal Control over Financial Reporting
We have audited theChembio Diagnostics, Inc.’s (the “Company’s”) internal control over financial reporting of Chembio Diagnostics, Inc. and subsidiaries (the "Company") as of December 31, 2016,2017, based on criteria established in Internal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedule and our report dated March 8, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's“Item 9A, Management’s Report on Internal Control over Financial Reporting ("Management's Report")Reporting”. Our responsibility is to express an opinion on the Company'sCompany’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 Public Company Accounting Oversight Board (United States).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, andrisk. 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'scompany’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'scompany’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'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. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Chembio Diagnostics, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Chembio Diagnostics, Inc. and subsidiary as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016 and our report dated March 7, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Melville,
New York, NY
March 7, 2017
8, 2018
(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the Company'sCompany’s last fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | ITEM 9B. OTHER INFORMATION |
Not applicable.
PART III
ITEM 10. | ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The 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.
ITEM 11. | ITEM 11. EXECUTIVE COMPENSATION |
The information required in response to this Item 11 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.
ITEM 12. | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required in response to this Item 12 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.
ITEM 13. | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The information 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 Exchange Act not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 14. | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required in response to this Item 14 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.
ITEM 15.
EXHIBITS INDEX
Number | | Description |
3.1 | | |
3.2 | | Bylaws and Bylaw Amendments. (2) |
3.3 | | |
4.1 | | |
4.2 | | |
4.3 | | |
4.4 | | |
4.5 | | |
4.6 | | Form of Warrant under Rights Agreement (to be filed by amendment) |
10.1* | | |
10.2* | | |
10.3* | | |
10.410.4* | | |
10.5* | | |
10.6* | | |
10.7 | | |
10.510.8 | | |
10.610.9 | | |
10.710.10 | | |
10.810.11 | | |
10.12 | | |
10.13 | | |
14.1 | | |
21 | | List of Subsidiaries |
23.1 | | |
31.1 | | |
31.2 | | |
32 | | |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Label Linkbase Document |
101.PRE | | XBRL Taxonomy Presentation Linkbase Document |
| | |
1 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on July 29, 2010. |
2 | | |
3 | | Incorporated by reference to the Registrant's definitive proxy statement on Schedule 14A filed with the Commission on August 3, 2012. |
4 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 8, 2014. |
5 | | Incorporated by reference to the Registrant's definitive proxy statement on Schedule 14A filed with the Commission on April 29, 2014. |
6 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 7, 2014. |
7 | | Incorporated by reference to the Registrant's registration statement on Form 8-A filed with the Commission on April 7, 2016. |
8 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on March 14, 2016. |
9 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on June 17, 2015.27, 2017. |
10 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on October 5, 2006. |
11 | | Incorporated by reference to the Registrant's Annual Report on Form 10-K filed with the Commission on March 5, 2015. |
12 | | Incorporated by reference to the Registrant's Annual Report on Form 10-KSB filed with the Commission on March 30, 2006. |
13 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on April 7, 2016. |
14 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on January 10, 2017. |
15 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 9, 2017. |
16 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on November 8, 2017. |
17 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on February 13, 2018. |
| | |
(*) | | An asterisk (*) beside an exhibit number indicates the exhibit contains a management contract, compensatory plan or arrangement which is required to be identified in this report. |
ITEM 16. Form 10-K Summary
None.
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CHEMBIO DIAGNOSTICS, INC. |
| | | |
March 7,8, 2017 | By | /s/ John J. Sperzel | |
| | John J. Sperzel III | |
| | President, Chief Executive Officer and | |
| | Member of the Board | |
In accordance with the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures | | Title | | Date |
| | | | |
| | | | |
| | | | |
/s/ John J. Sperzel | | Chief Executive Officer, President and | | March 7,8, 2017 |
John J. Sperzel III | | Member Of The Board | | |
| | (Principal Executive Officer) | | |
| | | | |
| | | | |
| | | | |
/s/ Richard J. Larkin Neil A. Goldman | | Executive Vice President & Chief Financial Officer (Principal Financial & | | March 7,8, 2017 |
Richard J. LarkinNeil A. Goldman | | (Principal Financial & Accounting Officer) | | |
| | | | |
| | | | |
| | | | |
/s/ Gary Meller
| | Director | | March 7, 2017 |
Gary Meller | | | | |
| | | | |
| | | | |
| | | | |
/s/ Katherine L. Davis | | Director & Chair of the Board | | March 7,8, 2017 |
Katherine L. Davis | | | | |
| | | | |
| | | | |
| | | | |
/s/ Peter T. Kissinger | | Director | | March 7,8, 2017 |
Peter T. Kissinger | | | | |
| | | | |
| | | | |
| | | | |
/s/ Gail S. Page | | Director | | March 8, 2017 |
Gail S. Page | | | | |
�� | | | | |
| | | | |
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, 20162017 and 20152016 | F-2 |
| |
Statements of Operations for each of the years ended December 31, 2017, 2016 2015 and 20142015 | F-3 |
| |
Statements of Comprehensive Loss for each of the years ended December 31, 2017, 2016 and 2015 | F-4 |
| |
Statements of Changes in Stockholders'Stockholders’ Equity for each of the years ended December 31, 2017, 2016 2015 and 20142015 | F-4F-5 |
| |
Statements of Cash Flows for each of the years ended December 31, 2017, 2016 2015 and 20142015 | F-5F-6 |
| |
Notes to Consolidated Financial Statements | F-6F-7 - F-19F-17 |
| |
Schedule II - Valuation and Qualifying Accounts | F-18 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
Shareholders and Board of Directors and Stockholders of
Chembio Diagnostics, Inc.
Medford, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Chembio Diagnostics, Inc. (the “Company”) and Subsidiary (the "Company")subsidiaries as of December 31, 20162017 and 2015 and2016, the related consolidated statements of operations, stockholders'comprehensive loss, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016.2017, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In connection with our audits ofopinion, the consolidated financial statements we have also auditedpresent fairly, in all material respects, the financial statement schedule as listedposition of the Company and subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the accompanying index. These consolidated financial statements and schedule areperiod ended December 31, 2017, in conformity with accounting principles generally accepted in the responsibilityUnited States of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.America.
We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 8, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includesmisstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements and schedule, 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 statements and schedule.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, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Chembio Diagnostics, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 7, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2011.
/s/ BDO USA, LLP
Melville, New York, NY
March 7, 20178, 2018
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF
- ASSETS -
| | December 31, 2016 | | | December 31, 2015 | |
CURRENT ASSETS: | | | | | | |
Cash and cash equivalents | | $ | 10,554,464 | | | $ | 5,376,931 | |
Accounts receivable, net of allowance for doubtful accounts of $52,000 and $52,000 at December 31, 2016 and 2015, respectively | | | 3,383,729 | | | | 2,422,971 | |
Inventories | | | 3,335,188 | | | | 3,578,025 | |
Prepaid expenses and other current assets | | | 840,145 | | | | 1,256,879 | |
TOTAL CURRENT ASSETS | | | 18,113,526 | | | | 12,634,806 | |
| | | | | | | | |
FIXED ASSETS, net of accumulated depreciation | | | 1,709,321 | | | | 2,374,308 | |
| | | | | | | | |
OTHER ASSETS: | | | | | | | | |
Deferred tax asset, net of valuation allowance | | | - | | | | 5,467,143 | |
License agreements, net of current portion | | | - | | | | 100,000 | |
Deposits on manufacturing equipment | | | 31,900 | | | | 30,918 | |
Deposits and other assets | | | 720,489 | | | | 209,169 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 20,575,236 | | | $ | 20,816,344 | |
| | | | | | | | |
- LIABILITIES AND STOCKHOLDERS' EQUITY - | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 3,013,133 | | | $ | 2,801,432 | |
Deferred revenue | | | 392,517 | | | | 353,406 | |
TOTAL CURRENT LIABILITIES | | | 3,405,650 | | | | 3,154,838 | |
| | | | | | | | |
TOTAL LIABILITIES | | | 3,405,650 | | | | 3,154,838 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 13) | | | | | | | | |
| | | | | | | | |
STOCKHOLDERS' EQUITY: | | | | | | | | |
Preferred stock – 10,000,000 shares authorized, none outstanding | | | - | | | | - | |
Common stock - $.01 par value; 100,000,000 shares authorized, 12,026,847 and 9,628,248 shares issued and outstanding for 2016 and 2015, respectively | | | 120,268 | | | | 96,282 | |
Additional paid-in capital | | | 60,721,783 | | | | 47,890,642 | |
Accumulated deficit | | | (43,672,465 | ) | | | (30,325,418 | ) |
TOTAL STOCKHOLDERS' EQUITY | | | 17,169,586 | | | | 17,661,506 | |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 20,575,236 | | | $ | $ 20,816,344 | |
See accompanying notes to condensed consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
| | For the years ended | |
| | December 31, 2016 | | | December 31, 2015 | | | December 31, 2014 | |
REVENUES: | | | | | | | | | |
Net product sales | | $ | 13,680,107 | | | $ | 21,886,688 | | | $ | 25,949,769 | |
License and royalty revenue | | | 449,685 | | | | 52,753 | | | | 23,257 | |
R&D, milestone and grant revenue | | | 3,739,049 | | | | 2,316,044 | | | | 1,672,258 | |
TOTAL REVENUES | | | 17,868,841 | | | | 24,255,485 | | | | 27,645,284 | |
| | | | | | | | | | | | |
Cost of product sales | | | 9,417,505 | | | | 13,768,658 | | | | 16,831,261 | |
| | | | | | | | | | | | |
GROSS MARGIN | | | 8,451,336 | | | | 10,486,827 | | | | 10,814,023 | |
| | | | | | | | | | | | |
OPERATING EXPENSES: | | | | | | | | | | | | |
Research and development expenses | | | 8,427,554 | | | | 6,377,839 | | | | 4,832,537 | |
Selling, general and administrative expenses | | | 7,595,559 | | | | 7,663,035 | | | | 7,531,739 | |
| | | 16,023,113 | | | | 14,040,874 | | | | 12,364,276 | |
LOSS FROM OPERATIONS | | | (7,571,777 | ) | | | (3,554,047 | ) | | | (1,550,253 | ) |
| | | | | | | | | | | | |
OTHER INCOME (EXPENSE): | | | | | | | | | | | | |
Other expense | | | - | | | | (4,814 | ) | | | (5,707 | ) |
Interest income | | | 25,548 | | | | 2,412 | | | | 5,839 | |
Interest expense | | | - | | | | (836 | ) | | | - | |
| | | 25,548 | | | | (3,238 | ) | | | 132 | |
| | | | | | | | | | | | |
LOSS BEFORE INCOME TAXES (BENEFIT) | | | (7,546,229 | ) | | | (3,557,285 | ) | | | (1,550,121 | ) |
| | | | | | | | | | | | |
Income tax provision (benefit) | | | 5,800,818 | | | | (1,160,243 | ) | | | (412,918 | ) |
| | | | | | | | | | | | |
NET LOSS | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) | | $ | (1,137,203 | ) |
| | | | | | | | | | | | |
Basic loss per share | | $ | $ (1.26 | ) | | $ | (0.25 | ) | | $ | (0.12 | ) |
| | | | | | | | | | | | |
Diluted loss per share | | $ | $ (1.26 | ) | | $ | (0.25 | ) | | $ | (0.12 | ) |
| | | | | | | | | | | | |
Weighted average number of shares outstanding, basic | | | 10,622,331 | | | | 9,626,028 | | | | 9,530,320 | |
| | | | | | | | | | | | |
Weighted average number of shares outstanding, diluted | | | 10,622,331 | | | | 9,626,028 | | | | 9,530,320 | |
See accompanying notes to condensed consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
| | Common Stock | | | Additional Paid- in Capital | | | Accumulated Deficit | | | Total | |
| | Shares | | | Amount | | | Amount | | | Amount | | | Amount | |
Balance at December 31, 2013 | | | 9,324,783 | | | $ | 93,248 | | | $ | 46,875,027 | | | $ | (26,791,173 | ) | | $ | 20,177,102 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Common Stock: | | | | | | | | | | | | | | | | | | | | |
New stock from offering | | | 2,300,000 | | | | 23,000 | | | | 12,470,398 | | | | - | | | | 12,493,398 | |
| | | | | | | | | | | | | | | | | | | | |
Options: | | | | | | | | | | | | | | | | | | | | |
Exercised | | | 98,599 | | | | 986 | | | | 56,589 | | | | - | | | | 57,575 | |
Stock option compensation | | | - | | | | - | | | | 304,154 | | | | - | | | | 304,154 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (13,347,047 | ) | | | (13,347,047 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2016 | | | 12,026,847 | | | $ | 120,268 | | | $ | 60,721,783 | | | $ | (43,672,465 | ) | | $ | 17,169,586 | |
| | December 31, 2017 | | | December 31, 2016 | |
CURRENT ASSETS: | | | | | | |
Cash and cash equivalents | | $ | 3,790,302 | | | $ | 10,554,464 | |
Accounts receivable, net of allowance for doubtful accounts of $42,000 and $52,000 at December 31, 2017 and 2016, respectively | | | 2,085,340 | | | | 3,383,729 | |
Inventories, net | | | 4,423,618 | | | | 3,335,188 | |
Prepaid expenses and other current assets | | | 554,383 | | | | 840,145 | |
TOTAL CURRENT ASSETS | | | 10,853,643 | | | | 18,113,526 | |
| | | | | | | | |
FIXED ASSETS, net of accumulated depreciation | | | 1,909,232 | | | | 1,709,321 | |
| | | | | | | | |
OTHER ASSETS: | | | | | | | | |
Intangible assets, net | | | 1,597,377 | | | | - | |
Goodwill | | | 1,666,610 | | | | - | |
Deposits and other assets | | | 589,159 | | | | 752,389 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 16,616,021 | | | $ | 20,575,236 | |
| | | | | | | | |
- LIABILITIES AND STOCKHOLDERS’ EQUITY - | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 3,046,303 | | | $ | 3,013,133 | |
Deferred revenue | | | 50,000 | | | | 392,517 | |
TOTAL CURRENT LIABILITIES | | | 3,096,303 | | | | 3,405,650 | |
| | | | | | | | |
OTHER LIABILITIES: | | | | | | | | |
Note payable | | | 99,480 | | | | - | |
Deferred tax liability | | | 341,042 | | | | - | |
| | | | | | | | |
TOTAL LIABILITIES | | | 3,536,825 | | | | 3,405,650 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 13) | | | | | | | | |
| | | | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | | | | |
Preferred stock – 10,000,000 shares authorized, none outstanding | | | - | | | | - | |
Common stock - $.01 par value; 100,000,000 shares authorized, 12,318,570 and 12,026,847 shares issued and outstanding at December 31, 2017 and 2016, respectively | | | 123,185 | | | | 120,268 | |
Additional paid-in capital | | | 62,821,288 | | | | 60,721,783 | |
Accumulated deficit | | | (50,044,225 | ) | | | (43,672,465 | ) |
Accumulated other comprehensive income | | | 178,948 | | | | - | |
TOTAL STOCKHOLDERS’ EQUITY | | | 13,079,196 | | | | 17,169,586 | |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 16,616,021 | | | $ | 20,575,236 | |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY
SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSOPERATIONS
FOR THE YEARS ENDED
| | December 31, 2016 | | | December 31, 2015 | | | December 31, 2014 | |
| | | | | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Cash received from customers and grants | | $ | 16,947,194 | | | $ | 30,174,083 | | | $ | 23,898,516 | |
Cash paid to suppliers and employees | | | (23,677,476 | ) | | | (28,382,681 | ) | | | (27,724,654 | ) |
Interest received | | | 25,548 | | | | 2,412 | | | | 5,839 | |
Interest paid | | | - | | | | (836 | ) | | | - | |
Net cash provided by (used in) operating activities | | | (6,704,734 | ) | | | 1,792,978 | | | | (3,820,299 | ) |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
Acquisition of license | | | - | | | | (550,000 | ) | | | - | |
Deposit for investment in RVR | | | (550,000 | ) | | | - | | | | - | |
Acquisition of and deposits on fixed assets | | | (118,706 | ) | | | (480,585 | ) | | | (1,452,601 | ) |
Net cash used in investing activities | | | (668,706 | ) | | | (1,030,585 | ) | | | (1,452,601 | ) |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
Proceeds from option and warrant exercises | | | 57,575 | | | | - | | | | 237,163 | |
Proceeds from credit line | | | - | | | | 700,000 | | | | - | |
Repayment of credit line | | | - | | | | (700,000 | ) | | | - | |
Proceeds from sale of common stock, net | | | 12,493,398 | | | | - | | | | - | |
Net cash provided by financing activities | | | 12,550,973 | | | | - | | | | 237,163 | |
| | | | | | | | | | | | |
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | 5,177,533 | | | | 762,393 | | | | (5,035,737 | ) |
Cash and cash equivalents - beginning of the period | | | 5,376,931 | | | | 4,614,538 | | | | 9,650,275 | |
| | | | | | | | | | | | |
Cash and cash equivalents - end of the period | | $ | 10,554,464 | | | $ | 5,376,931 | | | $ | 4,614,538 | |
| | | | | | | | | | | | |
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net Loss | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) | | $ | (1,137,203 | ) |
Adjustments: | | | | | | | | | | | | |
Depreciation and amortization | | | 1,139,228 | | | | 1,372,563 | | | | 739,297 | |
Provision for (benefit from) deferred taxes | | | 5,800,818 | | | | (1,170,969 | ) | | | (403,375 | ) |
Provision for (recovery of) doubtful accounts | | | - | | | | - | | | | 28,000 | |
Share based compensation | | | 304,154 | | | | 334,386 | | | | 447,100 | |
Changes in assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | (960,758 | ) | | | 5,915,918 | | | | (3,774,768 | ) |
Inventories | | | 242,837 | | | | 60,274 | | | | (449,573 | ) |
Prepaid expenses and other current assets | | | (136,258 | ) | | | (190,960 | ) | | | 32,906 | |
Deposits and other assets | | | 1,480 | | | | - | | | | (279,223 | ) |
Accounts payable and accrued liabilities | | | 211,701 | | | | (2,144,598 | ) | | | 636,540 | |
Customer deposits and deferred revenue | | | 39,111 | | | | 13,406 | | | | 340,000 | |
Net cash provided by (used in) operating activities | | $ | (6,704,734 | ) | | $ | 1,792,978 | | | $ | (3,820,299 | ) |
| | | | | | | | | | | | |
Supplemental disclosures for non-cash investing and financing activities: | | | | | | | | | | | | |
Deposits on manufacturing equipment transferred to fixed assets | | $ | - | | | $ | 20,017 | | | $ | 603,627 | |
| | For the years ended | |
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
REVENUES: | | | | | | | | | |
Net product sales | | $ | 19,322,302 | | | $ | 13,680,107 | | | $ | 21,886,688 | |
License and royalty revenue | | | 741,534 | | | | 449,685 | | | | 52,753 | |
R&D, milestone and grant revenue | | | 3,951,591 | | | | 3,739,049 | | | | 2,316,044 | |
TOTAL REVENUES | | | 24,015,427 | | | | 17,868,841 | | | | 24,255,485 | |
| | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | |
Cost of product sales | | | 12,921,157 | | | | 9,417,505 | | | | 13,768,658 | |
Research and development expenses | | | 8,555,381 | | | | 8,427,554 | | | | 6,377,839 | |
Selling, general and administrative expenses | | | 9,021,439 | | | | 7,595,559 | | | | 7,663,035 | |
| | | 30,497,977 | | | | 25,440,618 | | | | 27,809,532 | |
LOSS FROM OPERATIONS | | | (6,482,550 | ) | | | (7,571,777 | ) | | | (3,554,047 | ) |
| | | | | | | | | | | | |
OTHER INCOME (EXPENSE): | | | | | | | | | | | | |
Other expense | | | - | | | | - | | | | (4,814 | ) |
Interest income | | | 25,430 | | | | 25,548 | | | | 2,412 | |
Interest expense | | | (2,945 | ) | | | - | | | | (836 | ) |
| | | 22,485 | | | | 25,548 | | | | (3,238 | ) |
| | | | | | | | | | | | |
LOSS BEFORE INCOME TAXES (BENEFIT) | | | (6,460,065 | ) | | | (7,546,229 | ) | | | (3,557,285 | ) |
| | | | | | | | | | | | |
Income tax provision (benefit) | | | (88,305 | ) | | | 5,800,818 | | | | (1,160,243 | ) |
| | | | | | | | | | | | |
NET LOSS | | $ | (6,371,760 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
| | | | | | | | | | | | |
Basic loss per share | | $ | $ (0.52 | ) | | $ | (1.26 | ) | | $ | (0.25 | ) |
| | | | | | | | | | | | |
Diluted loss per share | | $ | $ (0.52 | ) | | $ | (1.26 | ) | | $ | (0.25 | ) |
| | | | | | | | | | | | |
Weighted average number of shares outstanding, basic | | | 12,300,031 | | | | 10,622,331 | | | | 9,626,028 | |
| | | | | | | | | | | | |
Weighted average number of shares outstanding, diluted | | | 12,300,031 | | | | 10,622,331 | | | | 9,626,028 | |
See accompanying notes to condensed consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| | For the years ended | |
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
| | | | | | | | | |
Net loss | | $ | (6,371,760 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
Other comprehensive income: | | | | | | | | | | | | |
Foreign currency translation adjustments | | | 178,948 | | | | - | | | | - | |
COMPREHENSIVE LOSS | | $ | (6,192,812 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
| | Common Stock | | | Additional Paid-in-Capital | | | Accumulated Deficit | | | AOCI | | | Total | |
| | Shares | | | Amount | | | Amount | | | Amount | | | Amount | | | Amount | |
Balance at December 31, 2014 | | | 9,611,139 | | | $ | 96,112 | | | $ | 47,556,426 | | | $ | (27,928,376 | ) | | $ | - | | | $ | 19,724,162 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Options: | | | | | | | | | | | | | | | | | | | | | | | | |
Exercised | | | 17,109 | | | | 170 | | | | (170 | ) | | | - | | | | - | | | | - | |
Stock option compensation | | | - | | | | - | | | | 334,386 | | | | - | | | | - | | | | 334,386 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | (2,397,042 | ) | | | - | | | | (2,397,042 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2015 | | | 9,628,248 | | | $ | 96,282 | | | $ | 47,890,642 | | | $ | (30,325,418 | ) | | $ | - | | | $ | 17,661,506 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Common Stock: | | | | | | | | | | | | | | | | | | | | | | | | |
New stock from offering | | | 2,300,000 | | | | 23,000 | | | | 12,470,398 | | | | - | | | | - | | | | 12,493,398 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Options: | | | | | | | | | | | | | | | | | | | | | | | | |
Exercised | | | 98,599 | | | | 986 | | | | 56,589 | | | | - | | | | - | | | | 57,575 | |
Stock option compensation | | | - | | | | - | | | | 304,154 | | | | - | | | | - | | | | 304,154 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (13,347,047 | ) | | | - | | | | (13,347,047 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2016 | | | 12,026,847 | | | $ | 120,268 | | | $ | 60,721,783 | | | $ | (43,672,465 | ) | | $ | - | | | $ | 17,169,586 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Common Stock: | | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of RVR Diagnostics Sdn Bhd | | | 269,236 | | | | 2,692 | | | | 1,680,033 | | | | - | | | | - | | | | 1,682,725 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Options: | | | | | | | | | | | | | | | | | | | | | | | | |
Exercised | | | 22,487 | | | | 225 | | | | 34,575 | | | | - | | | | - | | | | 34,800 | |
Stock option compensation | | | - | | | | - | | | | 384,897 | | | | - | | | | - | | | | 384,897 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 178,948 | | | | 178,948 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (6,371,760 | ) | | | - | | | | (6,371,760 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | | | 12,318,570 | | | $ | 123,185 | | | $ | 62,821,288 | | | $ | (50,044,225 | ) | | $ | 178,948 | | | $ | 13,079,196 | |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
| | | | | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Cash received from customers and grants | | $ | 24,971,299 | | | $ | 16,947,194 | | | $ | 30,174,083 | |
Cash paid to suppliers and employees | | | (30,028,299 | ) | | | (23,677,476 | ) | | | (28,382,681 | ) |
Interest received | | | 22,485 | | | | 25,548 | | | | 2,412 | |
Interest paid | | | - | | | | - | | | | (836 | ) |
Net cash (used in) provided by operating activities | | | (5,034,515 | ) | | | (6,704,734 | ) | | | 1,792,978 | |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
Acquisition of license | | | - | | | | - | | | | (550,000 | ) |
Purchase of RVR Diagnostics Sdn Bhd | | | (850,000 | ) | | | (550,000 | ) | | | - | |
Acquisition of and deposits on fixed assets | | | (1,026,954 | ) | | | (118,706 | ) | | | (480,585 | ) |
Net cash used in investing activities | | | (1,876,954 | ) | | | (668,706 | ) | | | (1,030,585 | ) |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
Proceeds from option and warrant exercises | | | 34,800 | | | | 57,575 | | | | - | |
Proceeds from note payable | | | 99,480 | | | | - | | | | - | |
Proceeds from credit line | | | - | | | | - | | | | 700,000 | |
Repayment of credit line | | | - | | | | - | | | | (700,000 | ) |
Proceeds from sale of common stock, net | | | - | | | | 12,493,398 | | | | - | |
Net cash provided by financing activities | | | 134,280 | | | | 12,550,973 | | | | - | |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | 13,027 | | | | - | | | | - | |
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (6,764,162 | ) | | | 5,177,533 | | | | 762,393 | |
Cash and cash equivalents - beginning of the period | | | 10,554,464 | | | | 5,376,931 | | | | 4,614,538 | |
| | | | | | | | | | | | |
Cash and cash equivalents - end of the period | | $ | 3,790,302 | | | $ | 10,554,464 | | | $ | 5,376,931 | |
| | | | | | | | | | | | |
RECONCILIATION OF NET LOSS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net Loss | | $ | (6,371,760 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
Adjustments: | | | | | | | | | | | | |
Depreciation and amortization | | | 1,276,963 | | | | 1,139,228 | | | | 1,372,563 | |
Provision for (benefit from) deferred taxes | | | - | | | | 5,800,818 | | | | (1,170,969 | ) |
Fair value adjustment to contingent consideration | | | (148,000 | ) | | | - | | | | - | |
Share based compensation | | | 384,897 | | | | 304,154 | | | | 334,386 | |
Changes in assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | 1,298,389 | | | | (960,758 | ) | | | 5,915,918 | |
Inventories | | | (1,088,430 | ) | | | 242,837 | | | | 60,274 | |
Prepaid expenses and other current assets | | | 285,762 | | | | (136,258 | ) | | | (190,960 | ) |
Deposits and other assets | | | (512,272 | ) | | | 1,480 | | | | - | |
Accounts payable and accrued liabilities | | | 182,453 | | | | 211,701 | | | | (2,144,598 | ) |
Deferred revenue | | | (342,517 | ) | | | 39,111 | | | | 13,406 | |
Net cash (used in) provided by operating activities | | $ | (5,034,515 | ) | | $ | (6,704,734 | ) | | $ | 1,792,978 | |
| | | | | | | | | | | | |
Supplemental disclosures for non-cash investing and financing activities: | | | | | | | | | | | | |
Deposits on manufacturing equipment transferred to fixed assets | | $ | 174,399 | | | $ | - | | | $ | 20,017 | |
Accrual of contingent earn-out | | | 148,000 | | | | - | | | | - | |
Issuance of common stock for net assets of business acquired | | | 1,682,725 | | | | - | | | | - | |
See accompanying notes to consolidated financial statements
NOTE 1 — DESCRIPTION OF BUSINESS:
Chembio Diagnostics, Inc. and its subsidiary, Chembio Diagnostic Systems, Inc.subsidiaries (collectively, the "Company"“Company” or "Chembio"“Chembio”), develop, manufacture, and market rapidcommercialize point-of-care (POC) diagnostic tests that are used to detect infectiousor monitor diseases. The Company's mainAll products that are currently being developed are based on the Company’s patented DPP® technology, a novel point-of-care diagnostic platform that offers certain customer advantages as compared to traditional lateral flow productstechnology. POC tests, by providing prompt and early diagnosis, can reduce patient stays, lower overall costs, improve therapeutic interventions and improve patient outcomes. POC tests can also prevent needless hospital admissions, simplify testing procedures, avoid delays from central lab batching, and eliminate the need for return visits.
Our product commercialization and product development efforts are focused in three rapidareas: sexually transmitted disease, tropical & fever disease, and technology collaborations. In sexually transmitted disease, we are commercializing tests for HIV and Syphilis. In tropical and fever disease, we are commercializing a test for Zika virus, and developing tests for malaria, dengue virus, chikungunya virus, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi, individually or as part of fever panel tests. Through technology collaborations, we are developing tests for a specific form of cancer, concussion, bovine tuberculosis, and for an undisclosed biomarker, the detectionlatter in collaboration with global biopharmaceutical company AstraZeneca.
Large and growing markets have been established for these kinds of HIV antibodiestests, initially in whole blood, serumhigh prevalence regions where they are indispensable for large scale prevention and plasma samples, twotreatment programs. Our product development is focused on areas where the availability of which were approved byrapid, POC screening, diagnostic, or confirmatory results can improve health outcomes. More generally, we believe there is and will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the FDA in 2006; the third is sold for export only. Lateral Flow Rapid HIV tests represented nearly 58%point of the Company's product revenues in 2016. The Company's products based on its patented DPP® platform represented approximately 40% of the Company's product revenues in 2016. The Company also has other rapid tests that together represented approximately 2% of sales in 2016. The Company'scare.
Our products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally. Chembio's products are soldinternationally, under the Company's STAT-PAK®our STAT PAK® SURE CHECK®, SURE CHECK®, STAT VIEW®STAT-VIEW® or DPP®DPP® registered trademarks, or under the private labels of itsour marketing partners. All of the Company's products that are currently being developed are based on its patented Dual Path Platform (DPP®), which is a unique diagnostic point-of-care platform that has certain advantages over lateral flow technology. In December 2012, the
The Company received FDA approval for its DPP® HIV 1/2 Assayroutinely enters into arrangements with governmental and non-governmental organizations for the detectionfunding of HIV antibodies in saliva, whole blood, serumcertain research and plasma samples, which was CLIA-Waived in October 2014.development efforts.
NOTE 2 — ACQUISITION:
On January 9, 2017, pursuant to a stock purchase agreement (the "Stock Purchase Agreement), the Company acquired all of the outstanding common stock of RVR Diagnostics Sdn Bhd ("RVR"), a privately-held Malaysia based manufacturing company focused on assembly and sales of rapid medical assays, for $3,231,000. The Company acquired RVR, which subsequently changed its name to Chembio Diagnostics Malaysia Sdn Bhd ("CDM"), to have a better presence in Asia, access to lower cost, shorter approval time of in-country regulatory approvals, and a lower cost assembly operation.
Total consideration was: (i) a cash payment of $1,400,000, of which $550,000 was paid as a deposit in December 2016; (ii) 269,236 shares of Chembio's common stock, with a value at closing of $1,683,000, of which 7,277 shares were held back to satisfy certain potential claims under the Stock Purchase Agreement and became issuable to the sellers on the one-year anniversary of the closing; and, a contingent $148,000 milestone payment based on the achievement of performance goals related to sales by CDM during the 12 months ended December 31, 2017. The performance goals were not achieved and the related $148,000 accrual was reversed during the fourth quarter of 2017 and recognized in Selling, general, and administrative expenses associated with the change in fair value.
As a result of the consideration paid exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $1,503,361 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. In addition, the Company recorded $1,800,000 in intangible assets associated with the addition of CDM’s intellectual property, customer base and distribution channels, trade names, order backlog, industry reputation, and management talent and workforce. The Condensed Consolidated Statements of Operations for the year ended December 31, 2017 include $25,000 of transaction costs related to the CDM acquisition, which are reflected as Selling, general and administrative expenses.
The acquisition was accounted for using the purchase method of accounting. The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of January 9, 2017:
| | | |
| | Amount | |
Property, plant and equipment | | $ | 235,141 | |
Goodwill | | | 1,651,361 | |
Deferred tax liability | | | (307,636 | ) |
Contingent consideration | | | (148,000 | ) |
Other intangible assets (estimated useful life): | | | | |
Intellectual property (approximate 10 year weighted average) | | | 800,000 | |
Customer contracts / relationships (approximate 10 year weighted average) | | | 700,000 | |
Order backlog (3 months) | | | 200,134 | |
Trade names (approximate 11 year weighted average) | | | 100,000 | |
Total consideration | | $ | 3,231,000 | |
The Company calculated the fair value of the fixed assets based on the net book value of CDM as that approximates fair value. The intellectual property, customer contracts and trade names were based on discounted cash flows using management estimates. The order backlog was based on an order that CDM had at the closing that was shipped in the first quarter of 2017, and valued at an estimated net income.
The following represents unaudited pro forma operating results for the year ended December 31, 2016 as if the operations of CDM had been included in the Company’s Condensed Consolidated Statements of Operations as of January 1, 2016:
| | Pro Forma | |
Total revenues | | $ | 19,151,653 | |
| | | | |
Net loss | | $ | (13,473,084 | ) |
| | | | |
Net loss per common share | | $ | (1.26 | ) |
| | | | |
Diluted net loss per common share | | $ | (1.26 | ) |
The pro forma financial information includes business combination accounting effects from the acquisition including amortization charges from acquired intangible assets of approximately $398,000. The unaudited pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2016. CDM's net revenues and pre-tax loss for the year ended December 31, 2017 were approximately $1,465,000 and ($406,000), respectively.
NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES:
| (a) | Principles of Consolidation: |
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary.subsidiaries (Chembio Diagnostic Systems, Inc. and Chembio Diagnostics Malaysia Sdn Bhd). All significant intercompany transactions and balances have beenare eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make assumptions and estimates that affect the amounts reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates ofin the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods covered thereby. Actual results could differ from these estimates.accompanying notes. Judgments and estimates of uncertainties are required in applying the Company'sCompany’s accounting policies in certain areas. The following are someGenerally, matters subject to estimation and judgment include accounts receivable realization, inventory obsolescence, asset impairments, recognition of the areas requiring significant judgments and estimates: determinations of therevenue persuant to milestones, useful lives of intangible and fixed assets, estimates of allowances for doubtful accounts, inventory reserves, stock-based compensation, and deferred tax assets.asset valuation allowances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates.
| (c) | Fair Value of Financial Instruments: |
The carrying value for cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value because ofdue to the immediate or short-term maturity of these financial instruments. The fair value of the Company's notes payable approximates the recorded value as the rate is based upon the current rates offered to the Company for similar financial instruments.
| (d) | Statements of Cash Flows:and Cash Equivalents: |
For purposes of the statements ofCash and cash flows, the Company considers allequivalents are defined as short-term, highly liquid investments with a maturityoriginal maturities of three months or less when purchased to be cash equivalents.less.
| (e) | Concentrations of Credit Risk: |
Financial instruments whichthat potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash instruments with well-known financial institutions and, at times, may maintain balances in excess of the FDIC insurance limit. The Company monitors the credit ratings of the financial institutions to mitigate this risk. Concentration of credit risk with respect to trade receivables is principally mitigated by the Company'sCompany’s ability to obtain letters of credit from certain foreign customers and its diverse customer base, both in number of customers and geographic locations.
Inventories, consisting of material, labor and manufacturing overhead, are stated at the lower of cost or market.net realizable value. Cost is determined on the first-in, first-out method.
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, which range from three to seven years. Leasehold improvements are amortized over the useful life of the asset or the lease term, whichever is shorter. Deposits paid for fixed assets are capitalized and not depreciated until the related asset is placed in service.
In February 2008, theThe Company entered into arecords up-front payments related to sublicense agreement for which it had initially recorded an asset of $1,000,000. This asset is being expensedagreements as prepaids and amortizes them over an estimatedtheir respective economic life of ten years, based on the expected lifespan of our then current HIV products. The current portion of this asset is $100,000 aslife. As of December 31, 2017 and 2016, total prepaids were $100,000 and 2015 and is reported in prepaid expenses and other current assets. The long-term portion as of December 31, 2016 and 2015 is $- and $100,000, respectively and is reflected in other assets on the consolidated balance sheet.
In January 2015, the Company entered into a sublicense agreement for which it had initially recorded an asset of $400,000. This asset is being expensed over the life of the patent of 22 months. The current portion of this asset is $- and $181,818 as of December 31, 2016 and 2015, respectively and is reported in prepaid expenses. The long-term portion as of December 31, 2016 and 2015 is $- and $-, respectively and is reflected in other assets on the consolidated balance sheet.
In August 2015, the Company entered into a sublicense agreement for which it had initially recorded an asset of $100,000. This asset is being validated and will be expensed over the estimated economic life of the product(s) which will utilize this sublicense. The current portion of this asset is $100,000 as of December 31, 2016 and 2015 and is reported in prepaid expenses and other current assets. The long-term portion of this asset is $- as of December 31, 2016 and 2015.$237,500, respectively.
Amortization expenses for the licenses above for the years ended December 31, 2017, 2016 and 2015 were $137,500 $319,319, and 2014 were $357,000, $479,000 and $122,000.$442,557, respectively.
| (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, 20162017 and 2015, respectively.
2016.
The Company recognizes revenue for product sales in accordance with ASC 605, whereby revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, or services have been rendered, the sales price is fixed and determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.
For certain contracts, the Company recognizes revenue from non-milestone contracts and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned.
The Company follows Financial Accounting Standards Board ("FASB") Accounting Standards for the recognition of revenue under the milestone method. The Company applies the milestone method of revenue recognition for certain collaborative research projects defining milestones at the inception of the agreement.
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 $0.8 million for the year ended December 31, 2017, as R&D, milestone and grant revenue in our 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 $2.2 million and $2.7 million for the year ended December 31, 2017 and from inception through December 31, 2017, respectively, as R&D, milestone and grant revenue in our 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 $0.4 million and $0.7 million for the year ended December 31, 2017 and from inception through December 31, 2017, respectively, as R&D, milestone and grant revenue in our Consolidated Statements of Operations.
| (k) | Research and Development: |
Research and development (R&D) costs are expensed as incurred.
| (l) | Stock-Based Compensation: |
Stock-based compensation expense is calculated using the Black-Scholes valuation model based on awards ultimately expected to vest, reduced for forfeitures, and expensed on a straight-line basis over the requisite service period of the grant. 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, 2016 | | December 31, 2015 | | December 31, 2014 |
Basic | 10,622,331 | | 9,626,028 | | 9,530,320 |
| | | | | |
Diluted | 10,622,331 | | 9,626,028 | | 9,530,320 |
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share for the year ended December 31, 2017, 2016 2015 and 20142015 reflects the potential dilution from the exercise or conversion of other securities into common stock, if dilutive.
The following securities, presented on a common share equivalent basis, have been used in the diluted per share computations:
| For the years ended |
| December 31, 2016 | | December 31, 2015 | | December 31, 2014 |
1999, 2008 and 2014 Plan Stock Options | - | | - | | - |
There were 810,670, 600,549 and 658,631 and 798,475 options and warrants outstanding as of December 31, 2017, 2016 2015 and 2014,2015, 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 we paid over the fair value of the net tangible and identifiable intangible assets acquired in our acquisition of 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 we believe that indicators of impairment exist. We make a qualitative evaluation about the likelihood of goodwill impairment, which is based on a number of applicable factors. If we conclude that it is more likely than not that the carrying value of the applicable reporting unit is greater than its fair value, then we 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, 2017, the results of our goodwill impairment analysis did not result in any impairment.
F-8F-9
Following is a table that reflects changes in Goodwill:
| |
Beginning balance 1/1/17 | | $ | - | |
| | | | |
Acquisition of CDM | | | 1,651,361 | |
| | | | |
Changes in foreign currency exchange rate | | | 15,249 | |
| | | | |
Balance at December 31, 2017 | | $ | 1,666,610 | |
In addition, the Company recorded certain intangible assets as part of the CDM acquisition which are as follows as of December 31, 2017:
| | Cost | | | Accumulated Amortization | | | Net Book Value | |
Intellectual property | | $ | 886,872 | | | $ | 88,687 | | | $ | 798,185 | |
Customer contracts/relationships | | | 776,013 | | | | 77,601 | | | | 698,412 | |
Order backlog | | | 221,867 | | | | 221,867 | | | | - | |
Trade names | | | 110,859 | | | | 10,079 | | | | 100,780 | |
| | $ | 1,995,611 | | | $ | 398,234 | | | $ | 1,597,377 | |
Amortization expense for the year ended December 31, 2017 was $398,234.
| (p) | Foreign Currency Translation: |
Assets and liabilities of non-U.S. 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 non-U.S. subsidiaries are translated to U.S. dollars at average period currency exchange rates. The effect of translation for non-U.S subsidiaries is generally reported in Other comprehensive income.
| (o)(q) | Recent Accounting Pronouncements Affecting the Company: |
In May 2014, the FASB issuedFinancial Accounting Standards Update No.Board (“FASB”) issued converged guidance on recognizing revenue in contracts with customers, 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 the 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, 2017, and2017.
Except for expanded disclosures to be included in our first interim periods therein, using eitherfinancial statements for the fiscal year end 2018, we have completed our evaluation of the following transition methods: (i) a full retrospective approach reflecting the application of thenew standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluatingand assessed the impact of our pending adoption of ASU 2014-09 on our consolidated financial statementsstatements. We reviewed significant open contracts with customers for each revenue stream, and have not yet determined the method by which we will adopt the standard in 2018. The Company has conducted a preliminary analysis of its sales contracts which are based on our evaluation, revenue recognition under the shipment of goods to the customer, and currently this new accounting standard will not have a material impact on itsthe Company’s consolidated financial statement for ourstatements because: i) product sales contracts.revenue is recognized when control of the goods is transferred to the customer (i.e., the date of shipment, which is consistent under ASC 605), and ii) R&D, milestone and grant revenue do not generally constitute exchange transactions and therefore the new standard does not apply. The Company has conductedalso assessed its control framework as a preliminary analysisresult of adopting the new standard and notes minimal, insignificant changes to its current R&D contracts which are currently based on "as expenses are incurred" basis,systems and currently thisother controls processes.
The new accounting standard will not have a material impact on itspermits two adoption methods under ASU 2014-09. The guidance may be adopted through either retrospective application to all periods presented in the consolidated financial statementstatements (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, we applied the rules to all contracts existing as of January 1, 2018. We estimated the cumulative effect recorded to the opening balance of retained earnings to be immaterial.
The disclosures in our notes to the consolidated financial statements related to revenue recognition will be expanded under the new standard, specifically around the quantitative and qualitative information about performance obligations, changes in contract assets and liabilities, and disaggregation of revenue. The Company expects to make these enhanced disclosures in its interim financial statements for our current R&D contracts.the first quarter of 2018.
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. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under the new guidance. This guidance will be effective for Chembio beginning in 2018, with early adoption permitted. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update ("ASU"(“ASU”) 2016-02, which amends the ASC and creates Topic 842, Leases. Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous US GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. We are in the initial stages of evaluating the effect of the standard on our financial statements and will continue to evaluate. While not yet in a position to assess the full impact of the application of the new standard, the Company expects that the impact of recording the lease liabilities and the corresponding right-to-use assets will have a significant impact on its total assets and liabilities with a minimal impact on equity.
In March 2016, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU")authoritative guidance under ASU 2016-09, Compensation – StockCompensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting which will change certain. ASU 2016-09 provides for simplification of several aspects of the accounting for share-based paymentspayment 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 our consolidated financial 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 our effective tax rate, depending on the Company’s share price at exercise or vesting of share-based awards as compared to employees.grant date. The other provisions of ASU 2016-09 did not have a material impact on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance related to cash flows presentation and is effective for fiscal years (and interimannual reporting periods within those years) beginning after December 15, 2016.2017. The Companyguidance in ASU 2016-15 is currently ingenerally consistent with our current cash flow classifications, and we do not expect the initial stagesadoption of evaluating the impact of the provisions of ASU 2016-09. We are still evaluating this standard and currently the Company does not believe this new accounting standard will have a material impact on itsour consolidated financial statement.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 update will be effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company adopted ASU 2017-04 in the fourth quarter of 2017. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of 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. This update will be effective for annual periods and interim periods in fiscal years beginning after December 15, 2017 with early adoption permitted. We do not expect the adoption will have a material effect on our consolidated financial statements.
NOTE 34 — INVENTORIES:
Inventories consist of the following at:
| | December 31, 2016 | | | December 31, 2015 | | | December 31, 2017 | | | December 31, 2016 | |
Raw materials | | $ | 1,824,248 | | | $ | 2,248,371 | | | $ | 1,767,684 | | | $ | 1,824,248 | |
Work in process | | | 535,320 | | | | 370,340 | | | | 286,413 | | | | 535,320 | |
Finished goods | | | 975,620 | | | | 959,314 | | | | 2,369,521 | | | | 975,620 | |
| | $ | 3,335,188 | | | $ | 3,578,025 | | | $ | 4,423,618 | | | $ | 3,335,188 | |
NOTE 45 — FIXED ASSETS:
Fixed assets consist of the following at:
| | December 31, 2016 | | | December 31, 2015 | | | December 31, 2017 | | | December 31, 2016 | |
Machinery and equipment | | $ | 3,962,051 | | | $ | 3,862,698 | | | $ | 4,582,759 | | | $ | 3,962,051 | |
Furniture and fixtures | | | 437,962 | | | | 436,588 | | | | 449,548 | | | | 437,962 | |
Computer and telephone equipment | | | 343,167 | | | | 326,170 | | | | 422,946 | | | | 343,167 | |
Leasehold improvements | | | 2,012,945 | | | | 2,012,945 | | | | 2,258,779 | | | | 2,012,945 | |
| | | 6,756,125 | | | | 6,638,401 | | | | 7,714,032 | | | | 6,756,125 | |
Less accumulated depreciation and amortization | | | (5,046,804 | ) | | | (4,264,093 | ) | | | (5,804,800 | ) | | | (5,046,804 | ) |
| | $ | 1,709,321 | | | $ | 2,374,308 | | | $ | 1,909,232 | | | $ | 1,709,321 | |
There were no capital leases at the end of December 31, 2016.2017. Fixed assets at December 31, 20162017 also include $199,921$538,406 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 2017, 2016 2015 and 20142015 years aggregated $727,563, $782,711 $893,305 and $616,943,$893,305, respectively.
As of December 31, 20162017 and 2015,2016, the Company had paid deposits on various pieces of equipment classified within Deposits and Other Assets aggregating $31,900$257,455 and $30,918,$31,900, respectively.
NOTE 56 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following at:
| | December 31, 2016 | | | December 31, 2015 | | | December 31, 2017 | | | December 31, 2016 | |
Accounts payable – suppliers | | $ | 1,437,290 | | | $ | 1,260,520 | | | $ | 1,494,759 | | | $ | 1,437,290 | |
Accrued commissions | | | 221,982 | | | | 129,192 | | | | 126,827 | | | | 221,982 | |
Accrued royalties / license fees | | | 352,660 | | | | 732,301 | | | | 429,297 | | | | 352,660 | |
Accrued payroll | | | 167,575 | | | | 146,962 | | | | 187,305 | | | | 167,575 | |
Accrued vacation | | | 289,587 | | | | 244,810 | | | | 309,767 | | | | 289,587 | |
Accrued bonuses | | | 282,500 | | | | 177,700 | | | | 282,500 | | | | 282,500 | |
Accrued expenses – other | | | 261,539 | | | | 109,947 | | |
TOTAL | | $ | 3,013,133 | | | $ | 2,801,432 | | |
Accrued expenses - other | | | | 215,848 | | | | 261,539 | |
Total | | | $ | 3,046,303 | | | $ | 3,013,133 | |
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, 20162017 and 2015,2016, there were $392,517$50,000 and $353,406$392,517 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.
NOTE 8 — INCOME TAXES:
The (benefit from) provision for income taxes for the years ended December 31, 2017, 2016, and 2015 is comprised of the following:
| | 2016 | | | 2015 | | | 2014 | | | 2017 | | | 2016 | | | 2015 | |
Current | | | | | | | | | | | | | | | | | | |
Federal | | $ | - | | | $ | - | | | $ | (16,119 | ) | | $ | (97,339 | ) | | $ | - | | | $ | - | |
State | | | - | | | | 10,726 | | | | 6,576 | | | | 9,034 | | | | - | | | | 10,726 | |
Total current (benefit) provision | | | - | | | | 10,726 | | | | (9,543 | ) | | | (88,305 | ) | | | - | | | | 10,726 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Deferred | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | | 5,778,185 | | | | (1,171,865 | ) | | | (449,452 | ) | | | - | | | | 5,778,185 | | | | (1,171,865 | ) |
State | | | 22,633 | | | | 896 | | | | 46,077 | | | | - | | | | 22,633 | | | | 896 | |
Total deferred (benefit) provision | | | 5,800,818 | | | | (1,170,969 | ) | | | (403,375 | ) | | | - | | | | 5,800,818 | | | | (1,170,969 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total (benefit) provision | | $ | 5,800,818 | | | $ | (1,160,243 | ) | | | (412,918 | ) | | $ | (88,305 | ) | | $ | 5,800,818 | | | $ | (1,160,243 | ) |
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 Tax Act also puts in place new tax laws that will apply prospectively, which include, but are not limited to, (1) implementing a base erosion and anti-abuse tax, (2) generally eliminating U.S.federal income taxes on dividends from foreign subsidiaries, (3) a new provision designed to tax currently in the U.S. global intangible low-taxed income (“GILTI”) of foreign subsidiaries, which allows for the possibility of utilizing foreign tax credits to offset the income tax liability (subject to some limitations), and (4) a lower effective U.S. tax rate on certain revenues from sources outside the U.S.
The Company calculated its best estimate of the impact of the Act in accordance with its understanding of the Act and guidance available as of the date of this filing and recorded a $97,339 tax benefit in the period in which the legislation was enacted, related to a credit for alternative minimum taxes (AMT) paid in prior periods. A provisional amount related the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future resulted in a charge of $3,906,774, which was fully offset by an equivalent adjustment to the deferred tax valuation allowance. No provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was deemed necessary.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US 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 Act. In accordance with SAB 118, the Company has determined that the $97,339 benefit recorded which relates to the AMT credit is a provisional amount and a reasonable estimate of December 31, 2017.
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 20182020 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 20182020 through 2028.2026.
After applying the above limitations, at December 31, 2016,2017, the Company has post-change net operating loss carry-forwards of approximately $21,960,362$26,660,530 which expire between 20202018 and 2036.2037. In addition the Company has research and development tax credit carryforwards of approximately $1,461,351 for the year ended December 31, 2016,2017, which expire between 2025 and 2036.
| | 2016 | | | 2015 | |
Current assets | | | | | | |
Inventory reserves | | $ | 253,380 | | | $ | 242,532 | |
Accrued expenses | | | 53,140 | | | | 91,143 | |
Current deferred tax assets | | | 306,520 | | | | 333,675 | |
Less valuation allowances | | | (306,520 | ) | | | - | |
Net current deferred asset | | $ | - | | | $ | 333,675 | |
| | | | | | | | |
Noncurrent assets | | | | | | | | |
Net operating loss carry-forwards | | $ | 7,487,937 | | | $ | 5,365,401 | |
Research and development credit | | | 1,461,351 | | | | 1,518,414 | |
Other credits | | | 97,339 | | | | 97,339 | |
Depreciation | | | 31,285 | | | | (206,150 | ) |
Other | | | 292,556 | | | | 210,553 | |
Noncurrent deferred tax assets | | | 9,370,468 | | | | 6,985,557 | |
Less valuation allowances | | | (9,370,468 | ) | | | (1,518,414 | ) |
Net noncurrent deferred tax assets | | $ | - | | | $ | 5,467,143 | |
2037.
F-11F-12
As referenced in Note 2 - Acquisition, the Company acquired the stock of RVR Diagnostics Sdn Bhd, a Malaysia corporation, during the current year. RVR is on tax holiday through December 31, 2018. Accordingly, no taxes nor (benefit) have been provided on RVR results.
| | 2017 | | | 2016 | |
| | | | | | |
Inventory reserves | | $ | 244,158 | | | $ | 253,380 | |
Accrued expenses | | | 102,332 | | | | 53,140 | |
Net operating loss carry-forwards | | | 5,800,144 | | | | 7,487,937 | |
Research and development credit | | | 1,918,137 | | | | 1,461,351 | |
Other credits | | | - | | | | 97,339 | |
Other | | | 167,522 | | | | 292,556 | |
Depreciation | | | 91,258 | | | | 31,285 | |
Deferred tax assets | | | 8,323,551 | | | | 9,676,988 | |
| | | | | | | | |
Intangibles | | | (341,042 | ) | | | - | |
Deferred tax liabilities | | | (341,042 | ) | | | - | |
| | | | | | | | |
Net deferred tax assets before valuation allowance | | | 7,982,509 | | | | 9,676,988 | |
Less valuation allowances | | | (8,323,551 | ) | | | (9,676,988 | ) |
Net noncurrent deferred tax liabilities | | $ | (341,042 | ) | | $ | - | |
The components of (loss) before income taxes consisted of the following:
| | Year Ending December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
United States operations | | $ | (6,054,002 | ) | | $ | (7,546,229 | ) | | $ | (3,557,285 | ) |
International operations | | | (406,063 | ) | | | - | | | | - | |
(Loss) before taxes | | $ | (6,460,065 | ) | | $ | (7,546,229 | ) | | $ | (3,557,285 | ) |
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, | |
| 2016 | | 2015 | | 2014 | | 2017 | | | 2016 | | | 2015 | |
Federal income tax at statutory rates | (34.00)% | | (34.00)% | | (34.00)% | | | (34.00 | )% | | | (34.00 | )% | | | (34.00 | )% |
State income taxes, net of federal benefit | .21% | | 0.23% | | 0.28% | | | 0.09 | % | | | 0.21 | % | | | 0.23 | % |
Nondeductible expenses | .57% | | 1.38% | | 4.54% | | | 1.04 | % | | | 0.57 | % | | | 1.38 | % |
Foreign rate differential | | | | 2.14 | % | | | - | | | | - | |
Change in valuation allowance | 114.81% | | 9.46% | | 9.47% | | | 99.41 | % | | | 114.81 | % | | | 9.46 | % |
Impact of Tax Act on valuation allowance | | | | (60.48 | )% | | | - | | | | - | |
AMT refund under Tax Act | | | | (1.51 | )% | | | - | | | | - | |
Tax credits | .00% | | (9.46)% | | (9.47)% | | | (7.07 | )% | | | 0.00 | % | | | (9.46 | )% |
Change in tax rates | .00% | | 0.00% | | 1.96% | |
Other | .04% | | 0.34% | | 0.58% | | | (0.99 | )% | | | 0.04 | % | | | 0.34 | % |
Income tax (benefit) | 81.63% | | (32.05)% | | (26.64)% | | | (1.37 | )% | | | 81.63 | % | | | (32.05 | )% |
Interest and penalties, if any, related to income tax liabilities are included in income tax expense. As of December 31, 2016,2017, the Company does not have a liability for uncertain tax positions.
The Company files Federal and state income tax returns. Tax years for fiscal 20132014 through 20152016 are open and potentially subject to examination by the federal and state taxing authorities.
NOTE 9 — STOCKHOLDERS'STOCKHOLDERS’ EQUITY:
In August of 2016, the Company closed on an underwritten public offering of 2,300,000 shares of its common stock at $6.00 per share. The net proceeds of the offering, after deducting the underwriters' discounts and other offering expenses payable by the Company, was approximately $12,493,000. The Company intends
During 2017, options to usepurchase 56,969 shares of the net proceedsCompany’s common stock were exercised for business expansion22,487 shares of common stock at exercise prices ranging from $3.48 to $4.45 by surrendering options and working capital.shares of common stock already owned.
During 2016, options to purchase 191,804 shares of the Company'sCompany’s common stock were exercised on a cashless basis intofor 98,599 shares of common stock at exercise prices ranging from $2.80 to $5.56 by paying cash or surrendering options and shares of common stock already owned.owned.
During 2015, options to purchase 41,141 shares of the Company'sCompany’s common stock were exercised either for cash or cashless, into 17,109 shares of common stock at exercise prices ranging from $2.16 to $3.60 by paying cash or surrendering options already owned.
During 2014, options to purchase 318,750 shares of the Company's common stock were exercised, either for cash or cashless, into 286,356 shares of common stock at an exercise price of $1.04 by paying cash or surrendering options already owned
The Company has 10,000,000 shares of preferred stock authorized and none outstanding. These shares can become issuable upon an approved resolution by the board of directors and the filing of a Certificate of Designation with the state of Nevada.
During the fourth quarter of 2016, the Company issued options to purchase 36,000 shares of common stock to a newly-hired presidentThe Compensation Committee of the EMEA and APAC regions. TheBoard of Directors may issues options are exercisable in three equal annual installments starting on the first anniversary of the date of issue. The options issuedpersuant to employee stock option plans that have an exercise price of $7.15 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
During the second quarter of 2016 the Company issued options to purchase 46,875 shares of common stock to one of its directors pursuant tobeen approved by the Company's compensation policy for directors. The options become exercisable in five equal annual installments starting on the date of issue. The options issued have an exercise price of $8.860 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
The Company entered into an employment agreement, effective as of March 5, 2016 (the "Employment Agreement"), with Javan Esfandiari to serve as the Company's Chief Scientific and Technical Officer, for an additional term of three years through March 5, 2019. Pursuant to the Employment Agreement, the Company issued to Mr. Esfandiari incentive and non-qualified stock options to purchase 60,000 shares of the Company's common stock. Of these stock options, options to purchase 20,000 shares vest on each of the first three anniversaries of March 11, 2016 which is the date on which the Employment Agreement was entered into. The exercise price for these options was to be equal to the trading price for the Company's common stock on March 11, 2016, which was $5.64 per share. Each option granted will expire and terminate, if not exercised sooner, upon the earlier to occur of (a) 30 days after termination of Mr. Esfandiari's employment with the Company or (b) the fifth anniversary of the effective date of the grant.
During 2015, the Company did not issue options to purchase common stock.
During the fourth quarter of 2014, the Company issued options to purchase 36,000 shares of common stock to a newly-hired vice-president of the Company. The options are exercisable in three equal annual installments starting on the first anniversary of the date of issue. The options issued have an exercise price of $4.35 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
During the second quarter of 2014 the Company issued options to two of its directors pursuant to the Company's compensation policy for directors. Each director was issued options to purchase 46,875 shares of common stock. The options become exercisable in five equal annual installments starting on the date of issue. The options issued have an exercise price of $3.480 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
The Company entered into an employment agreement, effective March 13, 2014 ("Employment Agreement"), with Mr. Sperzel to serve as the Company's Chief Executive Officer, which included issuing incentive and non-incentive stock options to purchase 250,000 shares of the Company's common stock. The options become exercisable in five equal annual installments starting on the first anniversary of the effective date of the Employment Agreement. The exercise price for these options was to be equal to the volume-weighted average trading price for the Company's common stock on March 13, 2014, which was $3.416 per share. The options expire seven years from date of issue.stockholders.
As of December 31, 20162017 and 2015,2016, the Company had no warrants outstanding to purchase shares of common stock.
NOTE 10 — RIGHTS AGREEMENT:
In March 2010, the Company entered into a Rights Agreement (the "Rights Agreement") between the Company and Action Stock Transfer Corp., as Rights Agent. The Rights Agreement expired at the end of November 2015. Pursuant to the Rights Agreement, the Company declared a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of Common Stock, $0.01 par value (the "Common Stock"), of the Company. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2010, and the Rights were distributed to the Company'sCompany’s shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable. The Rights were not exercisable until a Distribution Date. Until a Right was exercised, the holder thereof, as such, would have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights. The Rights were to be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date") or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 20% or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date").
NOTE 11 — EMPLOYEE STOCK OPTION PLAN:
Effective June 3, 2008, the Company'sCompany’s stockholders voted to approve the 2008 Stock Incentive Plan ("SIP"(“SIP”), with 625,000750,000 shares of Common Stock available to be issued. At the Annual Stockholder meeting on September 22, 2011 the Company'sCompany’s stockholders voted to approve an increase to the shares of Common Stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, the Compensation Committee of the Company'sCompany’s Board has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee. As of December 31, 2016,2017, there were 467,685480,172 options exercised, 275,931228,177 options outstanding and 6,38441,651 options still available to be issued under the SIP.
Effective June 19, 2014, the Company'sCompany’s stockholders voted to approve the 2014 Stock Incentive Plan ("SIP14"(“SIP14”), with 800,000 shares of Common Stock available to be issued. Under the terms of the SIP14, the Compensation Committee of the Company'sCompany’s Board has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee. As of December 31, 2016,2017, there were 12,00022,000 options exercised, 117,750375,625 options outstanding and 670,250402,375 options still available to be issued under the SIP14.
The Company's results for the years ended December 31, 2017, 2016 2015 and 20142015 include stock-based compensation expense totaling $384,897, $304,100, $334,400, and $447,100$334,400 respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold ($-,47,000, $-, and $700$- respectively), research and development ($89,200,89,400, $89,200, and $62,700 and $44,500 respectively) and selling, general and administrative expenses ($214,900,248,497, $214,900, and $271,700 and $401,900 respectively). In accordance with ASC 718 the Company has not recorded a deferred tax asset related to the net operating losses resulting from the exercise of disqualifying stock options in the accompanying financial statements.
Stock option compensation expense in the years ended December 31, 2017, 2016 2015 and 20142015 represents the estimated fair value of options outstanding which is being amortized on a straight-line basis over the requisite vesting period of the entire award.
The weighted average estimated fair value of stock options granted in the yearyears ended December 31, 2017 and 2016 waswere $2.77 and $2.75 per share.share, respectively. 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 year ended December 31, 2014 was $3.52 per share.2015. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based on the Company'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, 2016 | | December 31, 2015 | | December 31, 2014 |
Expected term (in years) | | 4.71 | | n/a | | 4.50-6.30 |
Expected volatility | | 45.78 % | | n/a | | 61.50-96.10% |
Expected dividend yield | | n/a | | n/a | | n/a |
Risk-free interest rate | | 0.92 % | | n/a | | .83-1.52% |
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
Expected term (in years) | | | 5.48 | | | | 4.71 | | | | n/a | |
Expected volatility | | | 43.31 | % | | | 45.78 | % | | | n/a | |
Expected dividend yield | | | n/a | | | | n/a | | | | n/a | |
Risk-free interest rate | | | 1.78 | % | | | 0.92 | % | | | n/a | |
The Company granted 142,875267,875 new options during the year ended December 31, 2017 to employees.