If we are unable to meet customer demand for our products, it could also harm our relationships with our customers and impair our reputation within the industry. This, in turn, could have a material adverse effect on our business.
Risks Related to Our Products
For Our Business to Succeed in the Future, Our Current and Future Products Must Receive Market Acceptance.
The marketMarket 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/orand 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 Havemay not have Sufficient Resources to Effectively Introduce and Market Our Products, Which Couldwhich 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/orand 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.
Other 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 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, our revenues and operating results could be negatively impacted if some of our customers internally develop or acquire their own sample collection devices and use those devices in place of our products in order to reduce costs.
New Developments in Health Treatments and Non-Diagnostic Products Maymay Reduce or Eliminate the Demand Forfor Our Products.
The development and commercialization of products outside of the diagnostics industry could adversely affect sales of our products. For example, the development of a safe and effective vaccine to HIV or treatments for other diseases or conditions that our products are designed to detect, could reduce or eventually eliminate the demand for our HIV or other diagnostic products and result in a loss of revenues.
The Sales Cycles for Our Products Can Becan be Lengthy, Which Canwhich can Cause Variability and Unpredictability in Our Business.
Some of our products may require lengthy and unpredictable sales cycles, which makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Our products may involve sales to large public and private institutions which may require many levels of approval and may be dependent on economic or political conditions and the availability of grants or funding from government or public health agencies which can vary from period to period. There can be no assurance that purchases or funding from these agencies will occur or continue, especially if current negative economic conditions continue or intensify. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete transactions at all or on a schedule and in an amount consistent with our objectives.
We May be Inadequate to Cover Our Potential Business Risks.Face Product Liability Claims for Injuries.
We believe that our presentThe testing, manufacturing and marketing of medical diagnostic products involves an inherent risk of product liability and other insurance coverage is sufficientclaims. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to coverlimit or cease sales of our current estimated exposures, but weproducts. We cannot be sure that we will not incur liabilities in excess of the policy limits of our policy limits. Although we believeexisting product liability insurance coverage or that we will be able to continue to obtain adequate product liability insurance coverage in the future there is no assurance that we will be able to do so.
Due toat an acceptable cost, or at all. In addition, a defect in the Use of Our Products, We May Face Product Liability Claims for Injuries.
If anydesign or manufacture of our products or any product which is made withcould have a material adverse effect on our reputation in the use or incorporationindustry and subject us to claims of any ofliability for injury and otherwise. Any substantial underinsured loss resulting from such a claim could have a material adverse effect on 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)profitability, and the 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 arisingreputation 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 lawsuitsindustry could result in the termination or modification of a material contract or otherwise have a material adverse effect on our business.
Our Customers May Notmay 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.
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Customer Concentration Creates Risks for Our Business.
A significant portion of our revenues each year comes from a few large customers. To the extent that such a large customer fails to meet its purchase commitments, changes its ordering patterns or business strategy, or otherwise reduces its purchases or stops purchasing our products, or if we experience difficulty in meeting the demand by these customers for our products, our revenues and results of operations could be adversely affected.
If Our Products Do Notdo not Perform Properly, It Maymay 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 Maymay 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,We have incurred losses 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,recent years and We May Not be Able to Raise Capital or Borrow Funds on Attractive Terms and/or in Amounts Necessary to Continue Our Business, or At All.we are uncertain about our future profitability.
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 eachevery year forfrom 2014 through 2017. We estimate that2019. Under our resources are sufficient to fund our needs through the end of 2018 and beyond. Weoperating plans, we have already made, and mayplan to continue to make, significant financial commitments to investinvestments in our production capacity, including in expanding facilities and automating manufacturing, and in our sales and marketing, organization, regulatory approvals,approval, and 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 2018 or, in the alternative, be successful in raising sufficient capital to fund our needs after 2018.
Our U.S. market sales are difficult to predict in 2018 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.
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.activities. Our ability to re-achieveachieve profitability and generate cash flow in the future will primarily depend on our ability to increase sales of our existing 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. marketplace, all while controlling and managing our expenses consistent with our operating plan.
If we are unable to increase our revenues at a rate that is sufficient to achieve profitability, or adequately control and reducemanage our expenses in accordance with our operating costs,plan, our operating results would be materially harmed.harmed and we may not be able to generate the cash flow needed to fund the investments in our production capacity and other activities, we will be required to implement one or both of the following:
We could reduce the level, or otherwise delay the timing, of the anticipated investments in our production capacity and other activities, which would likely curtail or delay the growth in our business contemplated by our operating plan and could impair or defer our ability to achieve profitability and generate cash flow.
We could raise additional funds through public or private financings, strategic relationships, or other arrangements, to the extent funding would be available to us on acceptable terms or at all. If we succeed in raising additional funds through the issuance of equity or convertible securities, then the issuance could result in substantial dilution to existing stockholders. Furthermore, the holders of these new securities or debt may have rights, preferences and privileges senior to those of the holders of our Common Stock.
In such circumstances, we also would need to forego acquisition opportunities, which could impede our ability to grow our business.
We Base Our Estimates or Judgments Relating to Critical Accounting Policies on Assumptions That Can Change or Prove to be Incorrect.
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States and our discussion and analysis of financial condition and results of operations is based on such statements. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We continuously evaluate significant estimates used in preparing our financial statements, including those related to (i) revenue recognition; (ii) stock-based compensation; (iii) allowance for uncollectible accounts receivable; (iv) 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 resultsFinancial 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.Fluctuate.
From quarter to quarter and year to year, our operating results can fluctuate, which could cause our growth or financial performance to fail to meet the expectations of investors and securities analysts. Our financial projections are based on a number of assumptions, including the estimated demand for our products. However, salesSales 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.report. A variety of factors could also contribute to the variability of our financial results, including infrequent, unusual or unexpected changes in revenues or costs.
Different products provide dissimilar contributions to our gross product margin. Accordingly, our operating results could also fluctuate and be negatively affected by the mix of products sold and the relative prices and gross product margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts could adversely affect our reputation and the price of our Common Stock.
The failure to comply with the terms of our Credit Agreement and Guaranty could result in a default under its terms and, if uncured, could result in action against our pledged assets and dilution of our stockholders.
On September 3, 2019, we entered into a Credit Agreement and Guaranty, or Credit Agreement, with Perceptive Credit Holdings II, LP, or Perceptive. Under the Credit Agreement, we received a $20,000,000 senior secured term loan credit facility, which was drawn in full on September 4, 2019. In connection with the Credit Agreement, we issued a warrant to purchase up to 550,000 shares of our common stock. The credit agreement is secured by a first priority, perfected lien on substantially all of our property and assets, including our equity interests in our subsidiaries.
The Credit Agreement also contains covenants that restrict our ability to finance future operations or capital needs or to engage in other business activities. The Credit Agreement restricts our ability and the ability of our restricted subsidiaries to:
incur, assume or guarantee additional Indebtedness (as defined in the Credit Agreement);
repurchase capital stock;
make other restricted payments including, without limitation, paying dividends and making investments;
sell or otherwise dispose of assets, including capital stock of subsidiaries;
enter into agreements that restrict dividends from subsidiaries;
enter into mergers or consolidations; and
enter into transactions with affiliates
In addition, the Credit Agreement also contain covenants requiring us and our subsidiaries to maintain cash and cash equivalents held in one or more accounts subject to the first priority perfected security interests of the lenders under the Credit Agreement of not less than $3,000,000. The Credit Agreement also provides for specified quarterly minimum consolidated net revenue covenants of us and our subsidiaries for the trailing twelve-month period ended on each such calculation date during the term of the Credit Agreement. A breach of any of these covenants would result in a default under the Credit Agreement. If an event of default under our Credit Agreements occurs, Perceptive could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we were unable to pay such amounts, Perceptive could proceed against the collateral pledged to them. We have pledged our inventory, accounts receivable, cash, securities, other general intangibles and the capital stock of certain subsidiaries to the lenders. In such an event, we cannot assure you that we would have sufficient assets to pay amounts due under the Credit Agreement.
Servicing our debt will require a significant amount of cash. Our ability to generate sufficient cash to service our debt depends on many factors beyond our control.
Our ability to make payments on and to refinance our debt, to fund planned capital expenditures, and to maintain sufficient working capital depends on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or from other sources in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. In the year ended December 31, 2019, our operations used $9.1 million in cash. If our cash flow and capital resources are insufficient to allow us to make scheduled payments on our debt, we may need seek additional capital or restructure or refinance all or a portion of our debt on or before the maturity thereof, any of which could have a material adverse effect on our business, financial condition or results of operations. We cannot assure you that, if needed, we would be able to refinance any of our debt on commercially reasonable terms or at all, or that the terms of that debt will allow any of the above alternative measures or that these measures would satisfy our scheduled debt service obligations. If we are unable to generate sufficient cash flow to repay or refinance our debt on favorable terms, it could significantly adversely affect our financial condition. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. There can be no assurance that we will be able to obtain any financing when needed.
Our Operating Results Maymay 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. Dollardollar 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, opTricon and Orangelife, one of our subsidiaries, are recorded in Malaysian Ringgit.Ringgit, in Euros and Brazilian Real, respectively. 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, businessopTricon and Orangelife businesses will continue to grow and, consequently, our exposure to foreign currency exchange rates may grow as well.
Chembio Diagnostics Malaysia’sOur foreign subsidiaries’ revenues and expenses and the translation of Chembio Diagnostics Malaysia’stheir financial results into U.S. Dollarsdollars 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.
VolatilityWe Operate in the economyCountries where there is or may continue or exist in the future. This could negatively impact our financial performance or those of our customers and suppliers. These circumstances could inhibit our access to liquidity needed to conduct or expand our business. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of economic conditions. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase our products or supply us with necessary equipment, raw materials or components. Even with the improvement of economic conditions, it may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of an economic recovery.
The New U.S. Tax Cuts and Jobs Act of 2017 and Any Subsequent Tax Law Changes Could Adversely Affect Us.
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA includes, among other matters, changes to U.S. federal tax rates, allows for the expensing of capital expenditures, imposes significant additional limitations on the deductibility of interest, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We do not expect tax reform to have a material impact to our projection of minimal cash taxes or to our net operating losses. Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate of 21 percent, and the impact will be recognized in our tax expense in the year of enactment. We continue to evaluate the TCJA may have on our business. The impact of this tax reform on holders of our common stock is uncertain and could be adverse. In addition, subsequent unforeseen changes in U.S. or other countries’ tax laws could adversely affect us. We urge our stockholders to consult with their legal and tax advisors with respect to the TCJA and the potential tax consequences of investing in our common stock.Widespread Corruption.
We May Require Additional Capitalhave a policy in place prohibiting our employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the U.S. Foreign Corrupt Practices Act. Nevertheless, because we work through independent sales agents and distributors outside the United States, we do not have control over the day-to-day activities of such independent agents and distributors. In addition, in the Future.
Our liquiditydonor-funded markets in Africa where we sell our products, there is significant oversight from PEPFAR, the Global Fund, and ability to meet capital requirements will depend onadvisory 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 operate our subsidiary Orangelife and have had numerous factors, including, butproduct 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 limitedthe 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 following: (i) the costs and timingBrazilian Ministry of expansionHealth, 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 and marketing activities; (ii) the extent toagents of any actions which we gain or expand market acceptance for existing, new or enhanced products; (iii) the timing and successcould be in violation 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. ThereFCPA, although 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.this.
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Our subsidiary Chembio Diagnostics Malaysia Sdn. Bhd. is located in Malaysia. There have been numerous high-profile corruption cases, and corruption is one of the most problematic factors for doing business in Malaysia. While the Malaysian government has acknowledged the problem, it appears that endemic corruption is continuing and that market-based principles are not applied in cases involving individuals with high-level political access. To the extent bribery and similar practices continue to exist in Malaysia, U.S. companies such as ours, which are subject to U.S. laws making it illegal to pay bribes to foreign officials, may make us less competitive in winning business in Malaysia when competing with non-U.S. companies.
Changes in Interpretation or Application of U.S. Generally Accepted Accounting Principles may Adversely Affect Our Operating Results.
We prepare our financial statements to conform to U.S. generally accepted accounting principles. These principles are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the Securities and Exchange Commission and various other regulatory or accounting bodies. A change in interpretations of, or our application of, these principles can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. Additionally, as we are required to adopt new accounting standards, our methods of accounting for certain items may change, which could cause our results of operations to fluctuate from period to period. For example, upon adoption of Accounting Standards Codification (“ASC”) 606 Revenue from Contracts with Customers of the Financial Accounting Standards Board (“FASB”), we now recognize revenue upon transfer of control, which is generally at time of delivery. Under the previous accounting guidance, we recognized revenue upon acceptance when and if we had production responsibilities. If circumstances change over time or interpretation of the revenue recognition rules change, we could be required to adjust the timing of recognizing revenue and our financial results could suffer.
We Base Our Estimates or Judgments Relating to Critical Accounting Policies on Assumptions that can Change or Prove to be Incorrect.
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States and our discussion and analysis of financial condition and results of operations is based on such statements. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We continuously evaluate significant estimates used in preparing our financial statements, including those related to (i) revenue recognition; (ii) stock-based compensation; (iii) allowance for uncollectible accounts receivable; (iv) inventory reserves and obsolescence; (v) customer sales returns and allowances; (vi) contingencies; and (vii) income taxes, (viii) goodwill and intangibles, (ix) business acquisition, and (x) research and development costs.
Our estimates are based on historical experience and various other assumptions that we believe to be reasonable, as set forth in our discussion and analysis of financial condition and results of operations, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these and other estimates if our assumptions change or if actual circumstances differ from those in our assumptions. If our operating results fall below the expectations of securities analysts and investors, the price of our Common Stock may decline.
Our Global Operations may be Adversely Effected by the Coronavirus Outbreak and Face Risks that could Impact our Business.
A novel strain of coronavirus, COVID-19, originated in Wuhan, China, in December 2019. As of March 2020, the virus has spread globally, including to the United States, Malaysia, Germany and Brazil. Our business operations in those locations are subject to potential business interruptions arising from protective measures that may be taken by the respective governments, agencies or other governing bodies in each country. Business disruptions in other countries also could negatively affect the sources and availability of components and materials that are essential to the operation of our business. Extended periods of interruption to our U.S. or international operations due to the coronavirus outbreak could adversely impact the growth of our business, could cause us to cease or delay operations, and could prevent our customers from receiving shipments or processing payments.
The extent to which the coronavirus impacts our global business, sales and results of operations will depend on future developments, which are highly uncertain and cannot be predicted. This includes new information that may emerge concerning the severity of the coronavirus, the spread and proliferation of the coronavirus around the world, and the actions taken to contain the coronavirus or treat its impact, among others.
Our Business Maymay 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 Withwith Our Key Employees and Other Third Parties to Protect Our Proprietary Rights, and We Cannotcannot be Sure That Thesesure that these Laws or Agreements will Adequately Protect Our Rights.
Our industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in other countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenues and gross profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other technologies may not be adequate for the operation of our business.
As appropriate, we intend to file patent applications and obtain patent protection for our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to the use or manufacture of those products. However, there have been changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, which may impact our ability to protect our technology and enforce our intellectual property rights. For example, in 2011, the U.S. enacted sweeping changes to the U.S. patent system under the Leahy-Smith America Invents Act, (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®DPP and optical technology. We have licenses to reagents (antigens and peptides) used in several of our products and products under development. Despite our efforts to protect our proprietary assets, and respect the intellectual property rights of others, we participate in several markets where intellectual property rights protections are of little or no value. This can place our products and our company at a competitive disadvantage.
Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how.
To facilitate development and commercialization of a proprietary technology base, we may need to obtain additional licenses to patents or other proprietary rights from other parties. Obtaining and maintaining these licenses, which may not be available, may require the payment of up-front fees and royalties. In addition, if we are unable to obtain these types of licenses, our product development and commercialization efforts may be delayed or precluded.
If We Become Involved inAny Future Intellectual Property Disputes Such Disputes Could Increase Our Costscould Require Significant Resource 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)(1) it could consume a substantial portion of managerial and financial resources; (ii)(2) its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by our products; (iii)(3) the pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products; (iv)(4) a court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products; and (v)(5) an adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect our future earnings.
Under certain contracts with third parties, we may indemnify the other party if our products or activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Furthermore, our products may contain technology provided to us by third parties, and we may be unable to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the event that an infringement or misappropriation claim is asserted against us.
There may also be other types of disputes that we become involved in regarding intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reissue, patent reexamination, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office as well. These proceedings permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Risks Related to Our Third Party Collaborators
Our Use of Third-Party Suppliers, Somesome of Which Maywhich may Constitute Our Sole Supply Source, for Certain Important Product Components and Materials Presents a Risk ThatRisks that Could Have Negative Consequences for Our Business.
AWe purchase certain HIV antigens, a syphilis antigen, the nitrocellulose, and certain other critical components used in our STAT-PAK, STAT-VIEW, SURE CHECK and DPP product lines from a sole or limited number of sources. If for any reason these suppliers become unwilling or unable to supply our antigen, nitrocellulose, or other critical component needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, nitrocellulose or other critical components used in our products would require additional development work and critical raw materials are providedapproval by third-party suppliers, some of whichthe FDA and other regulatory agencies. In addition, it may be sole-source suppliers, which impacts our abilitydifficult to manufacture or sell certain products if our suppliers cannot or will not deliver those materialsfind such an alternate supply source in a timely fashion,reasonable time period or on commercially reasonable terms, if at all, due to an interruption in their supply, qualityall. As a result, the termination 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. Evenlimitation of our relationship 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 factorssuppliers could prevent us from being ablerequire significant time to commercially producecomplete, increase our costs, and marketdisrupt or discontinue our ability to manufacture and sell the affected product or products.
If Needed, With some of these suppliers, we do not have long-term agreements and instead purchase components and materials through a purchase order process. As a result, these suppliers may stop supplying us components and materials, limit the allocation of supply and equipment to us due to increased industry demand, or significantly increase their prices at any time with little or no advance notice. Our reliance on a limited number of suppliers could also result in delivery problems, reduced control over product pricing and quality, and our inability to identify and qualify another supplier in a timely manner.
Moreover, some of these suppliers may experience financial difficulties that could prevent them from supplying us with components or subassemblies used in the design and manufacture of our products. In addition, these suppliers may experience manufacturing delays or shut downs due to circumstances beyond their control, such as labor issues, political unrest or natural disasters.
Any supply deficiencies could materially and adversely affect our ability to fulfill customer orders and our results of operations. The availability of critical components and materials from sole- or limited source suppliers could reduce our control over pricing, quality and timely delivery, increase our costs, could disrupt our ability to manufacture and sell, and preclude us from manufacturing and selling, certain of our products into one or more markets. Any such event could have a material adverse effect on our results of operations, cash flow and business.
We May Work with Strategic Collaborators to Assist in Developing and Commercializing Our Products.Products, which could Limit Rights We Receive from the Collaborations and Exposes Us to Other Risks Outside Our Control.
Some business opportunities that require a technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic collaborators. As part of our strategy for development and commercialization of our products, we may enter into arrangements with distributors or other third-parties. Relying on such collaborative relationships could be risky to our business for a number of reasons, including: (i) we may be required to transfer material rights to such strategic collaborators, licensees and others; (ii) our collaborators may not 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.
IfOur Ability to Grow Our Business will be Limited if We Fail to Maintain Existing Distribution Channels or Develop New Distribution Channels, It May Result in Lower Revenues.Channels.
We collaborate with laboratories, diagnostic companies and distributors in order to sell our products. The sale of our products depends in large part on our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate and work with.
By relying on distributors or third-parties to market and sell our products could negatively impact our business for various reasons, including: (i) we may not be able to find suitable distributors for our products on satisfactory terms, or at all; (ii) agreements with distributors may prematurely terminate or may result in litigation between the parties; (iii) our distributors or other customers may not fulfill their contractual obligations and distribute our products in the manner or at the levels we expect; (iv) our distributors may prioritize their own private label products that compete with our products; (v) Our existing 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.
Our U.S. Government Contracts Require Compliance with Numerous Laws and Increases Our Risk and Liability.
We are currently receiving funding from the U.S. government related to DPP Zika, and our growth strategy targets sales to U.S. government entities. As a result of our U.S. government funding and potential product sales to the U.S. government, we must comply with laws and regulations relating to the award, administration and performance of U.S. government contracts. U.S. government contracts typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and additional risks to us as compared to competitors that do not rely on government contracts. As a U.S. government contractor, we are subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which purely private sector companies are not. The results of any such actions could adversely impact our business and have an adverse effect on our consolidated financial performance.
A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts, as well as suspension or debarment. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could be applied to our entire enterprise in certain severe circumstances. Even a narrow scope suspension or debarment could result in negative publicity that could adversely affect our ability to renew contracts and to secure new contracts, both with the U.S. government and private customers, which could materially and adversely affect our business and results of operations. Fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow rules relating to billing on cost-plus contracts, receiving or paying kickbacks, or filing false claims, among other potential violations. In addition, we could suffer serious reputational harm and the value of our Common Stock could be negatively affected if allegations of impropriety related to such contracts are made against us.
Our U.S. Government Contracts are Subject to Future Funding and the Government’s Choice to Exercise Options, and may be Terminated at the Government’s Convenience.
Our contracts with the U.S. government are subject to future funding and are subject to the right of the government to terminate the contracts in whole or in part for its convenience. There is pressure for the U.S. government to reduce spending. The non-appropriation of funds or the termination for the government’s convenience of our contracts could negatively affect our financial results. If levels of U.S. government expenditures and authorizations for emerging diseases decrease or shift to programs in areas where we do not offer products or are not developing product candidates, or if the U.S. government otherwise declines to exercise its options under its contracts with us, our business, revenues and other operating results would suffer.
Risks Related to Regulations
Because We May Not Bemay not be Able to Obtain or Maintain the Necessary Regulatory Approvals for Some of Our Products, We May Notmay 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 USDAU.S. Department of Agriculture as well as by non-governmental organizations such as the ISO and WHO. We have implemented a quality control system that is intended to comply with applicable regulations. Although FDA approval is not required for the export of our products, there are export regulations promulgated by the FDA that specifically relate to the export of our products that require compliance with FDA quality system regulation ("QSRs")QSRs and that also require meeting certain documentary requirements regarding the approval of the product in export markets.
If We Do Notdo not Comply Withwith FDA or Other Regulatory Requirements, We May Bemay be Required to Suspend Production or Sale of Our Products or Institute a Recall, Which Couldwhich could Result in Higher Costs and a Loss of Revenues.
Regulations of the FDA Regulations and regulations by other federal, state and foreign regulatory agencies has an effecthave significant effects 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, a determination that a device is not approvable, marketing clearances or approvals, or criminal prosecution. For example, in February 2020, we received a “not approvable” letter from the U.S. Food and Drug Administration with respect to our premarket approval submission on our DPP HIV-Syphilis multiplex test for commercial use in the United States. 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.
Our Inability to Respond to Changes in Regulatory Requirements could Adversely Affect Our Business.
We believe that our products and procedures are in material compliance with all applicable FDA regulations, ISO requirements, and other applicable regulatory requirements, but the regulations regarding the manufacture and sale of our products, the QSR and ISO requirements, and other requirements may be unclear and are subject to change. Newly promulgated regulations could require changes to our products, necessitate additional clinical trials or procedures, or make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory authorities also have the ability to change the requirements for obtaining product approval and/or impose new or additional requirements as part of the approval process. These changes or new or additional requirements may occur after the completion of substantial clinical work and other costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain approvals and sell our products. In addition, the FDA may revoke an Emergency Use Authorization under which our products are sold, where it is determined that the underlying health emergency no longer exists or warrants such authorization. Such revocation would preclude the sale of our affected products unless and until a further regulatory approval or authorization is obtained. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations.
Demand Forfor Our Products Maymay 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 Couldwith 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 Maymay Incur Additional Costs Ifif We Do Notdo not Comply Withwith Privacy, Security and Breach Notification Regulations.
We believe that we are not a covered entity nor a business associate of a covered entity and the Company isare not responsible for complying with the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”).or HIPAA. Even though the Company iswe likely are not a covered entity under HIPAA, the Company doeswe do have in place administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information.] The Company isWe are required to comply with varying state privacy, security and breach reporting laws. If we fail to comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. Also, there are other federal and state laws that protect the privacy and security of consumers’ personal information, and we may be subject to enforcement by various governmental authorities and courts resulting in complex compliance issues. We could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information.
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Failure to Comply With Recent European Data Protection Requirements could Increase Our Costs.
The EU has adopted a comprehensive overhaul of its data protection regime from the prior national legislative approach to a single European Economic Area Privacy Regulation called the General Data Protection Regulation, or GDPR, which came into effect on May 25, 2018. The new EU data protection regime extends the scope of the EU data protection law to all foreign companies processing data of EU residents. It imposes a strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide turnover and €20 million and includes new rights such as the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation, as had been the case under the prior data protection regime, local data protection authorities will still have the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country basis. We are evaluating these new requirements and implementing a plan to ensure compliance. Complying with the enhanced obligations imposed by the GDPR may result in significant costs to our business and require us to amend certain of our business practices. Further, we have no assurances that violations will not occur, particularly given the complexity of the GDPR, as well as the uncertainties that accompany new, comprehensive legislation.
If We Are Notare not Able to Manufacture Products in Accordance Withwith Applicable Requirements, It Couldcould 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 isto which we are 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 iswe are subject to that require the Companyus to report certain transactions between it and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs. Many of the existing requirements are new and have not been definitively interpreted by state authorities or courts, and available guidance is limited. We could face enforcement action and fines and other penalties, and could receive adverse publicity, unless and until we are in full compliance with these laws, all of which could materially harm the Company.us. Furthermore, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require us to change our business practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations.
Our Compliance Withwith 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 and 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”).Market. The implementation of certain aspects of these laws and regulations has required and will continue to require substantial management time and oversight and may require us to incur significant additional accounting and legal costs. We continually review changes with respect to new and proposed rules and cannot predict or estimate the amount of additional costs, and the timing of such costs, we may incur. There are several interpretations of these laws and regulations, in many cases due to their lack of specificity, and as a result, their application in practice may change as new guidance is provided by regulatory and governing bodies. This may result in continuing uncertainty regarding compliance matters and higher costs. We are committed to maintaining high standards of corporate governance and public disclosure, but if we fail to comply with any of these requirements, legal proceedings may be initiated against us, which may adversely affect our business.
Although We Have an Ethics and Anti-Corruption Policy in Place, and Have No Knowledge or Reason to Know of Any Practices by Our Employees, Agents or Distributors That Could be Construed as in Violation of Such Policies, Our Business Includes Sales of Products to Countries Where There is or may be Widespread Corruption.
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 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.
Risks Related to Our Common Stock
Our Common Stock continues to be illiquid, so investorshas Limited Liquidity, and Investors may not be ableAble to sellSell as much stockMuch Stock as they wantThey Want at prevailing market prices.Prevailing Market Prices or at all.
The average daily trading volume of our Common Stock on the NASDAQ market was approximately 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. The liquidity of our stockCommon Stock depends on several factors, including but not limited to theour financial results of the Company and overall market conditions, so it is not possible to predict whether this level of liquidity will continue, be sustained, or decrease.
Decreased trading volume in our stock would make it more difficult for investors to sell their shares in the public market at any given time at prevailing prices. Our management and larger stockholders exercise significant control over the Company.our company.
The Price of Our Common Stock Couldcould 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)(1) the performance of our business; (ii)(2) clinical results with respect to our products or those of our competitors; (iii)(3) the gain or loss of significant contracts and availability of funding for the purchase of our products; (iv)(4) actions undertaken by the Congress or the Presidential Administration; (v)(5) changes in our relations with our key customers, distributors or suppliers; (vi)(6) developments in patent or other proprietary rights; (vii)(7) litigation or threatened litigation; (viii)(8) general market and economic conditions; (ix)(9) the relatively low trading volume for our Common Stock; (x)(10) changes in competition; (xi)(11) Complaints or concerns about the performance or safety of our products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; (xii)(12) failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; (xiii)(13) announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or our customers; (xiv)(14) changes in our operating results; and (xv)(15) terrorist attacks, civil unrest, war and national disasters.
Overall, the stock market has experienced price and volume fluctuations that have affected the market price of our Common Stock, as well as the stock of many other similar companies. Such price fluctuations are generally unrelated to the operating performance of the specific companies whose stock is affected.
After the volatility in the market price of a company’s stock, class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and the attention and resources of our management could be diverted, each of which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities.
Any Future Issuances of Shares of Our Common Stock by Us Could Harm the Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings.
Any future sales of a substantial number of our shares of Common Stock or other equity-related securities, or the perception that such sales may occur, could adversely affect the price of our Common Stock, and could impair our ability to raise capital through future offerings of equity or equity-related securities.
Our Management and Larger Stockholders Exercise Significant Control Over Us.
As of December 31, 2019, 25.5% of our outstanding common stock was beneficially owned by our executive officers, directors and 5% stockholders including three large investors that beneficially own 21%, of our outstanding common 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.
Sales of Our Common Stock by Existing Stockholders, Executive Officers or Directors Couldcould Depress the Market Price of Our Common Stock.
If our existing stockholders, officers or directors sell our Common Stock in the public market, or the perception that such sales may occur, it could negatively affect the price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors.
Institutional stockholders own significant amounts of our Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, the prevailing price of our Common Stock could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock.
We Do Notdo 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.Stock.
We do not expect to pay any cash dividends on our Common Stock and currently intend to retain our earnings, if any, to finance the expansion of our business. Therefore, the success of an investment in our Common Stock will depend entirely upon any future increase in value of our Common Stock. There is no guarantee that our Common Stock will gain value or even maintain the price at which investors purchased their shares.
If We 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, 2017, our named executive officers, directors and 5% stockholders beneficially owned approximately 44.35% of our voting power, which includes four large investors that beneficially own approximately 13.97%, 10.42%, 7.46%, and 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. |
2139
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, together with nearbypursuant to a lease covering approximately 39,650 square feet and expiring on June 30, 2021.
On February 5, 2019, we entered into a commercial real estate lease for new corporate headquarters comprised of 70,000 square feet of office, research and development, and warehouse space located in Hauppauge, New York. The lease has an initial term of eleven years that can be extended, at our option, for two additional terms of five years each. Rent under the lease, which is payable in monthly installments, totals approximately $900,000 for the initial year and additional administrative offices inthen increases by approximately three percent each succeeding year.
On February 5, 2019, we also entered into an agreement to sublet the space at Holbrook, New York. The sublease has a term that (a) commenced on the date we vacate the premises and (b) terminate on April 29, 2020. The sublessee has paid us 50% of our rent and additional rent payments, which will total approximately $100,000 per year during the term of the sublease.
Our European headquarters and Center of Excellence for Optical Technology is located in leased office and manufacturing space in Berlin, Germany. Our Southeast Asia manufacturing, warehouse, and commercial facilities are located in leased space in Kuala Lumpur, Malaysia. Our Latin America manufacturing, warehouse, and commercial facilities are located in Rio de Janeiro, Brazil. We regularly review our real estate portfolio and develop footprint strategies to support our customers’ global plans, while at the same time supporting our technical needs and controlling operating expenses.
From time to time we may bebecome involved in litigation relatinglegal proceedings or may be subject to claims arising outin the ordinary course of our operations inbusiness. Although the normalresults of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of business. We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, isthe outcome, litigation can have an adverse party or has a material interest that is adverse to our interest.impact on us because of defense and settlement costs, diversion of management resources and other factors.
ITEM 4. MINE SAFETY DISCLOSURESNot Applicable.
PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
MarketListing Information
Our stock is listed on the NASDAQ Global Select Market of the NASDAQ Stock Market LLC under the symbol “CEMI.” The table below sets forth the high and low 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 | |
| First Quarter | | $ | 6.10 | | | $ | 4.03 | |
| Second Quarter | | $ | 9.40 | | | $ | 5.87 | |
| Third Quarter | | $ | 8.48 | | | $ | 5.08 | |
| Fourth Quarter | | $ | 7.45 | | | $ | 6.10 | |
Holders
As of March 5, 20181, 2020, there were approximately 1,590132 record owners of our common stockCommon 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 duringDuring the year ended December 31, 2017 that were not previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.2019, we issued unregistered securities in connection with the acquisition of Orangelife. See Note 2 - Acquisitions, for further discussion.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the fourth quarter of the fiscal year ended December 31, 2017.2019.
ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial data were derived from our audited consolidated financial statements and should be read in conjunction with, and are qualified by reference to, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The financial information presented may not be indicative of our future performance.
| CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES | |
| SELECTED HISTORICAL FINANCIAL DATA | |
| As of and For the Years Ended December 31, | |
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2017 (1) | | | (2 | ) | | 2016 (3) | | | (2 | ) | | 2015 | | | (2 | ) | | 2014 | | | (2 | ) | | 2013 | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL REVENUES | | $ | 24,015,427 | | | | | | $ | 17,868,841 | | | | | | $ | 24,255,485 | | | | | | $ | 27,645,284 | | | | | | $ | 29,549,609 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of product sales | | | 12,921,157 | | | | | | | 9,417,505 | | | | | | | 13,768,658 | | | | | | | 16,831,261 | | | | | | | 17,249,450 | | | | |
| Research and development expenses | | | 8,555,381 | | | 36 | % | | | 8,427,554 | | | 47 | % | | | 6,377,839 | | | 26 | % | | | 4,832,537 | | | 17 | % | | | 5,834,249 | | | 20 | % |
| Selling, general and administrative expenses | | | 9,021,439 | | | 38 | % | | | 7,595,559 | | | 43 | % | | | 7,663,035 | | | 32 | % | | | 7,531,739 | | | 27 | % | | | 5,461,083 | | | 18 | % |
| | | | 30,497,977 | | | | | | | 25,440,618 | | | | | | | 27,809,532 | | | | | | | 29,195,537 | | | | | | | 28,544,782 | | | | |
| INCOME (LOSS) FROM OPERATIONS | | | (6,482,550 | ) | | | | | | (7,571,777 | ) | | | | | | (3,554,047 | ) | | | | | | (1,550,253 | ) | | | | | | 1,004,827 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSES): | | | 22,485 | | | | | | | 25,548 | | | | | | | (3,238 | ) | | | | | | 132 | | | | | | | 12,943 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| INCOME (LOSS) BEFORE INCOME TAXES | | | (6,460,065 | ) | | (27 | )% | | | (7,546,229 | ) | | (42 | )% | | | (3,557,285 | ) | | (15 | )% | | | (1,550,121 | ) | | (6 | )% | | | 1,017,770 | | | 3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income tax provision (benefit) | | | (88,305 | ) | | | | | | 5,800,818 | | | | | | | (1,160,243 | ) | | | | | | (412,918 | ) | | | | | | 486,952 | | | | |
| NET INCOME (LOSS) | | $ | (6,371,760 | ) | | | | | $ | (13,347,047 | ) | | | | | $ | (2,397,042 | ) | | | | | $ | (1,137,203 | ) | | | | | $ | 530,818 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic income (loss) per share | | $ | (0.52 | ) | | | | | $ | (1.26 | ) | | | | | $ | (0.25 | ) | | | | | $ | (0.12 | ) | | | | | $ | 0.06 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Diluted income (loss) per share | | $ | (0.52 | ) | | | | | $ | (1.26 | ) | | | | | $ | (0.25 | ) | | | | | $ | (0.12 | ) | | | | | $ | 0.06 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares outstanding, basic | | | 12,300,031 | | | | | | | 10,622,331 | | | | | | | 9,626,028 | | | | | | | 9,530,320 | | | | | | | 8,994,080 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares outstanding, diluted | | | 12,300,031 | | | | | | | 10,622,331 | | | | | | | 9,626,028 | | | | | | | 9,530,320 | | | | | | | 9,519,968 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Working capital (4) | | $ | 7,757,340 | | | | | | $ | 14,707,876 | | | | | | $ | 9,479,968 | | | | | | $ | 12,372,169 | | | | | | $ | 14,221,011 | | | | |
| Total assets | | | 16,616,021 | | | | | | | 20,575,236 | | | | | | | 20,816,344 | | | | | | | 25,010,192 | | | | | | | 24,486,592 | | | | |
| Total liabilities | | | 3,536,825 | | | | | | | 3,405,650 | | | | | | | 3,154,838 | | | | | | | 5,286,030 | | | | | | | 4,309,490 | | | | |
| Shareholders' equity | | | 13,079,196 | | | | | | | 17,169,586 | | | | | | | 17,661,506 | | | | | | | 19,724,162 | | | | | | | 20,177,102 | | | | |
(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’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The 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 Item 8. Financial Statementsthe audited consolidated financial statements and Supplementary Data. Our MD&Arelated notes included in this report. In addition to historical information, the following discussion contains forward-looking statements that involves risks, uncertainties and assumptions. See “Special Note Regarding Forward-Looking Statements” at page 4 of this report. Please read “Item1A. Risk Factors” for a discussion of factors that could cause our actual results to differ materially from our expectations.
The following discussion is presented in six sections:
| ● | Consolidated Results of Operations |
| ● | Liquidity and Capital Resources |
Consolidated Results of Operations
Liquidity and Capital Resources
| ● | Significant Accounting Policies and Critical Accounting Estimates |
Significant Accounting Policies and Critical Accounting Estimates
| ● | Recently Issued Accounting Pronouncements |
Recently Issued Accounting Pronouncements
Executive Overview
Our Business
Through our wholly-ownedwholly owned subsidiaries, Chembio Diagnostic Systems Inc. and, Chembio Diagnostics Malaysia Sdn Bhd, Chembio Diagnostics Germany, and Chembio Diagnostics Brazil we develop, manufacture and commercialize point-of-care (“POC”) diagnostic tests that are used to detect or monitordiagnose diseases. All products that are currently being developed are based on the Company’sour patented DPP® technology, a novel POCpoint-of-care diagnostic platform that offers certain customer advantages as compared to traditional lateral flow technology. Chembio was formed in 1985.
Business StrategyRecent operational accomplishments and highlights include:
Recent accomplishmentsAchieved product sales of $28.8 million for full year 2019, an increase of 3.3% over prior year
Achieved total revenue of $34.5 million for full year 2019, a decrease of 0.3% over prior year
Acquired Orangelife Comercio e Industria Ltda., a privately-held Brazilian manufacturer of lateral flow tests for infectious diseases to diversify and highlights:expand our market penetration in Brazil and support Bio-Manguinhos, a major customer.
● | Achieved total revenue of $24.0 million for full year 2017, an increase of 34% over prior year |
Received WHO Prequalification approval for the HIV Self-Test and our Malaysian production facility
● | Achieved product sales of $19.3 million for full year 2017, an increase of 41% over prior year |
Successfully completed the technical feasibility phase for a rare disease with Takeda Pharmaceutical.
● | 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
|
Initiated production on our fully-automated DPP test manufacturing line and took delivery of our second and third automated lines for our other product platforms.
In addition, in February 2018, weWe strengthened our balance sheet by entering a credit agreement with net proceeds of $11.0Perceptive Credit Holdings II, LP. for a $20 million in capital from an underwritten public offering, which is more fully discussed under “Recent Developments”.term loan. See “—Liquidity and Capital Resources.”
OurThe Company’s product commercialization and product development efforts areare focused in three areas: sexually transmittedon infectious disease tropical & fever disease,testing and technology collaborations. In sexually transmittedinfectious disease, we arethe Company is commercializing tests for HIV and Syphilis. In tropical and fever disease, we are commercializing a test forSyphilis, Zika virus, dengue virus, and chikungunya 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 a fever panel test.tests. Through technology collaborations, we arethe Company is developing tests for a specific form of cancer, concussion, bovine tuberculosis, and for an undisclosed biomarker, the lattera rare disease in collaboration with global biopharmaceutical companyTakeda Pharmaceutical, and a biomarker development project in collaboration with 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 POCpoint-of-care screening, diagnostic, or confirmatory results can improve health outcomes. More generally, we believe there is and will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the point of care.
Our products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally, under our STAT-PAK,®, SURE CHECK,®, STAT-VIEW® or DPP® registered trademarks, or under the private labels of our marketing partners.
Consolidated Results of Operations
2017 compared to 2016
The results of operations for the years ended December 31, 20172019 and 20162018 were as follows:
| | | | Year Ended December 31, | |
| | | December 31, 2017 | | | December 31, 2016 | | | 2019 | | 2018 | |
| | | | | | | | | | | | | | | | | | | | | | |
| TOTAL REVENUES | | $ | 24,015,427 | | | 100 | % | | $ | 17,868,841 | | | 100 | % | | $ | 34,464,032 | | | | 100 | % | | $ | 34,581,440 | | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of product sales | | | 12,921,157 | | | 54 | % | | | 9,417,505 | | | 53 | % | | | 22,394,317 | | | | 65 | % | | | 22,599,432 | | | | 65 | % |
| Research and development expenses | | | 8,555,381 | | | 36 | % | | | 8,427,554 | | | 47 | % | | | 8,538,416 | | | | 25 | % | | | 8,526,256 | | | | 26 | % |
| Selling, general and administrative expenses | | | 9,021,439 | | | 38 | % | | | 7,595,559 | | | 43 | % | | | 16,138,424 | | | | 47 | % | | | 11,100,775 | | | | 33 | % |
| Acquisition costs | | | | 721,465 | | | | 2 | % | | | 337,645 | | | | 1 | % |
| | | | 30,497,977 | | | | | | | 25,440,618 | | | | | | | 47,792,622 | | | | 139 | % | | | 42,564,108 | | | | 25 | % |
| LOSS FROM OPERATIONS | | | (6,482,550 | ) | | | | | | (7,571,777 | ) | | | | | | (13,328,590 | ) | | | (39 | )% | | | (7,982,668 | ) | | | (23 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| OTHER INCOME | | | 22,485 | | | | | | | 25,548 | | | | | |
| OTHER (LOSS)/INCOME | | | | (846,831 | ) | | | (2 | )% | | | 49,498 | | | | 0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (6,460,065 | ) | | (27 | )% | | | (7,546,229 | ) | | (42 | )% | | | (14,175,421 | ) | | | (41 | )% | | | (7,933,170 | ) | | | (23 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income tax (benefit) provision | | | (88,305 | ) | | | | | | 5,800,818 | | | | | |
| Income tax benefit | | | | (500,292 | ) | | | (2 | )% | | | (67,521 | ) | | | 0 | % |
| NET LOSS | | $ | (6,371,760 | ) | | | | | $ | (13,347,047 | ) | | | | | $ | (13,675,129 | ) | | | (39 | )% | | $ | (7,865,649 | ) | | | (23 | )% |
Percentages in the table reflect the percent of total revenues.
Total Net Revenues
Total net revenues during the year ended December 31, 20172019 were $24.0$34.5 million, an increasea decrease of $6.1$0.1 million, or 34%0.3% compared to 2016.2018. The increasedecrease in total net revenues was comprised of the following:
| ● | $5.6 million, or 41.2% increase in net product sales, reflecting gains in every region of the world except North America, which in 2016 benefited on a one-time basis from a former U.S. distributor's "end-of-contract purchase" of certain products following our notice of termination of that distribution agreement. The last of those products reached their normal expiration date in February 2018, and the Company has been building its own distribution channels consistent with our commercial strategy. As part of these regional successes and as highlighted above, during 2017, the Company re-secured its DPP® HIV Assay and DPP® Leishmania Assay sales to Brazil and established both a commercial and lower cost manufacturing footprint with its acquisition of RVR Diagnostics Sdn Bhd (now Chembio Diagnostics Malaysia Sdn Bhd). Refer to Note 2 – Acquisition to the audited consolidated financial statements included herein for further information regarding the acquisition.
|
| ● | $0.5 million, or 12.0% increase in R&D milestone and grant, and license and royalty revenues compared to 2016, reflecting the Company’s continued success in securing governmental, non-governmental, and commercial partnerships, in particular associated with our DPP® technology platform.$0.9 million, or 3.3% increase in net product sales, reflecting gains in U.S., Europe, and Latin America, offset in part by lower sales in Africa and Asia. U.S. sales benefited from our winning back a large public health program and Latin America benefited from initial sales of Zika, Chikungunya, and Dengue Fever tests, both standalone and in the multiplex version. Europe includes contribution from our acquisition of Chembio Diagnostics GmbH in November 2018. Asia and Africa declines were affected by the timing of national tenders. $1.0 million, or 15.7% decrease in R&D and grant, and license and royalty revenues compared to 2018, relating to the timing and cadence of customer program schedules and their related performance obligations. |
Gross Product Margin
Cost of product 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$1.1 million, or 50.2%21.4% compared to 2016.2018. The following schedule calculates gross product margin:
| | | For the years ended December 31 | | | Favorable/ (unfavorable) | | | % Change | |
| | | 2019 | | | 2018 |
| | | (in thousands) | | | | | | | |
| Net product sales | | $ | 28,845 | | | $ | 27,913 | | | $ | 932 | | | | 3.3 | % |
| Less: Cost of product sales | | | (22,394 | ) | | | (22,599 | ) | | | 205 |
| | | (0.9 | %) |
| Gross product margin | | $ | 6,451 | | | $ | 5,314 | | | $ | 1,137 | | | | 21.4 | % |
| Gross product margin % | | | 22.4 | % | | | 19.0 | % | | | | | | | | |
| | | 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$1.1 million increase in gross product margin was comprised of the following:
| ● | $1.7 million from favorable product sales volume as described above, and |
| ● | $0.4 million from favorable product margins, principally related to favorable overhead application. |
$0.2 million from favorable product sales volume as described above, and
$0.9 million from favorable product margins, related to the impact of geographic mix on average selling price, initial benefits from our first automated assembly line, and reduced contract labor costs.
Research and Development
This category includes costs incurred for clinical &and regulatory affairs and other research &and 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 | %) |
| | | For the years ended December 31 | | | Favorable/ (unfavorable) | | | % Change | |
| | | 2019 | | | 2018 |
| | | (in thousands) | | | | | | | |
| Clinical and regulatory affairs | | $ | 1,516 | | | $ | 1,307 | | | $ | (209 | ) | | | (16.0 | )% |
| Other research and development | | | 7,022 | | | | 7,219 | | | | 197 | | | | 2.7 | % |
| Total research and development | | $ | 8,538 | | | $ | 8,526 | | | $ | (12 | ) | | | (0.1 | )% |
The increase in clinical & regulatory affairs costs for the year ended December 31, 2017 2019 as compared to 2016 2018 is primarily associated with new product negotiations in new countries and around the Company’s U.S.world and clinical trial evaluating its DPP® HIV-Syphilis System, which it completed in December 2017, as discussed above.costs. The decrease in other research &and development costs is primarily associated with acorrelates to the reduction in spending on materials & supplies associated with R&D milestone and grant revenue-related projects.revenue noted above.
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$5.0 million, or 18.8%,45.4% increase in SG&Aselling, general and administrative expenses for the year ended December 31, 2017 2019 as compared to 2016 is primarily associated with increases in the following:2018 includes $0.9 million costs from Chembio Diagnostics Germany, $1.1 million higher non-cash equity compensation costs, and $0.7 million compensation, travel, entertainment,of rent and trade showother costs related to leasing our new facility in Hauppauge, NY, which were partially non-cash in 2019 due to the lease terms.
Acquisition Costs
Acquisition costs include legal, due diligence, audit, and related costs associated with the growth in our sales and commercial team,acquisitions. The $0.4 million intangible asset amortizationincrease in acquisition costs for the year ended December 31, 2019 as compared to 2018 is associated with spending related to acquisitions. During 2019, these included an audit required for Chembio Diagnostics Germany, as well as diligence and legal costs related to the acquisition of RVR DiagnosticsChembio Dignostics Brazil in January 2017, and $0.3 million corporate regulatory costs.November 2019.
Other Income and Expense
Other income and expenses are principally interest income earned on the Company'sour deposits, net of interest expense, which decreasedincreased by approximately $3,000$0.9 million for the year ended December 31, 20172019 as compared to 2016.2018 due to the interest paid on the term loan debt the company entered into in September 2019.
Income Tax Provision
For the year ended December 31, 2017 the Company2019 we recognized a tax benefit of $88,000 associated with anticipated refunds$0.6 primarily attributable to the loss generated by Chembio Diagnostics Malaysia. As of accumulated alternative minimum tax (AMT) credits to be received betweenDecember 31, 2019 and 2021 pursuant to recently enacted tax legislation net of state tax provisions. Accordingly, the benefit had no cash impact in 2017. In 2016,2018, the Company recorded a non-cash income tax provision and decreased its deferred tax assets by $5.8 million as the Company took a full valuation allowance against its carryforward losses.
2016 versus 2015
The results of operations for the years ended December 31, 2016 and 2015 were as follows:
| | | December 31, 2016 | | | December 31, 2015 | |
| | | | | | | | | | | | | |
| TOTAL REVENUES | | $ | 17,868,841 | | | 100 | % | | $ | 24,255,485 | | | 100 | % |
| | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | |
| Cost of product sales | | | 9,417,505 | | | 53 | % | | | 13,768,658 | | | 57 | % |
| Research and development expenses | | | 8,427,554 | | | 47 | % | | | 6,377,839 | | | 26 | % |
| Selling, general and administrative expenses | | | 7,595,559 | | | 43 | % | | | 7,663,035 | | | 32 | % |
| | | 25,440,618 | | | | | | | 27,809,532 | | | | |
| LOSS FROM OPERATIONS | | | (7,571,777 | ) | | | | | | (3,554,047 | ) | | | |
| | | | | | | | | | | | | | | |
| OTHER INCOME | | | 25,548 | | | | | | | (3,238 | ) | | | |
| | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (7,546,229 | ) | | (42 | %) | | | (3,557,285 | ) | | (15 | %) |
| | | | | | | | | | | | | | | |
| Income tax provision (benefit) | | | 5,800,818 | | | | | | | (1,160,243 | ) | | | |
| NET LOSS | | $ | (13,347,047 | ) | | | | | $ | (2,397,042 | ) | | | |
| | | | | | | | | | | | | | | |
Percentages in the table reflect the percent of total revenues.
Total Net Revenues
Total net revenues during the year ended December 31, 2016 were $17.9 million, a decrease of $6.4 million, or 26.3% compared to 2015. The decrease in total net revenues was comprised of the following:
| ● | $8.2 million, or 37.5% decrease in net product sales compared to 2015, reflecting decreased sales in Brazil and Mexico, partially offset by increased sales in the U.S., which in 2016 benefited on a one-time basis from a former U.S. distributor's "end-of-contract purchase" of certain products following our termination of that distribution agreement. |
| ● | $1.8 million, or 76.8% increase in R&D milestone and grant revenues compared to 2015, reflecting the Company’s continued success in securing governmental, non-governmental, and commercial partnerships, in particular associated with our DPP® technology platform.
|
Gross Product Margin
Cost of sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross product margin percentage is gross product margin as a percentage of net product sales.
Gross product margin fell by $3.9 million, or 47.5% compared to 2015. The following schedule calculates gross product margin:
| | | For the years ended | | | | | | | |
| | | December 31, 2016 | | | December 31, 2015 | | | Favorable/ (unfavorable) | | | % Change | |
| | | | | | | | | | | | | |
| Net product sales | | $ | 13,680,107 | | | $ | 21,886,688 | | | $ | (8,206,581 | ) | | | (37.5 | )% |
| Less: Cost of product sales | | | (9,417,505 | ) | | | (13,768,658 | ) | | | 4,351,153 | | | | (31.6 | )% |
| Gross product margin | | $ | 4,262,602 | | | $ | 8,118,030 | | | $ | (3,855,428 | ) | | | (47.5 | )% |
| Gross product margin % | | | 31.16 | % | | | 37.09 | % | | | | | | | | |
The $3.9 million decrease in gross product margin was comprised of the following:
| ● | $3.0 million from unfavorable product sales volume as described above, and |
| ● | $0.9 million from unfavorable product margins, reflecting the increased absorption of overhead at lower unit volumes. |
Research and Development
This category includes costs incurred for clinical & regulatory affairs and other research & development, as follows:
| | | For the years ended | | | | | | | |
| | | December 31, 2016 | | | December 31, 2015 | | | | | | % Change | |
| Clinical & regulatory affairs | | $ | 1,444,410 | | | $ | 982,366 | | | $ | (462,044 | ) | | | (47.0 | )% |
| Other research development | | | 6,983,144 | | | | 5,395,473 | | | | (1,587,671 | ) | | | (29.4 | )% |
| Total Research and Development | | $ | 8,427,554 | | | $ | 6,377,839 | | | $ | (2,049,715 | ) | | | (32.1 | )% |
Expenses for Clinical & Regulatory Affairs increased by $0.5 million for the year ended December 31, 2016, as compared to 2015, primarily related to an increase in clinical trial expenses and additional wages and related costs.
Other R&D expenses increased by $1.6 million in the year ended December 31, 2016, as compared to 2015. The increase is primarily related to an increase in wages, benefits, materials, and supplies to support the growth in sponsored research and internal development programs.
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A”) includes administrative expenses, sales and marketing costs including commissions, and other corporate items.
The $0.1 million decrease in SG&A for the year ended December 31, 2016 as compared to 2015 reflects reduced commissions (principally for lower sales in Brazil) and other selling costs related to the lower 2016 sales volume, somewhat offset by increases in wages and travel costs associated with the growth in our sales and commercial team.
Other Income and Expense
Other income and expenses are principally interest income earned on the Company's deposits, which increased by approximately $29,000 for the year ended December 31, 2016 as compared to 2015, reflecting interest on funds raised in the 2016 public offering.
Income Tax Provision
For the year ended December 31, 2016, the Company recognized a $5.8 million non-cash income tax provision and decreased its deferred tax assets by a corresponding amount, together with a full valuation allowance. By comparison, for the year ended December 31, 2015, the Company recognized a $1.2 million non-cash income tax benefit and increased its deferred tax assets by a corresponding amount.assets.
Liquidity and Capital Resources
Overview
Our liquidity requirements are primarily to fundDuring 2019, we funded our business operations, including capital expenditures and working capital requirements, principally from cash and cash equivalents. Our operations used $9.1 million of cash. As of December 31, 2019, we had outstanding debt (excluding leases) in the amount of $20.2 million (carrying amount of $17.7 million), consisting of loans of $20.0 million under a credit agreement entered into on September 3, 2019 (see “—Sources of Funds—Credit Agreement” below) and $0.2 million under a seller-financed note payable incurred in connection with our purchase of automated manufacturing equipment.
We continually evaluate our liquidity requirements, capital needs and availability of capital resources based on our operating needs and our planned growth initiatives. We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next twelve months.
Our future working capital needs will depend on many factors, including the rate of our business and revenue growth, the timing of our continuing automation of U.S. manufacturing, and the timing of investment in our research and development as well as to fund opportunistic investments that align with our focused business strategy. Our primarysales and marketing. If, however, those sources of liquidity arebecome insufficient to fund the growth of our business, we may need to reduce the level or slow the timing of its growth plans, which would likely curtail or delay the growth in our business contemplated by our operating plan and could impair or defer our ability to achieve profitability and generate cash flows from operations,flow, or to seek to raise additional funds through debt or equity financings, strategic relationships, or other arrangements, to the extent funding would be available to us on acceptable terms or at all. If we were to raise additional funds through the issuance of equity or convertible securities, the issuance could result in substantial dilution to existing stockholders, and the holders of these new securities or debt may have rights, preferences and privileges senior to those of the holders of common stock.
Sources of Funds
Credit Agreement. On September 3, 2019, we, as borrower, and certain of our subsidiaries, as guarantors, entered into a Credit Agreement and Guaranty, or the Credit Agreement, with Perceptive Credit Holdings II, LP, or the Lender.
• Principal Amount. The Credit Agreement provides for a $20,000,000 senior secured term loan credit facility, which was drawn in full on September 4, 2019. Under the terms of the Credit Agreement, we may use the proceeds (i) for general working capital purposes and other permitted corporate purposes, (ii) to refinance certain of our existing cash balance,indebtedness and as necessary, additional capital. We will continually explore ways(iii) to enhancepay fees, costs and expenses incurred in connection with the Credit Agreement, including the Lender’s closing cost amount of $550,000, which was netted from the proceeds, and a financing fee of $600,000 (3.0% of gross proceeds) payable to Craig-Hallum Capital Group LLC, our capital structure.financial advisor for the financing.
Acquisition• Interest Rate. Principal outstanding under the Credit Agreement bears interest at a rate per annum equal to the sum of (a) the greater of the one-month London Interbank Offered Rate and 2.5% plus (b) 8.75%. At any time at which an event of default (as described under “—Default Provisions” below) has occurred and is continuing, the interest rate will increase by 4.0%. Accrued interest is payable on a monthly basis.
On January 9, 2017, Chembio acquired 100%• Scheduled Repayment. No principal repayments are due prior to September 30, 2022, unless we elect to prepay principal as described under “—Optional Prepayment” below or principal is accelerated pursuant to an event of default as described under “—Default Provisions” below. Principal installments in the amount of $300,000 are payable on the last day of each of the equity interests of RVR Diagnostics Sdn Bhd, a Malaysia manufacturereleven months from September 2022 through July 2023, and distributor of rapid medical assays, for $1.4 million in cash and for common shares with a valueall remaining principal is payable 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 accounted for as a business combination, with the operating results of RVR Diagnostics included within the Company’s operating results from the date of acquisition. The Company financed the cash portion of the acquisition with funds raised in its 2016 public equity offering. After the acquisition, RVR Diagnostics Sdn Bhd changed its name to Chembio Diagnostics Malaysian Sdn Bhd.maturity on September 3, 2023.
Government, Non-Governmental Organization,• Optional Prepayment. We may prepay outstanding principal from time to time, subject to payment of a premium on the prepaid principal amount equal to 10% through September 3, 2020, 8% from September 4, 2020 through September 3, 2021, and Non-Profit Programs4% from September 4, 2021 through September 3, 2022.
No premium will be due with respect to any prepayment made on or after September 4, 2022.
• Guaranties. Our subsidiaries Chembio commonly seeksDiagnostic Systems Inc. and Chembio Diagnostics Malaysia Sdn Bhd. have guaranteed, and the Lender from time to time may require our other subsidiaries to guarantee, our obligations under the Credit Agreement.
• Security. Our obligations under the Credit Agreement are secured by a first priority, perfected lien on substantially all of our property and assets, including our equity interests in our subsidiaries. Our subsidiary Chembio Diagnostic Systems Inc. has secured its guarantee of our Credit Agreement obligations with a lien on substantially all of its assets, and the Lender from time to time may require Chembio Diagnostics Malaysia Sdn Bhd. and any of our other subsidiaries that has guaranteed our Credit Agreement obligations to do the same.
• Representations and Warranties; Financial and Other Covenants. In the Credit Agreement we made customary representations and warranties as well as customary affirmative and negative covenants, including covenants limiting additional indebtedness, liens, guaranties, mergers and acquisitions, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates, and fundamental changes. The Credit Agreement also contains financial covenants requiring that (i) we maintain aggregate unrestricted cash of not less than $3,000,000 at all times and (ii) we achieve specified minimum rolling four-quarter (“last twelve month”) total revenue amounts as of September 30, 2019 and the last day of each calendar quarter thereafter. The minimum total revenue amounts, which range from $32.0 million to $50.1 million, were developed for purposes of the Credit Agreement and do not reflect the internal estimates and plans used by our management and board of directors to understand and evaluate our operating performance, to establish budgets, and to establish operational goals for managing our business. We therefore do not believe that the covenant requirements provide useful information to investors or others in enhancing an understanding of our future prospects.
• Default Provisions. The Credit Agreement provides for customary events of default, including events of default based on non-payment of amounts due under the Credit Agreement, defaults on other debt, misrepresentations, covenant breaches, changes of control, insolvency, bankruptcy and the occurrence of a material adverse effect on the Company. Upon an event of default resulting from a voluntary or involuntary proceeding for bankruptcy, insolvency or receivership, the amounts outstanding under the Credit Agreement will become immediately due and payable and the Lender’s commitments will be automatically terminated. Upon the occurrence and continuation of any other event of default, the Lender may accelerate payment of all obligations and terminate the Lender’s commitments under the Credit Agreement. Upon an acceleration of payment following an event of default occurring prior to September 4, 2021, the amounts due and payable by us will include a prepayment premium on accelerated principal in the amount described under “—Optional Prepayment” above.
In connection with entering into the Credit Agreement, on September 3, 2019, we issued to the Lender a seven-year warrant, or the Warrant, to purchase up to 550,000 shares of our common stock at a per-share exercise price of $5.22. The Warrant is exercisable for cash or on a net, or “cashless,” basis, and the exercise price of the Warrant is subject to price-based, weighted-average antidilution adjustments for one year after issuance.
Equity and Equity-Related Securities. We did not raise additional capital from a public offering of Common Stock in 2019.
Research and Development Awards. We frequently seek research and development programs that may be awarded by government, non-governmental organization (“NGO”),organizations, and non-profit entities, including private foundations. Chembio currently has or has recently undertaken development programs that are competitively awarded
Since 2015 we have earned over $12.2 million of funding from agenciessome of the U.S. Federal Government includingworld’s leading health organizations, which has helped us accelerate the U.S. Departmentexpansion of Health and Human Services and U.S. Departmentour pipeline of Agriculture, as well as from FIND, theinfectious disease tests. Our collaborators have included Bill & Melinda Gates Foundation, and The Paul G. Allen Family Foundation.Foundation, FIOCRUZ and FIND, as well as U.S. government agencies such as CDC, BARDA and the U.S. Department of Agriculture. See “Item 1. Business—Products” above. During the year ended December 31, 2019, we recognized grant revenue totaling $1.4 million from government, non-governmental organizations, and non-profit entities.
Contractual Commitments
Working Capital.The following table summarizes the Company’s expectedsets forth selected working capital information:
| | | December 31, 2019 | |
| | | (in thousands) | |
| Cash and cash equivalents | | $ | 18,271 | |
| Accounts receivable, net | | | 3,661 | |
| Inventories, net | | | 9,598 | |
| Prepaid expenses and other current assets | | | 693 | |
| Total current assets | | | 32,223 | |
| Less: Total current liabilities | | | (6,442 | ) |
| Working capital | | $ | 25,781 | |
Our cash outflows resulting from financial contracts and commitments as ofcash equivalents at December 31, 2017, with amounts denominated2019 were unrestricted and held for working capital purposes. We currently intend to retain all available funds and any future earnings for use in foreign currencies translated using foreign currency rates asthe operation 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 business and do not anticipate paying any cash dividends. We have not entered into, and do not expect to enter into, investments for trading or speculative purposes. Our accounts receivable and inventory balances fluctuate from period to period, which affects our cash flow from operating leases.
2Represents salary payments payable underactivities. Fluctuations vary depending on cash collections, client mix, and the termstiming 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 numbershipment of days following notice byour products and the Company.
Cash Flows
As of December 31, 2017, we had cashour research and equivalents of $3.8 million and no outstanding debt except for a $0.1 million seller-financed note payable associated with automated manufacturing equipment.
| | | For the years ended | | | | | | | |
| | | December 31, 2017 | | | December 31, 2016 | | | | | | % Change | |
| | | | | | | | | | | | | |
| Net cash used in operating activities | | $ | (5,034,515 | ) | | $ | (6,704,734 | ) | | $ | 1,670,219 | | | | 24.9 | % |
| Net cash used in investing activities | | | (1,876,954 | ) | | | (668,706 | ) | | | (1,208,248 | ) | | | (180.7 | )% |
| Net cash provided by financing activities | | | 134,280 | | | | 12,550,973 | | | | (12,416,693 | ) | | | (98.9 | )% |
| Effect of exhange rate changes on cash | | | 13,027 | | | | - | | | | 13,027 | | | | 100.0 | % |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | $ | (6,764,162 | ) | | $ | 5,177,533 | | | $ | (11,941,695 | ) | | | (230.6 | )% |
The Company's cash as of December 31, 2017 decreased by $6.8 million vs. December 31, 2016, primarily due to net cash used in operating and investingdevelopment activities.
Uses of Funds
Cash Flow Used in Operating Activities. Our operations used in operating activities in 2017 was $5.1$9.1 million of cash during the year ended December 31, 2019, primarily due to the net loss adjusted for non-cash items of $4.9$10.6 million, and a $1.1$3.8 million increase in inventory, offset by a $1.3 million reductiondecrease in accounts receivable related to favorable collections.collections timing, and a $1.5 million increase in inventory related to supply chain timelines.
Cash usedAcquisition. In November 2019, we acquired all of the equity interests of Orangelife for a purchase price net of cash acquired of $100,000 in investing activities during 2017 relatedcash, and 153,707 common shares, with an additional 316,456 common shares that would be deliverable as an earnout, based on the achievement of certain milestones between 2020 and 2022.
Capital Expenditures. During the year ended December 31, 2019, we advanced our plan to the acquisition of RVR Diagnostics and the purchase ofinvest in automated manufacturing equipment, facilities, and other fixed assets. Our capital expenditures totaled $3.5 million in 2019.
During 2016,Effects of Inflation
Inflation and changing prices have not had a material effect on our business, and we do not expect that they will materially affect our business in the Company completed an underwritten registered public offering, whereas no such offering occurred during 2017. Please seeforeseeable future. Any impact of inflation on cost of revenue and operating expenses, especially employee compensation costs, may not be readily recoverable in the “Recent Developments” section, below, for further information regarding the Company’s February 2018 underwritten registered public offering.price of our product offerings.
Off-Balance Sheet Arrangements
The Company doesWe do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
Recent Developments
As described in Note 16 – Subsequent Event to the audited consolidated financial statements included herein, on February 13, 2018, the Company consummated an underwritten registered public offering of 1,783,760 shares of its common stock at a public offering price of $6.75 per share for gross proceeds of approximately $12.0 million. The net proceeds, after underwriting discounts and commissions, and estimated expenses, are approximately $11.0 million.1934.
Significant 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. |
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 following listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any viable alternative would not produce a materially different result.
Revenue Recognition
We recognize revenue for product sales in accordance with FASB ASC 605. 606, Revenue isfrom Contracts with Customers. Revenues from product sales are recognized when therethe customer obtains control of our product, which occurs at a point in time, typically upon tendering to the customer. We expense incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that it would have recognized is persuasive evidenceone year or less or the amount is immaterial. Freight and distribution activities on products are performed after the customer obtains control of the goods. We have made an arrangement, delivery has occurredaccounting policy election to account for shipping and handling activities that occur either when or services have been rendered,after goods are tendered to the customer as a fulfillment activity, and therefore recognizes freight and distribution expenses in Cost of Product Sales. The Company excludes certain taxes from the transaction price (e.g., sales, price is determinable,value added and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.some excise taxes).
For certain contracts, we recognize revenue from R&D,research and development, milestone and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned. For certain collaborative research projects, we recognize revenue by defining milestones at the inception of the agreement and applying the milestone method ofjudgement and estimates in recognizing revenue recognition for relevant contracts.
Stock-Based Compensation
We recognize the fair value of equity-based awards as compensation expense in our consolidated statement of operations. The fair value of restricted stock and restricted stock unit awards are their fair value on the date of grant. The fair value of our stock option awards was estimated using a Black-Scholes option valuation model. This valuation model’s computations incorporate highly subjective assumptions, such as the expected stock price volatility and the estimated life of each award. The fair value of the options,equity-based awards, after considering the effect of expected forfeitures, is then amortized, generally on a straight-line basis, over the related vesting period of the option.
Research &and Development Costs
Research and development activities consist primarily of new product development, continuing engineering for existing products, and regulatory and clinical trial costs. Costs related to research and development efforts on existing or potential products are expensedexpensed/accrued as incurred.
Inventories
Inventories are stated at the lower of cost or market,and net realizable value, using the first-in, first-out method, (FIFO)or FIFO, to determine cost. Our policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a reserve for any inventory considered slow moving or obsolete. For example, each additional 1% of obsolete inventory would reduce such inventory by approximately $44,000.$95,980.
Accounts Receivable
Our policy is to review our accounts receivable on a periodic basis, no less frequently than monthly. On a quarterly basis an analysis is made of the adequacy of our allowance for doubtful accounts and adjustments are made accordingly. The current allowance is approximately 2%0.6% of accounts receivable. For example, each additional 1% of accounts receivable that becomes uncollectible would reduce such balance of accounts receivable by approximately $21,000.$36,613.
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.component. The fair value of the contingent consideration is estimated as of the date of the acquisition and is recorded as part of the purchase price. This estimate is updated in future periods and any changes in the estimate, which are not considered an adjustment to the purchase price, are recorded in our consolidated statements of operations.
We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets and any other significant assets or liabilities. We may adjust the preliminary purchase price allocation, asif necessary, up to one year after the acquisition closing date asif we obtain more information regarding asset valuations and liabilities assumed.assumed that materially differs from the information available during the time of close.
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 performsWe perform the goodwill impairment review at the reporting unit level. We perform a qualitative assessment of whether it is more likely than not that a reporting unit'sunit’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, our financial performance, of the Company, reporting unit specific events and changes in the Company'sour 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 FASB ASC 740, Income Taxes, authoritative guidance, (“Guidance”),which we refer to as the Guidance and which requires the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
The Guidance also requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’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 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.
Recently Issued Accounting Pronouncements
Refer to Note 3 – Significant Accounting Policies to the audited consolidated financial statements included herein for a complete description of recent accounting standards which we have not yet been required to implement which may be applicable to our operations. Additionally, the significant accounting standards that have been adopted during the year ended December 31, 20172019 are described.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.50
We are exposed to market risks from changes in currency exchange rates and certain commodity prices. All sales from our U.S. subsidiary, regardless of the customer location, are denominated in U.S. dollars. Sales denominated in foreign currencies are associated with a portion of the sales from our subsidiary Chembio Diagnostics Malaysia and comprised approximately 6.1% of our total net revenues for the year ended December 31, 2017.
ITEM 8. | ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Consolidated Financial Statements and schedules that constitute Item 8 are attached at the end of this Annual Report on Form 10-K.report. An index to thesethe Consolidated Financial Statements and schedules is also included on page F-1 of this Annual Report on Form 10-K.report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
| ITEM 9A. | Controls and Procedures |
ITEM 9A. CONTROLS AND PROCEDURES(a)Evaluation of Disclosure Controls and Procedures. Under the supervision andProcedures
Our management, with the participation of our senior management, consisting of our chief executive officerInterim Chief Executive Officer and our chief financial officer, we conducted an evaluation ofChief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, (asas defined by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2019. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019 at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(e)13a-15(f) and 15d-15(e)15d-15(f) promulgated under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)), as of the end of the period covereda process designed by, this report (the "Evaluation Date"). Based on that evaluation, the Company’s management, including our chief executive officer and chief financial officer, concluded that as of the Evaluation Date our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our Exchange Act reports is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Our internal control over financial reporting is a process,or under the supervision of, our chief executive officerChief Executive Officer and chief financial officer, designedChief Financial Officer and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. These internal controls over financial reporting processes includeand includes those policies and procedures that:
a. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
b. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
c. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company has designed its internal control over financial reporting to provide reasonable assurance on the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) company;
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 Companycompany are being made only in accordance with authorizations of management and directors of the Company;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, projectionsAs a result, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including theInterim Chief Executive Officer (CEO) and the Chief Financial Officer, (CFO), we conducted an evaluation ofour management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017, based on2019. In making their assessment of internal control over financial reporting, our management used the framework and criteria described in the 2013 Internal Control – Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission. Our evaluation included documenting, evaluating and testing of the design and operating effectiveness of our internal control over financial reporting. Based on management’sthis evaluation, and those criteria, the CEO and CFOwe concluded that its systemour controls over financial reporting were effective as of December 31, 2019.
Previously Identified Material Weaknesses in Internal Control Over Financial Reporting
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting was effective as of December 31, 2017.
BDO USA, LLP, the Company's independent registered public accounting firm that audited the Company's consolidated financial statements includedidentified in this report, has issued an attestation report on the effectivenessmanagement’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Company'sSecurities Exchange Act of 1934 during the period covered by this Annual Report on Form 10-K that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, a copy of which appears on the following page.reporting.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Chembio Diagnostics, Inc.
Medford,Hauppauge, New York
Opinion on Internal Control over Financial Reporting
We have audited Chembio Diagnostics, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, 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, 20172019 and 2016,2018, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the threetwo years in the period ended December 31, 2017,2019, and the related notes and schedule and our report dated March 8, 201813, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
New York,Melville, NY
March 8, 201813, 2020
(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the Company’s last fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATIONNot 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. | 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.
3553
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
PART IV
ITEM 15.(a) See “Item 8. Financial Statements and Supplementary Data – Index to Consolidated Financial Statements” above.
EXHIBITS INDEX(b) Exhibits
NumberExhibit No. | | Description |
| 3.1 | | |
| 3.2 | | |
3.34.1 | | |
4.110.1(a)* | | |
4.210.1(b)* | | |
4.310.2(a)* | | |
4.410.2(b)* | | |
4.510.3* | | |
| 10.4* | | |
4.6 | | Form of Warrant under Rights Agreement (to be filed by amendment) |
10.1*10.5* | | |
10.2*10.6(a)* | | |
10.3*10.6(b)* | | |
| 10.7* | | |
10.4*10.8(a)* | | |
10.5*10.8(b)* | | |
10.6* | | |
10.7 | | |
10.810.9* | | |
10.9 | | |
| 10.10 | | |
10.1110.11(a) | | |
| 10.11(b) | | |
| 10.12 | | Amended And Restated Stock PurchaseLease Agreement, dated as of December 7, 2016, byFebruary 4, 2013, between Sherwood Corporate Center LLC and among Chembio Diagnostics, Inc., RVR Diagnostics Sdn Bhd, Avijit Roy and Magentiren Vajuram (14) with respect to 91-1A Colin Drive, Holbrook, New York, as amended on September 19, 2017 |
| 10.13 | | UnderwritingLease Agreement dated February 9, 2018, by5, 2019 between Myra Properties, LLC, as lessor, and betweenChembio Diagnostic Systems Inc., as lessee, with respect to 555 Wireless Boulevard, Hauppauge, New York. |
| 10.14† | | |
| 14.1 | | |
| 21.1 | | |
| 23.1 | | |
| 31.1 | | |
| 31.2 | | |
3232.1 | | |
| 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 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 aIndicates management contract or compensatory plan or arrangement which is requiredplan. |
| † | Certain exhibits and schedules have been omitted pursuant to be identified in this report.Item 601(a)(5) of Regulation S-K. We hereby undertake to furnish copies of the omitted exhibits and schedules upon request by the Securities and Exchange Commission, provided that we may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934 for the exhibits and schedules so furnished. |
ITEM 16. Form 10-K SummaryNone.
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 8, 201713, 2020 | By | /s/ John J. Sperzel/s/ Gail S. Page |
|
|
| John J. Sperzel IIIGail S. Page |
|
|
| President,Interim 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/ Gail S. Page | | | | |
| | | | |
/s/ John J. Sperzel | | Interim Chief Executive Officer President and Director | | March 8, 201713, 2020 |
John J. Sperzel III | | Member Of The Board | | |
| Gail S. Page | | (Principal Executive Officer) | | |
| | | | |
| | | | |
| | | | | |
| /s/ Neil A. Goldman | | Executive Vice President &and Chief Financial Officer | | March 8, 201713, 2020 |
| Neil A. Goldman | | (Principal Financial & Accounting Officer) | | |
| | | | | |
| | | | |
| | | | |
| /s/ Katherine L. Davis | | Director & Chair of the Board | | March 8, 201713, 2020 |
| Katherine L. Davis | | | | |
| | | | | |
| /s/ Mary Lake Polan | | Director | | March 13, 2020 |
| Mary Lake Polan | | | | |
| | | | | |
/s/ Peter T. KissingerJohn G. Potthoff | | Director | | March 8, 201713, 2020 |
Peter T. Kissinger | | | | |
| | | | |
| | | | |
| | | | |
/s/ Gail S. Page | | Director | | March 8, 2017 |
Gail S. Page | | | | |
| | | | |
| John G. Potthoff | | | | |
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
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, 20172019 and 20162018 | F-2 |
|
|
|
| Statements of Operations for each of the years ended December 31, 2017, 20162019 and 20152018 | F-3 |
|
|
|
| Statements of Comprehensive Loss for each of the years ended December 31, 2017, 20162019 and 20152018 | F-4 |
|
|
|
| Statements of Changes in Stockholders’ Equity for each of the years ended December 31, 2017, 20162019 and 20152018 | F-5 |
|
|
|
| Statements of Cash Flows for each of the years ended December 31, 2017, 20162019 and 20152018 | F-6 |
|
|
|
| Notes to Consolidated Financial Statements | F-7 - F-17 |
| |
Schedule II - Valuation and Qualifying Accounts | F-18F-30 |
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Chembio Diagnostics, Inc.
Medford,Hauppauge, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Chembio Diagnostics, Inc. (the “Company”) and subsidiaries as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the three years in the periodthen ended, December 31, 2017, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 20172019 and 2016,2018, and the results of their operations and their cash flows for each of the threetwo years in the period ended December 31, 2017,2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company'sCompany’s internal control over financial reporting as of December 31, 2017,2019, 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, 201813, 2020 expressed an unqualified opinion thereon.
Change in Accounting Principle
On January 1, 2019, the Company changed its method of accounting for leases due to the adoption of Accounting Standards Codification Topic 842, Leases. The effects of the adoption are described in Note 3 to the consolidated financial statements.
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, 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 regarding the amounts and disclosures in the consolidated financial statements. 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. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company'sCompany’s auditor since 2011.
New York,Melville, NY
March 8, 201813, 2020
F-1
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF
- ASSETS -
| | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2019 | | December 31, 2018 | |
| - ASSETS - | | | | | | |
| CURRENT ASSETS: | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 3,790,302 | | | $ | 10,554,464 | | | $ | 18,271,352 | | | $ | 12,524,551 | |
| 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 | | |
| Accounts receivable, net of allowance for doubtful accounts of $62,000 and $42,000 at December 31, 2019 and 2018, respectively | | | | 3,661,325 | | | | 7,373,971 | |
| Inventories, net | | | 4,423,618 | | | | 3,335,188 | | | | 9,598,030 | | | | 7,851,222 | |
| Prepaid expenses and other current assets | | | 554,383 | | | | 840,145 | | | | 693,013 | | | | 702,010 | |
| TOTAL CURRENT ASSETS | | | 10,853,643 | | | | 18,113,526 | | | | 32,223,720 | | | | 28,451,754 | |
| | | | | | | | | | | | | | | | | |
FIXED ASSETS, net of accumulated depreciation | | | 1,909,232 | | | | 1,709,321 | | |
| FIXED ASSETS: | | | | | | | | | |
| Property, plant and equipment, net | | | | 5,933,569 | | | | 2,873,920 | |
| Finance lease right-of-use assets, net | | | | 210,350 | | | | – | |
| | | | | | | | | | | | | | | | | |
| OTHER ASSETS: | | | | | | | | | | | | | | | | |
| Operating right-of-use assets, net | | | | 7,030,744 | | | | – | |
| Intangible assets, net | | | 1,597,377 | | | | - | | | | 3,914,352 | | | | 3,884,831 | |
| Goodwill | | | 1,666,610 | | | | - | | | | 5,872,690 | | | | 4,983,127 | |
| Deposits and other assets | | | 589,159 | | | | 752,389 | | | | 543,539 | | | | 717,551 | |
| | | | | | | | | | | | | | | | | |
| TOTAL ASSETS | | $ | 16,616,021 | | | $ | 20,575,236 | | | $ | 55,728,964 | | | $ | 40,911,183 | |
| | | | | | | | | | | |
| - LIABILITIES AND STOCKHOLDERS’ EQUITY - | - LIABILITIES AND STOCKHOLDERS’ EQUITY - | | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 3,046,303 | | | $ | 3,013,133 | | | $ | 5,526,243 | | | $ | 5,888,681 | |
| Deferred revenue | | | 50,000 | | | | 392,517 | | | | 125,000 | | | | 422,905 | |
| Note payable | | | | 180,249 | | | | 207,694 | |
| Finance lease liabilities | | | | 41,894 | | | | – | |
| Operating lease liabilities | | | | 568,294 | | | | – | |
| TOTAL CURRENT LIABILITIES | | | 3,096,303 | | | | 3,405,650 | | | | 6,441,680 | | | | 6,519,280 | |
| | | | | | | | | | | | | | | | | |
| OTHER LIABILITIES: | | | | | | | | | | | | | | | | |
| Long-term operating lease liabilities | | | | 6,969,603 | | | | – | |
| Long-term finance lease liabilities | | | | 171,953 | | | | – | |
| Note payable | | | 99,480 | | | | - | | | | – | | | | 171,821 | |
| Long-term debt net of debt discount and issuance costs | | | | 17,644,149 | | | | – | |
| Deferred tax liability | | | 341,042 | | | | - | | | | 466,326 | | | | 892,308 | |
| | | | | | | | | | | | | | | | | |
| TOTAL LIABILITIES | | | 3,536,825 | | | | 3,405,650 | | | | 31,693,711 | | | | 7,583,409 | |
| | | | | | | | | | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES (Note 13) | | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES (Note 12) | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 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 | | |
| Common stock - $.01 par value; 100,000,000 shares authorized, 17,733,617 and 17,166,459 shares issued and outstanding at December 31, 2019 and 2018, respectively | | | | 177,335 | | | | 171,664 | |
| Additional paid-in capital | | | 62,821,288 | | | | 60,721,783 | | | | 95,433,077 | | | | 90,953,788 | |
| Accumulated deficit | | | (50,044,225 | ) | | | (43,672,465 | ) | | | (71,585,003 | ) | | | (57,909,874 | ) |
| Accumulated other comprehensive income | | | 178,948 | | | | - | | | | 9,844
|
| | | 112,196 | |
| TOTAL STOCKHOLDERS’ EQUITY | | | 13,079,196 | | | | 17,169,586 | | | | 24,035,253 | | | | 33,327,774 | |
| | | | | | | | | | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 16,616,021 | | | $ | 20,575,236 | | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | | $ | 55,728,964 | | | $ | 40,911,183 | |
See accompanying notes to consolidated financial statements
F-2
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | For the years ended | | | For the years ended | |
| | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2019 | | December 31, 2018 | |
| REVENUES: | | | | | | | | | | | | | | |
| Net product sales | | $ | 19,322,302 | | | $ | 13,680,107 | | | $ | 21,886,688 | | | $ | 28,844,997 | | | $ | 27,913,209 | |
| R&D and grant revenue | | | | 4,680,282 | | | | 5,719,458 | |
| License and royalty revenue | | | 741,534 | | | | 449,685 | | | | 52,753 | | | | 938,753 | | | | 948,773 | |
| 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 | | | | 34,464,032 | | | | 34,581,440 | |
| | | | | | | | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | |
| Cost of product sales | | | 12,921,157 | | | | 9,417,505 | | | | 13,768,658 | | | | 22,394,317 | | | | 22,599,432 | |
| Research and development expenses | | | 8,555,381 | | | | 8,427,554 | | | | 6,377,839 | | | | 8,538,416 | | | | 8,526,256 | |
| Selling, general and administrative expenses | | | 9,021,439 | | | | 7,595,559 | | | | 7,663,035 | | | | 16,138,424 | | | | 11,100,775 | |
| Acquisition costs | | | | 721,465 | | | | 337,645 | |
| | | | 30,497,977 | | | | 25,440,618 | | | | 27,809,532 | | | | 47,792,622 | | | | 42,564,108 | |
| LOSS FROM OPERATIONS | | | (6,482,550 | ) | | | (7,571,777 | ) | | | (3,554,047 | ) | | | (13,328,590 | ) | | | (7,982,668 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | | | | | | |
| Other expense | | | - | | | | - | | | | (4,814 | ) | |
| Interest income | | | 25,430 | | | | 25,548 | | | | 2,412 | | |
| Interest expense | | | (2,945 | ) | | | - | | | | (836 | ) | |
| OTHER (EXPENSE) INCOME: | | | | | | | | | |
| Interest (expense) income, net | | | | (846,831 | ) | | | 49,498 | |
| | | | 22,485 | | | | 25,548 | | | | (3,238 | ) | | | | | | | | |
| LOSS BEFORE INCOME TAX BENEFIT | | | | (14,175,421 | ) | | | (7,933,170 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| 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 | ) | |
| Income tax benefit | | | | (500,292 | ) | | | (67,521 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| NET LOSS | | $ | (6,371,760 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) | | $ | (13,675,129 | ) | | $ | (7,865,649 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Basic loss per share | | $ | $ (0.52 | ) | | $ | (1.26 | ) | | $ | (0.25 | ) | | $ | (0.81 | ) | | $ | (0.54 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted loss per share | | $ | $ (0.52 | ) | | $ | (1.26 | ) | | $ | (0.25 | ) | | $ | (0.81 | ) | | $ | (0.54 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares outstanding, basic | | | 12,300,031 | | | | 10,622,331 | | | | 9,626,028 | | | | 16,954,142 | | | | 14,432,505 | |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares outstanding, diluted | | | 12,300,031 | | | | 10,622,331 | | | | 9,626,028 | | | | 16,954,142 | | | | 14,432,505 | |
See accompanying notes to consolidated financial statements
F-3
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| | | For the years ended | |
| | | December 31, 2019 | | | December 31, 2018 | |
| | | | | | | |
| Net loss | | $ | (13,675,129 | ) | | $ | (7,865,649 | ) |
| Other comprehensive loss: | | | | | | | | |
| Foreign currency translation adjustments | | | (102,352 | ) | | | (66,752 | ) |
| COMPREHENSIVE LOSS | | $ | (13,777,481 | ) | | $ | (7,932,401 | ) |
| | | 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, 20162019, AND 20152018
| | | Common Stock | | | Additional
Paid-in-Capital | | | Accumulated Deficit | | | AOCI | | | Total | |
| Common Stock |
| | Additional Paid-in-Capital Amount |
|
| Accumulated Deficit Amount |
| | AOCI Amount |
|
| Total Amount | |
| | | Shares | | | Amount | | | Amount | | | Amount | | | Amount | | | Amount | | Shares | | | Amount |
| Balance at December 31, 2014 | | | 9,611,139 | | | $ | 96,112 | | | $ | 47,556,426 | | | $ | (27,928,376 | ) | | $ | - | | | $ | 19,724,162 | | |
| Balance at December 31, 2017 | | | 12,318,570 | | | $ | 123,185 | | | $ | 62,821,288 | | | $ | (50,044,225 | ) | | $ | 178,948 | | | $ | 13,079,196 | |
| | | | | | | | | | | | | | | | | | | | |
| Common Stock: | | | | | | | | | | | | | | | | | | | |
| New stock from offerings | | | 4,509,760 | | | 45,098 | | | 27,431,162 | | | – | | | – | | | 27,476,260 | |
| Restricted stock issued | | | 266,839 | | | 2,668 | | | (2,668 | ) | | – | | | – | | | – | |
| Restricted stock compensation | | | – | | | – | | | 281,249 | | | – | | | – | | | 281,249 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercised | | | 17,109 | | | | 170 | | | | (170 | ) | | | - | | | | - | | | | - | | | 71,290 | | | 713 | | | 71,201 | | | – | | | – | | | 71,914 | |
| Stock option compensation | | | - | | | | - | | | | 334,386 | | | | - | | | | - | | | | 334,386 | | | – | | | – | | | 351,556 | | | – | | | – | | | 351,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss | | | – | | | – | | | – | | | – | | | (66,752 | ) | | (66,752 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | (2,397,042 | ) | | | - | | | | (2,397,042 | ) | | | – | | | | – | | | | – | | | | (7,865,649 | ) | | | – | | | | (7,865,649 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2015 | | | 9,628,248 | | | $ | 96,282 | | | $ | 47,890,642 | | | $ | (30,325,418 | ) | | $ | - | | | $ | 17,661,506 | | |
| Balance at December 31, 2018 | | | 17,166,459 | | | $ | 171,664 | | | $ | 90,953,788 | | | $ | (57,909,874 | ) | | $ | 112,196 | | | $ | 33,327,774 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| New stock from offering | | | 2,300,000 | | | | 23,000 | | | | 12,470,398 | | | | - | | | | - | | | | 12,493,398 | | |
| Restricted stock issued | | | 381,908 | | | 3,819 | | | (128,081 | ) | | – | | | – | | | (124,262 | ) |
| Restricted stock compensation | | | – | | | – | | | 1,394,812 | | | – | | | – | | | 1,394,812 | |
| Issuance of common stock for business acquired | | | 153,707 | | | 1,537 | | | 441,754 | | | – | | | – | | | 443,291 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercised | | | 98,599 | | | | 986 | | | | 56,589 | | | | - | | | | - | | | | 57,575 | | | 31,543 | | | 315 | | | 32,171 | | | – | | | – | | | 32,486 | |
| Stock option compensation | | | - | | | | - | | | | 304,154 | | | | - | | | | - | | | | 304,154 | | | – | | | – | | | 261,088 | | | – | | | – | | | 261,088 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (13,347,047 | ) | | | - | | | | (13,347,047 | ) | |
| Warrants and Other: | | | | | | | | | | | | | | | | | | | |
| Warrant on Term Debt | | | – | | | – | | | 1,196,093 | | | – | | | – | | | 1,196,093 | |
| Contingent Earnout for business acquired | | | – | | | – | | | 1,281,452 | | | – | | | – | | | 1,281,452 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | |
| Comprehensive loss | | | – | | | – | | | – | | | – | | | (102,352 | ) | | (102,352 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (6,371,760 | ) | | | - | | | | (6,371,760 | ) | | | – | | | | – | | | | – | | | | (13,675,129 | ) | | | – | | | | (13,675,129 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2017 | | | 12,318,570 | | | $ | 123,185 | | | $ | 62,821,288 | | | $ | (50,044,225 | ) | | $ | 178,948 | | | $ | 13,079,196 | | |
| Balance at December 31, 2019 | | | | 17,733,617 | | | $ | 177,335 | | | $ | 95,433,077 | | | $ | (71,585,003 | ) | | $ | 9,844 |
| | $ | 24,035,253 | |
See accompanying notes to consolidated financial statements
F-5
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
| | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2019 | | December 31, 2018 | |
| | | | | | | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | |
| Cash received from customers and grants | | $ | 24,971,299 | | | $ | 16,947,194 | | | $ | 30,174,083 | | | $ | 37,930,172 | | | $ | 29,804,273 | |
| Cash paid to suppliers and employees | | | (30,028,299 | ) | | | (23,677,476 | ) | | | (28,382,681 | ) | | | (45,655,562 | ) | | | (41,624,299 | ) |
| 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 paid for operating and finance leases | | | | (640,844 | ) | | | – | |
| Interest and taxes, net | | | | (689,272 | ) | | | 38,585 | |
| Net cash used in operating activities | | | | (9,055,506 | ) | | | (11,781,441 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
| Acquisition of license | | | - | | | | - | | | | (550,000 | ) | |
| Purchase of RVR Diagnostics Sdn Bhd | | | (850,000 | ) | | | (550,000 | ) | | | - | | |
| Purchase of businesses, net of cash acquired | | | | (100,000 | ) | | | (5,491,204 | ) |
| Acquisition of and deposits on fixed assets | | | (1,026,954 | ) | | | (118,706 | ) | | | (480,585 | ) | | | (3,502,540 | ) | | | (1,467,192 | ) |
| Patent Application Costs | | | | (297,006 | ) | | | – | |
| Working capital adjustments related to business combination | | | | 145,760 | | | | – | |
| Net cash used in investing activities | | | (1,876,954 | ) | | | (668,706 | ) | | | (1,030,585 | ) | | | (3,753,786 | ) | | | (6,958,396 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| 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 option exercises | | | | 32,486 | | | | 71,914 | |
| Principal payments for finance leases | | | | (19,875 | ) | | | – | |
| Payments on debt issuance costs | | | | (186,313 | ) | | | – | |
| Payments on note payable | | | | (181,822 | ) | | | (64,481 | ) |
| Proceeds from issuance of long-term debt, net | | | | 18,850,000 | | | | – | |
| Proceeds from sale of common stock, net | | | - | | | | 12,493,398 | | | | - | | | | – | | | | 27,476,260 | |
| Net cash provided by financing activities | | | 134,280 | | | | 12,550,973 | | | | - | | | | 18,494,476 | | | | 27,483,693 | |
| | | | | | | | | | | | | | | | | | | | | |
| Effect of exchange rate changes on cash | | | 13,027 | | | | - | | | | - | | | | 61,617 | | | | (9,607 | ) |
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (6,764,162 | ) | | | 5,177,533 | | | | 762,393 | | |
| INCREASE IN CASH AND CASH EQUIVALENTS | | | | 5,746,801 | | | | 8,734,249 | |
| Cash and cash equivalents - beginning of the period | | | 10,554,464 | | | | 5,376,931 | | | | 4,614,538 | | | | 12,524,551 | | | | 3,790,302 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents - end of the period | | $ | 3,790,302 | | | $ | 10,554,464 | | | $ | 5,376,931 | | | $ | 18,271,352 | | | $ | 12,524,551 | |
| | | | | | | | | | | | | | | | | | | | | |
| RECONCILIATION OF NET LOSS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES: | | | | | | | | | | | | | |
| RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net Loss | | $ | (6,371,760 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) | | $ | (13,675,129 | ) | | $ | (7,865,649 | ) |
| Adjustments: | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 1,276,963 | | | | 1,139,228 | | | | 1,372,563 | | | | 1,916,194 | | | | 902,505 | |
| 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 | | | | 1,655,900 | | | | 632,805 | |
| Changes in assets and liabilities: | | | | | | | | | | | | | |
| Benefit from deferred tax liability | | | | (513,715 | ) | | | (78,432 | ) |
| Provision for doubtful accounts | | | | 20,000 | | | | – | |
| Changes in assets and liabilities, net of effects from acquisitions: | | | | | | | | | |
| Accounts receivable | | | 1,298,389 | | | | (960,758 | ) | | | 5,915,918 | | | | 3,764,045 | | | | (5,150,072 | ) |
| Inventories | | | (1,088,430 | ) | | | 242,837 | | | | 60,274 | | | | (1,457,612 | ) | | | (3,077,104 | ) |
| Prepaid expenses and other current assets | | | 285,762 | | | | (136,258 | ) | | | (190,960 | ) | | | 64,355 | | | | (118,293 | ) |
| Deposits and other assets | | | (512,272 | ) | | | 1,480 | | | | - | | | | (90,624 | ) | | | – | |
| Accounts payable and accrued liabilities | | | 182,453 | | | | 211,701 | | | | (2,144,598 | ) | | | (441,015 | ) | | | 2,599,894 | |
| Deferred revenue | | | (342,517 | ) | | | 39,111 | | | | 13,406 | | | | (297,905 | ) | | | 372,905 | |
| Net cash (used in) provided by operating activities | | $ | (5,034,515 | ) | | $ | (6,704,734 | ) | | $ | 1,792,978 | | |
| Net cash used in operating activities | | | $ | (9,055,506 | ) | | $ | (11,781,441 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Supplemental disclosures for non-cash investing and financing activities: | | | | | | | | | | | | | | | | | | | | |
| Deposits on manufacturing equipment transferred to fixed assets | | $ | 174,399 | | | $ | - | | | $ | 20,017 | | | $ | 430,000 | | | $ | 257,455 | |
| Accrual of contingent earn-out | | | 148,000 | | | | - | | | | - | | |
| Deposits and other assets transferred to intangible assets | | | | – | | | | 118,899 | |
| Seller-financed equipment purchases | | | | – | | | | 326,110 | |
| Issuance of common stock for net assets of business acquired | | | 1,682,725 | | | | - | | | | - | | | | 443,291 | | | | – | |
| Contingent liability earnout | | | | 1,225,000 | | | | – | |
See accompanying notes to consolidated financial statements
F-6
NOTE 1 — DESCRIPTION OF BUSINESS:
Chembio Diagnostics, Inc. and its subsidiaries (collectively, the “Company” or “Chembio”), develop, manufacture, and commercialize point-of-care (POC) diagnostic tests that are used to detect or monitorand diagnose diseases. The Company is pursuing three corporate priorities: (1) expand its commercialization, (2) advance its research and development pipeline, and (3) prepare for future growth.
All products that are currently being developed are based on the Company’s patented DPP® technology, a novel point-of-care diagnostic platform that offers certain customer advantages as compared to traditional lateral flow technology. 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.
OurThe Company’s product commercialization and product development efforts are focused in three areas: sexually transmittedon infectious disease tropical & fever disease,testing and technology collaborations. In sexually transmittedinfectious disease, we arethe Company is commercializing tests for HIV and Syphilis. In tropical and fever disease, we are commercializing a test forSyphilis, 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 arethe Company is developing tests for a specific form of cancer, concussion, bovine tuberculosis, and for an undisclosed biomarker, the lattera rare disease in collaboration with global biopharmaceutical companyTakeda Pharmaceutical, and a biomarker development project in collaboration with AstraZeneca.
Large and growing markets have been established for these kinds of tests, initially in high prevalence regions where they are indispensable for large scale prevention and treatment programs. Our product development is focused on areas where the availability of rapid, POC screening, diagnostic, or confirmatory results can improve health outcomes. More generally, we believethe Company believes there is and will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the point of care.
OurThe Company’s products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally, under ourthe Company’s STAT PAK®, SURE CHECK®, STAT-VIEW® or DPP® registered trademarks, or under the private labels of ourthe Company’s marketing partners.
The Company routinely enters into arrangements with governmental and non-governmental organizations for the funding of certain research and development efforts.
NOTE 2 — ACQUISITION:ACQUISITIONS:
Orangelife
On January 9, 2017,November 25, 2019, pursuant to a stockquote purchase agreement, (the "Stock Purchase Agreement), the Company acquired all of the outstanding common stockshares of RVR Diagnostics Sdn Bhd ("RVR")Orangelife Comercio e Industria Ltda., or Orangelife, a privately-held Malaysia based manufacturingBrazilian company, focused on assemblywhich is an original equipment manufacturer of point-of-care tests approved by the Brazilian Health Surveillance Agency (Agência Nacional de Vigilância Sanitária, or ANVISA) for infectious diseases that include HIV, Hepatitis C, Zika, Chikungunya, and sales of rapidDengue Fever. Orangelife tests are manufactured in its Rio de Janeiro facility, which is ISO-certified and approved by ANVISA to produce Class II/III/IV medical assays, for $3,231,000.devices. 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.purchase price includes the following consideration:
| · | $150,000 in cash and 153,707 shares of our common stock. |
| · | Issuance of 316,456 shares of our common stock to Dr. Manco Collovati, the founder and former CEO of Orangelife, based on the transfer and approval of certain of our product registration in Brazil prior to November 25, 2022. All of the shares may be deliverable in the event of change in control of our company. The number of shares issued is subjected to adjustments based upon Orangelife’s working capital at closing. The fair value of the shares on the date of the acquisition are recorded in equity.
|
The purchase consideration was: (i) a cash paymentis subject to routine post-closing adjustments. The acquisition 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 backOrangelife will allow us to satisfy certain potential claims under the Stock Purchase Agreement and became issuableexpand our commercial presence by offering our products to the sellersstate, private, and pharmacy markets in Brazil, in addition to providing local support to our long time customer Bio-Manguinhos, the subsidiary of the Oswaldo Cruz Foundation (Fiocruz) that oversees development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet the demands of Brazil’s national public health system. The results of Orangelife’s operations have been reflected in the consolidated financial statements since November 25, 2019.
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 one-year anniversaryclosing date of November 25, 2019:
| | | Amount | |
| Net current assets | | $ | 320,293 | |
| Property, plant and equipment and other assets | | | 226,035 | |
| Inventory | | | 289,205 | |
| Goodwill | | | 986,058 | |
| Deferred tax liability | | | (50,000 | ) |
| Other intangible assets (estimated useful life): | | | | |
| Trade name (0.5 years) | | | 5,000 | |
| Customer contracts / relationships (5 years) | | | 195,000 | |
| Total consideration | | $ | 1,971,591 | |
The Company calculated the fair value of the closing; and, a contingent $148,000 milestone paymentfixed assets based on the achievementnet book value of performance goals related to sales by CDM during the 12 months ended December 31, 2017.Orangelife as that approximates fair value. The performance goalstrade name, customer contracts/relationships and contingent earnouts 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.based on discounted cash flows using management estimates.
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$986,058 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. In addition, the Company recorded $1,800,000$200,000 in intangible assets associated with the addition of CDM’s intellectual property,Orangelife’s trade name and customer base and distribution channels, trade names, order backlog, industry reputation, and management talent and workforce.base. The Condensed Consolidated Statements of Operations for the year ended December 31, 20172019 include $25,000$325,853 of transaction costs related to the CDMOrangelife acquisition.
The following represents pro forma operating results for the year ended December 31, 2019 as if the operations of Orangelife had been included in the Company’s Consolidated Statements of Operations as of January 1, 2019. This pro forma financial information is unaudited and presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the acquisition of Orangelife and the other transactions contemplated by this acquisition had been completed as of January 1, 2019, nor is it necessarily indicative of the future operating results of Chembio Diagnostics and Orangelife on a combined and consolidated basis.
| | Unaudited Proforma December 31, 2019 | |
| Total revenues | | $ | 35,157,248 | |
| | | | | |
| Net loss | | $ | (13,654,001 | ) |
| | | | | |
| Net loss per common share | | $ | (0.80 | ) |
| | | | | |
| Diluted net loss per common share | | $ | (0.80 | ) |
opTricon
On November 6, 2018, pursuant to a share purchase agreement, the Company acquired all of the outstanding shares of opTricon GmbH (“opTricon”), a privately-held Germany based developer and manufacturer of handheld analyzers for rapid diagnostic tests, for $5.5 million in cash, subject to routine post-closing adjustments. Since 2015, the Company and opTricon have been parties to an agreement under which arethe Company has collaborated in developing its DPP Micro Reader, a handheld, battery-operated analyzer that uses an innovative image sensor to provide, when combined with the Company’s DPP tests, a quantitative interpretation of diagnostic results. The Company purchased opTricon because it believes it will enable it to promote DPP tests and DPP Micro Readers more actively across global markets. The results of opTricon operations have been reflected as Selling, generalin the consolidated financial statements since November 6, 2018.
As a result of the consideration paid exceeding the fair value of the net assets acquired, goodwill in the amount of $3,290,888 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. In addition, the Company recorded $2,260,000 in intangible assets associated with the addition of opTricon’s developed technology and administrative expenses.customer base. The Consolidated Statements of Operations for the year ended December 31, 2019 and 2018 includes $395,612 and $337,645 of transaction costs related to the opTricon acquisition, respectively.
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:November 6, 2018:
| | | | | | Amount | |
| | | Amount | | |
| Net current assets | | | $ | 404,204 | |
| Property, plant and equipment | | $ | 235,141 | | | | 125,000 | |
| Goodwill | | | 1,651,361 | | | | 3,383,112 | |
| Deferred tax liability | | | (307,636 | ) | | | (681,112 | ) |
| 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 | | |
| Developed technology (7 years) | | | | 1,900,000 | |
| Customer contracts / relationships (10 years) | | | | 360,000 | |
| Total consideration | | $ | 3,231,000 | | | $ | 5,491,204 | |
The Company calculated the fair value of the fixed assets based on the net book value of CDMopTricon as that approximates fair value. The intellectual property,developed technology and customer contracts and trade namescontracts/relationships 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, 20162018 as if the operations of CDMopTricon had been included in the Company’s Condensed Consolidated Statements of Operations as of January 1, 2016:2018:
| | | | Proforma | |
| | | Pro Forma | | | December 31, 2018 | |
| Total revenues | | $ | 19,151,653 | | | $ | 36,614,995 | |
| | | | | | | | |
| Net loss | | $ | (13,473,084 | ) | | $ | (8,394,074 | ) |
| | | | | | | | |
| Net loss per common share | | $ | (1.26 | ) | | $ | (0.58 | ) |
| | | | | | | | |
| Diluted net loss per common share | | $ | (1.26 | ) | | $ | (0.58 | ) |
The pro forma financial information includes business combination accounting effects from the acquisition including amortization charges from acquired intangible assets of opTricon approximately $398,000.$351,000 for the year ended December 31, 2018. The unaudited pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2016. CDM's2018. Included in the proforma table above are opTricon’s net revenues and pre-tax loss for the year ended December 31, 20172018 which were approximately $1,465,000$2,214,000 and ($406,000), $213,000, respectively. opTricon’s results of operations from the date of acquisition through December 31, 2018 are immaterial to the Company’s Consolidated Statements of Operations.
NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES:
| (a) | Principles of Consolidation: |
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries (Chembio Diagnostic Systems, Inc. and Chembio Diagnostics Malaysia Sdn Bhd).subsidiaries. All significant intercompany transactions and balances are 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 in the consolidated financial statements and accompanying notes. Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in certain areas. Generally, matters subject to estimation and judgment include accounts receivable realization, inventory obsolescence, asset impairments, recognition of revenue persuantpursuant to milestones, useful lives of intangible and fixed assets, stock-based compensation, and deferred tax 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 due to the immediate or short-term maturity of these financial instruments. Included in cash and cash equivalents is $16.0 million and $4.7 million as of December 31, 2019 and 2018, respectively, of money market funds that are Level 1 fair value measurements under the hierarchy. The fair value of the Company'sCompany’s notes payable approximates the recorded value as the rate is based upon the current rates offered to the Company for similar financial instruments.
Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories:
| Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| Level 2: | Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and |
| Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
| (d) | Cash and Cash Equivalents: |
Cash and cash equivalents are defined as short-term, highly liquid investments with original maturities of three months or less.
| (e) | Concentrations of Credit Risk: |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash instruments with well-known financial institutions and, at times, may maintain balances in excess of the FDIC insurance limit. The Company monitors the credit ratings of the financial institutions to mitigate this risk. Concentration of credit risk with respect to trade receivables is principally mitigated by the Company’s ability to obtain letters of credit from certain foreign customers and its diverse customer base, both in number of customers and geographic locations.
Inventories, consisting of material, labor and manufacturing overhead, are stated at the lower of cost orand net realizable value. Cost is determined on the first-in, first-out method. The Company’s policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a write-down for any inventory considered slow moving or obsolete.
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, which range from three to seven years. Leasehold improvements are amortized over the useful life of the asset or the lease term, whichever is shorter. Deposits paid for fixed assets are capitalized and not depreciated until the related asset is placed in service.
The Company records up-front payments related to sublicenselicense agreements as prepaids and amortizes them over their respective economic life. As of December 31, 20172019 and 2016,2018, total prepaids were $100,000 and $237,500,$100,000, respectively.
Amortization expenses for the licenses above for the years ended December 31, 2017, 20162019, and 20152018 were $137,500 $319,319,$0, and $442,557,$0, respectively.
F-8
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016, AND 2015
| (i) | Valuation of Long-Lived Assets and Intangible Assets: |
Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. No impairment of long-lived tangible and intangible assets was recorded for the years ended December 31, 20172019 and 2016.2018.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with customers, Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The intent of the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is for a company to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and in certain circumstances, allowing estimates of variable consideration to be recognized before contingencies are resolved. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.
The new revenue standards became effective for the Company on January 1, 2018 and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any material accounting changes that impacted the amount of reported revenues with respect to its product revenue, license and royalty revenue, and R&D, milestone and grant revenues, no adjustment to retained earnings was required upon adoption.
The Company adopted the standards to contracts that were not completed at the date of initial application (January 1, 2018).
Under the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company recognizes revenue forrevenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligation.
Product Revenues
Revenues from product sales are recognized and commissions are accrued when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon tendering to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial. Freight and distribution activities on products are performed after the customer obtains control of the goods. The Company has made an accounting policy election to account for shipping and handling activities that occur either when or after goods are tendered to the customer as a fulfillment activity, and therefore recognizes freight and distribution expenses in Cost of Product Sales. The Company excludes certain taxes from the transaction price (e.g., sales, value added and some excise taxes).
Our contracts with customers often include promises to transfer products or services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require judgment. Typical products sold are diagnostic tests and typical services performed are R&D feasibility studies. Revenues from sale of products are recognized point-in-time and revenues from R&D feasibility studies are recognized ratably, over the period of the agreement.
Judgement is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. SSP is directly observable and we can use a range of amounts to estimate SSP, as we sell products and services separately, and can determine whether there is a discount to be allocated based on the relative SSP of the various products and services, for the various geographies. The Company currently does not have agreements in which multiple performance obligations are sold combined.
The Company’s payment terms vary by the type and location of the Company’s customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 60 days from date of shipment or satisfaction of the performance obligation.
Reserves for Discounts and Allowances
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers. The Company’s process for estimating reserves established for these variable consideration components does not differ materially from its historical practices.
Product revenue reserves, which are classified as a reduction in product revenues, are generally related to discounts. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based on all information (historical, current and forecasted) that is reasonably available to the Company, taking into consideration the type of customer, the type of transaction and the specific facts and circumstances of each arrangement. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from the Company’s estimates. If actual results vary, the Company adjusts these estimates, which could have an effect on earnings in the period of adjustment.
Royalty Revenues
The Company receives royalty revenues on sales by its licensee of products covered under patents that it owns. The Company does not have future performance obligations under this license arrangement. The Company records these revenues based on estimates of the sales that occurred during the relevant period as a component of license and royalty revenues. The relevant period estimates of sales are based on interim data provided by the licensee and analysis of historical royalties that have been paid to the Company, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. Historically, adjustments have not been material when compared to actual amounts paid by licensee.
R&D and grant revenue
All such contracts are evaluated under the five-step model described above. For certain contracts that represent grants where the funder does not meet the definition of a customer, the Company recognizes revenue when earned in accordance with ASC 605, whereby958. Such contracts are further described under Disaggregation of Revenue, below. Grants are invoiced and revenue is recognized when thereratably as that is persuasive evidencethe depiction of the timing of the transfer of services. Performance obligation is the feasibility study which encompasses various phases of product development processes: design feasibility & planning, product development & design optimization, design verification, design validation & process validation, and pivotal studies.
In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This ASU clarifies the guidance presented in Topic 958, “Not-for-Profit Entities,” of the FASB’s Accounting Standards Codification (ASC) for evaluating whether a transaction is reciprocal (i.e., an arrangement, delivery has occurred,exchange transaction) or services have been rendered,nonreciprocal (i.e., a contribution) and for distinguishing between conditional and unconditional contributions. The ASU also clarifies the sales price is fixedguidance used by entities other than not-for-profits to identify and determinable,account for contributions made.
Disaggregation of Revenue
The following tables disaggregate Total Revenues for the year ended December 31, 2019, by type of transaction and collectability is reasonably assured. Revenue typicallyby geography:
| | | Exchange Transactions | | | Non-Exchange Transactions | | | Total | |
| Net product sales | | $ | 28,844,997 | | | $ | – | | | $ | 28,844,997 | |
| R&D, milestone and grant revenue | | | 3,321,031 | | | | 1,359,251 | | | | 4,680,282 | |
| License and royalty revenue | | | 938,753 | | | | – | | | | 938,753 | |
| | | $ | 33,104,781 | | | $ | 1,359,251 | | | $ | 34,464,032 | |
Exchange transactions are recognized in accordance with ASC 606, while non-exchange transactions are recognized in accordance with ASU No. 2018-08.
| | | Total | |
| Africa | | $ | 7,564,360 | |
| Asia | | | 888,800 | |
| Europe & Middle East | | | 6,498,995 | |
| Latin America | | | 11,808,768 | |
| United States | | | 7,703,109 | |
| | | $ | 34,464,032 | |
The following tables disaggregate Total Revenues for the year ended December 31, 2018, by type of transaction and by geography:
| | | Exchange Transactions | | | Non-Exchange Transactions | | | Total | |
| Net product sales | | $ | 27,913,209 | | | $ | – | | | $ | 27,913,209 | |
| R&D, milestone and grant revenue | | | 2,687,210 | | | | 3,032,248 | | | | 5,719,458 | |
| License and royalty revenue | | | 948,773 | | | | – | | | | 948,773 | |
| | | $ | 34,581,440 | | | $ | 3,032,248 | | | $ | 34,581,440 | |
Exchange transactions are recognized in accordance with ASC 606, while non-exchange transactions are recognized in accordance with ASU No. 2018-08.
| | | Total | |
| Africa | | $ | 8,838,632 | |
| Asia | | | 1,404,982 | |
| Europe & Middle East | | | 4,895,273 | |
| Latin America | | | 12,546,083 | |
| United States | | | 6,896,470 | |
| | | $ | 34,581,440 | |
Contract Liabilities
Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.
For certain contracts,as revenue as (or when) the Company recognizesperforms under the contract. At December 31, 2018, the Company reported $422,905 in deferred revenue from non-milestone contractsof which $422,905 was earned and recognized as R&D, milestone and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants fundedrevenue during the year ended December 31, 2019. At December 31, 2019, the Company reported $125,000 in advance are deferred until earned.
The Company followsrevenue which is expected to be recognized during the recognitionfirst quarter of revenue under the milestone method for certain collaborative research projects defining milestones at the inception of the agreement.2020.
In April 2017, the Company entered into a $1.0$1.1 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$0.2 million and $1.1 million for the year ended December 31, 2017,2019, and from inception through December 31, 2019, respectively as R&D, milestone and grant revenue in ourthe Company’s Consolidated Statements of Operations.
In August 2016, the Company was awarded a grant of $5.9 million from BARDA, which is part of the U.S. Department of Health And Human Resources to develop a rapid Zika virus assay. The Company earned $2.2$0.6 million and $2.7$5.9 million for the year ended December 31, 20172019 and from inception through December 31, 2017,2019, respectively, as R&D, milestone and grant revenue in ourthe Company’s Consolidated Statements of Operations.
In September 2016, the Company was awarded a $0.7 million contract from the USDA to develop a Bovid TB assay. The Company earned $0.4 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. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
| (l) | Stock-Based Compensation: |
The fair value of restricted stock and restricted stock unit awards are their fair value on the date of grant. Stock-based compensation expense for stock options is calculated using the Black-Scholes valuation model based on awards ultimately expected to vest together with the fair value of restricted stock and restricted stock unit awards, are, reduced for actual forfeitures, and, expensed on a straight-line basis over the requisite service period of the grant. During 2017,2018, the Company adopted ASU 2016-09, "Improvements“Improvements to Employee Share-Based Payment Accounting"Accounting”.
The Company accounts for income taxes under an asset and liability approach that 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 are 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 will reduce the net deferred tax assets by a valuation allowance. The realization of 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.
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period.period including outstanding restricted stock that by its terms is includible in the calculation. Diluted loss per share for the yearyears ended December 31, 2017, 20162019, and 20152018 reflects the potential dilution from the exercise or conversion of other securities into common stock, if dilutive.
There were 810,670, 600,549666,197, and 658,631732,906 options outstanding as of December 31, 2017, 20162019 and 2015,2018, 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 wethe Company paid over the fair value of the net tangible and identifiable intangible assets acquired in ourthe Company’s acquisition of CDMopTricon in November 2018, Chembio Diagnostics Malaysia in January 2017.2017 and Orangelife in November 2019. Goodwill is not amortized but rather is tested annually as of the first day of the fiscal fourth quarter, or sooner if we believethe Company believes that indicators of impairment exist. We makeThe Company makes a qualitative evaluation about the likelihood of goodwill impairment, which is based on a number of applicable factors. If we concludethe Company concludes that it is more likely than not that the carrying value of the applicable reporting unit is greater than its fair value, then weit 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 results2019 and 2018, there was no impairment of our goodwill impairment analysis did not result in any impairment.and other intangible assets.
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 | |
| Beginning balance January 1, 2019 | | $ | 4,983,127 | |
| Acquisition of Orangelife | | | 986,058 | |
| Chembio Diagnostics GmbH measurement period adjustment | | | (99,648 | ) |
| Changes in foreign currency exchange rate | | | 3,153
| |
| Balance at December 31, 2019 | | $ | 5,872,690 | |
In addition, the Company recorded certain intangibleIntangible assets as partconsist of the CDM acquisition which are as follows as of December 31, 2017:following at:
| |
| Weighted Average Remaining Life | |
| December 31, 2019 | | December 31, 2018 | |
| | Cost | | | Accumulated Amortization | | | Net Book Value | | Cost | | Accumulated Amortization | | Net Book Value | | Cost | | Accumulated Amortization | | Net Book Value | |
| Intellectual property | | $ | 886,872 | | | $ | 88,687 | | | $ | 798,185 | | | | 6 | | | $ | 1,418,681 | | | $ | 299,232 | | | $ | 1,119,449 | | | $ | 1,089,688 | | | $ | 173,633 | | | $ | 916,055 | |
| Developed technology | | | | 6 | | | | 1,922,682 | | | | 266,550 | | | | 1,656,132 | | | | 1,910,315 | | | | – | | | | 1,910,315 | |
| Customer contracts/relationships | | | 776,013 | | | | 77,601 | | | | 698,412 | | | | 7 | | | | 1,325,521 | | | | 270,902 | | | | 1,054,619 | | | | 1,121,600 | | | | 151,929 | | | | 969,671 | |
| Order backlog | | | 221,867 | | | | 221,867 | | | | - | | |
| Trade names | | | 110,859 | | | | 10,079 | | | | 100,780 | | | | 8 | | | | 114,946 | | | | 30,794 | | | | 84,152 | | | | 108,521 | | | | 19,731 | | | | 88,790 | |
| | | $ | 1,995,611 | | | $ | 398,234 | | | $ | 1,597,377 | | | | | | | $ | 4,781,830 | | | $ | 867,478 | | | $ | 3,914,352 | | | $ | 4,230,124 | | | $ | 345,293 | | | $ | 3,884,831 | |
Amortization expense for the year ended December 31, 20172019 and 2018 was $398,234.$515,263 and $233,734, respectively, and is recorded within COGS, R&D and Selling, General and Administrative expenses. Amortization expense, subject to changes in currency exchange rates, is expected to be approximately $590,000 per year from 2020 through 2024, and total $1 million for all of the years thereafter.
| (p) | Allowance for Doubtful Accounts: |
The Company records allowances for doubtful accounts for the estimated probable losses on uncollectible accounts receivable. The allowance is based upon the credit worthiness of the Company’s customers, the Company’s historical experience, the age of the receivable and current market and economic conditions. Receivables are written off against these allowances in the period they are determined to be uncollectible.
Acquisition costs include period expenses, primarily professional services, related to acquisition activities.
| (r) | Foreign Currency Translation: |
The functional currency of a foreign subsidiary is the local currency. Assets and liabilities of non-U.S.foreign subsidiaries that use a currency other than U.S. dollars as their functional currency are translated to U.S. dollars at end of period currency exchange rates. The consolidated statements of operations of non-U.S.foreign subsidiaries are translated to U.S. dollars at average period currency exchange rates. The effect of translation for non-U.Sforeign subsidiaries is generally reported in Otherother comprehensive income. Foreign transaction gains/losses are immaterial.
| (q)(s) | Recent Accounting Pronouncements Affecting the Company: |
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”)FASB issued convergedASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires the entity to recognize the assets and liabilities for the rights and obligations created by leased assets. Leases will be classified as either finance or operating, with classification affecting expense recognition in the income statement. In July 2018 the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provide supplemental adoption guidance on recognizing revenueand clarification to ASU 2016-02, and must be adopted concurrently with the adoption of ASU 2016-02, cumulatively referred to as “Topic 842”. Topic 842 was effective for the Company in contractsthe first quarter of 2019, with customers, ASU 2014-09, Revenue from Contracts with Customers. The intent ofearly adoption permitted, and was applied using either a modified retrospective approach, or an optional transition method which allows an entity to apply the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is for a company to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and in certain circumstances, allowing estimates of variable consideration to be recognized before contingencies are resolved. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2017.
Except for expanded disclosures to be included in our first interim financial statements for the fiscal year end 2018, we have completed our evaluation of the new standard and assessed the impact of adoption on our consolidated financial statements. We reviewed significant open contracts with customers for each revenue stream, and based on our evaluation, revenue recognition under the new standard will not have a material impact on the Company’s consolidated financial statements because: i) product sales 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 also assessed its control framework as a result of adopting the new standard and notes minimal, insignificant changes to its systems and other controls processes.
The new standard permits two adoption methods under ASU 2014-09. The guidance may be adopted through either retrospective application to all periods presented in the consolidated financial statements (full retrospective) or through a cumulative effect adjustment to retained earnings at the effectiveadoption 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 recordedwith a cumulative-effect adjustment to the opening balance of retained earnings to be immaterial.in the period of adoption.
The disclosures in our notes toAs further discussed on Note 12(c) – Leases, the consolidated financial statements related to revenue recognition will be expandedCompany adopted Topic 842 on January 1, 2019 under the optional transition method and elected the short-term lease exception and available practical expedients. Under the transition method, the Company did not adjust its comparative period financial information or make the new standard, specifically aroundrequired lease disclosures for periods before the quantitative and qualitative information about performance obligations, changes in contracteffective date. The impact of adoption of right-of-use assets and liabilities on January 1, 2019 was $0.8 million, and disaggregation of revenue. The Company expects to make these enhanced disclosures in its interim financial statements for the first quarter of 2018.
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.$0.8 million, respectively.
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 FASB issued authoritative guidance under ASU 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 provides for simplification of several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company adopted ASU 2016-09 on January 1, 2017. As the Company has a full valuation allowance against its U.S. net deferred tax assets, the adoption of this standard for recognition of the tax effect of deductions for employee share awards in excess of compensation costs (“windfall”) did not have a material impact on ourits 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 ourthe Company’s effective tax rate, depending on the Company’s share price at exercise or vesting of share-based awards as compared to grant date. The other provisions of ASU 2016-09 did not have a material impact on ourthe Company’s 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 annual reporting periods beginning after December 15, 2017.presentation. The Company adopted ASU 2016-15 in the first quarter of 2018. The guidance in ASU 2016-15 is generally consistent with ourthe Company’s current cash flow classifications, and we dodid not expect the adoption of this standard will have a material impact on ourthe Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. This 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 ourthe Company’s 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 willThe Company adopted ASU 2017-09 in the first quarter of 2018. Adoption did not have a material effect on the Company’s consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features and Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this ASU addresses the complexity of accounting for certain financial instruments with down round features. Per the ASU, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The ASU is effective for annual periods and interim periods inpublic entities for fiscal years beginning after December 15, 20172018 and the Company adopted it effective January 1, 2019. This ASU is applicable to the stock warrants issued as part of the Credit Agreement, as further discussed in Note 14 – Warrants.
In July 2018, the FASB issued ASU 2018-08Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made to clarify the accounting guidance related to contributions made or received. This guidance primarily affects not-for-profit entities, although it also applies to businesses to the extent that they make or receive contributions, including grants. ASU 2018-08 clarifies and improves the scope and accounting guidance for both contributions received and made in order to assist entities in evaluating if those transactions should be accounted for as contributions under the scope of Topic 958, or as an exchange transaction subject to other guidance. Public entities are required to apply the amendments on contributions received and contributions made to annual periods beginning after June 15, 2018, and December 15, 2018, respectively, each including interim periods within those annual periods. Early adoption is permitted, and the Company adopted ASU 2018-08 effective as of January 1, 2018. The impact of adoption was immaterial.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We do not expectUpon adoption, the adoption will haveCompany must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a material effectmodified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new standard on ourits consolidated financial statements.
In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for us beginning July 1, 2020, with early adoption permitted beginning July 1, 2019. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.
NOTE 4 — INVENTORIES:
Inventories consist of the following at:at December 31, 2019:
| | | December 31, 2017 | | | December 31, 2016 | |
| Raw materials | | $ | 1,767,684 | | | $ | 1,824,248 | |
| Work in process | | | 286,413 | | | | 535,320 | |
| Finished goods | | | 2,369,521 | | | | 975,620 | |
| | | $ | 4,423,618 | | | $ | 3,335,188 | |
| | | December 31 | |
| | | 2019 | | | 2018 | |
| Raw Materials | | $ | 2,901,319 | | | $ | 2,803,677 | |
| Work in Process | | | 793,343 | | | | 263,043 | |
| Finished Goods | | | 5,903,368 | | | | 4,784,502 | |
| | | $ | 9,598,030 | | | $ | 7,851,222 | |
NOTE 5 — FIXED ASSETS:
Fixed assets consist of the following at:
| | | December 31, 2017 | | | December 31, 2016 | |
| Machinery and equipment | | $ | 4,582,759 | | | $ | 3,962,051 | |
| Furniture and fixtures | | | 449,548 | | | | 437,962 | |
| Computer and telephone equipment | | | 422,946 | | | | 343,167 | |
| Leasehold improvements | | | 2,258,779 | | | | 2,012,945 | |
| | | | 7,714,032 | | | | 6,756,125 | |
| Less accumulated depreciation and amortization | | | (5,804,800 | ) | | | (5,046,804 | ) |
| | | $ | 1,909,232 | | | $ | 1,709,321 | |
There were no capital leases at the end of December 31, 2017. Fixed assets at December 31, 2017 also include $538,406 in equipment, that is undergoing validation and as such is not yet being depreciated. 2019:
| | | December 31 | |
| | | 2019 | | | 2018 | |
| Machinery and Equipment | | $ | 7,955,511 | | | $ | 6,070,137 | |
| Furniture and Fixtures | | | 21,477 | | | | 35,287 | |
| Computer Equipment | | | 416,359 | | | | 435,348 | |
| Leasehold Improvements | | | 3,038,469 | | | | 2,334,512 | |
| Enterprise Business Systems | | | 1,830,925 | | | | 462,420 | |
| Less: Accumulated Depreciation and Amortization | | | (7,329,173 | ) | | | (6,463,784 | ) |
| | | $ | 5,933,569 | | | $ | 2,873,920 | |
Depreciation expense for the 2017, 20162019 and 20152018 years aggregated $727,563, $782,711totaled $933,558 and $893,305,$634,261, respectively.
As of December 31, 20172019 and 2016,2018, the Company had paid deposits on various pieces ofhas purchased manufacturing equipment classified within Depositsthat is not yet in use and Other Assetstherefore has not been depreciated, aggregating $257,455$1,400,181 and $31,900,$428,859, respectively.
NOTE 6 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following at:at December 31, 2019:
| | | December 31, 2017 | | | December 31, 2016 | |
| Accounts payable – suppliers | | $ | 1,494,759 | | | $ | 1,437,290 | |
| Accrued commissions | | | 126,827 | | | | 221,982 | |
| Accrued royalties / license fees | | | 429,297 | | | | 352,660 | |
| Accrued payroll | | | 187,305 | | | | 167,575 | |
| Accrued vacation | | | 309,767 | | | | 289,587 | |
| Accrued bonuses | | | 282,500 | | | | 282,500 | |
| Accrued expenses - other | | | 215,848 | | | | 261,539 | |
| Total | | $ | 3,046,303 | | | $ | 3,013,133 | |
| | | December 31 | |
| | | 2019 | | | 2018 | |
| Accounts Payable - suppliers | | $ | 3,144,098 | | | $ | 3,622,765 | |
| Accrued Commissions & Royalties | | | 931,760 | | | | 867,344 | |
| Accrued Payroll | | | 231,753 | | | | 48,867 | |
| Accrued Vacation | | | 410,199 | | | | 264,789 | |
| Accrued Bonuses | | | 215,000 | | | | 494,318 | |
| Accrued Expenses - Other | | | 593,433 | | | | 590,598 | |
| | | $ | 5,526,243 | | | $ | 5,888,681 | |
NOTE 7 — 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. These projects are invoiced after expenses are incurred. Any projects or grants funded in advance are deferred until earned. As of December 31, 20172019 and 2016,2018, there were $50,000$125,000 and $392,517$422,905 unearned advanced revenues, respectively.
NOTE 8 — INCOME TAXES:
The components of (loss) before income taxes consisted of the following:
| | | Year Ending December 31, | |
| | | 2019 | | | 2018 | |
| United States operations | | $ | (12,504,780 | ) | | $ | (7,137,428 | ) |
| International operations | | | (1,670,641 | ) | | | (795,742 | ) |
| (Loss) before taxes | | $ | (14,175,421 | ) | | $ | (7,933,170 | ) |
The (benefit from) provision for income taxes for the years ended December 31, 2017, 2016,2019 and 20152018 is comprised of the following:
| | | | Year Ending December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | 2018 | |
| Current | | | | | | | | | | | | | | |
| Federal | | $ | (97,339 | ) | | $ | - | | | $ | - | | | $ | – | | | $ | – | |
| State | | | 9,034 | | | | - | | | | 10,726 | | | | 9,790 | | | | 10,911 | |
| Foreign | | | | 3,633 | | | | – | |
| Total current (benefit) provision | | | (88,305 | ) | | | - | | | | 10,726 | | | | 13,423 | | | | 10,911 | |
| | | | | | | | | | | | | | | | | | | | | |
| Deferred | | | | | | | | | | | | | | | | | | | | |
| Federal | | | - | | | | 5,778,185 | | | | (1,171,865 | ) | | | – | | | | – | |
| State | | | - | | | | 22,633 | | | | 896 | | | | – | | | | – | |
| Foreign | | | | (513,715 | ) | | | (78,435 | ) |
| Total deferred (benefit) provision | | | - | | | | 5,800,818 | | | | (1,170,969 | ) | | | (513,715 | ) | | | (78,435 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Total (benefit) provision | | $ | (88,305 | ) | | $ | 5,800,818 | | | $ | (1,160,243 | ) | | $ | (500,292 | ) | | $ | (67,521 | ) |
On December 22, 2017,A reconciliation of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changesFederal statutory rate to the Internal Revenue Code. Changes include, but are not limitedeffective rate applicable to a corporate tax rate decrease from 34% to 21% effectiveloss before income taxes is as follows:
| | | Year Ending December 31, | |
| | | 2019 | | | 2018 | |
| Federal income tax at statutory rates | | | 21.00 | % | | | 21.00 | % |
| State income taxes, net of federal benefit | | | (0.05 | )% | | | (0.10 | )% |
| Nondeductible expenses | | | (1.00 | )% | | | (1.58 | )% |
| Foreign rate differential | | | 0.45 | % | | | 0.36 | % |
| Change in valuation allowance | | | (17.51 | )% | | | (18.44 | )% |
| Other | | | 0.64 | % | | | (0.39 | )% |
| Income tax benefit | | | 3.53
| % | | | 0.85 | % |
In January 2018, the FASB released guidance on the accounting 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”) provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign subsidiaries, whichcorporations. The guidance allows companies to make an accounting policy election to either (1) account for the possibilityGILTI as a component 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 benefitexpense 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 expectedsubject to reversethe rules (the period cost method), or (ii) account for GILTI in the future resulted in a chargeCompany’s measurement of $3,906,774, which was fully offset by an equivalent adjustmentdeferred taxes (the deferred method). After completing the analysis of the GILTI provisions, the Company elected to account for GILTI using 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.period cost method.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the applicationF-20
The Company had an ownership change as described in Internal Revenue Code Sec. 382 during 2004 (“2004 change”). As a result, the Company’s net operating losses prior to the 2004 change of $5,832,516 were subject to an annual limitation of $150,608 and for the first five (5) years are entitled to a BIG (Built-In-Gains) of $488,207 per year. These net operating losses expire in 2020 through 2024.
The Company had a second ownership change during 2006 (“2006 change”). The net operating losses incurred between the 2004 change and the 2006 change of $8,586,861 were subject to an annual limitation of $1,111,831 and for the first five (5) years are entitled to a BIG of $1,756,842 per year. These net operating losses expire in 20202024 through 2026.
After applying the above limitations, at December 31, 2017,2019, the Company has post-change net operating loss carry-forwards of approximately $26,660,530$27,235,494 which expire between 20182020 and 2037.2037 and $16,242,683 which do not expire. In addition the Company has research and development tax credit carryforwards of approximately $1,461,351$1,679,495 for the year ended December 31, 2017,2019, which expire between 2020 and 2036.
The Company has state net operating loss carryforwards of approximately $1,912,798 which generally expire between 2035 and 2039. The Company has foreign net operating loss carryforwards of approximately $3,355,645 which generally expire between 2025 and 2037.
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 | | |
| | | | | | | | | 2019 | | 2018 | |
| Inventory reserves | | $ | 244,158 | | | $ | 253,380 | | | $ | 196,193 | | | $ | 204,206 | |
| Accrued expenses | | | 102,332 | | | | 53,140 | | | | 105,323 | | | | 175,168 | |
| Net operating loss carry-forwards | | | 5,800,144 | | | | 7,487,937 | | | | 10,079,317 | | | | 7,122,576 | |
| Research and development credit | | | 1,918,137 | | | | 1,461,351 | | | | 1,679,495 | | | | 1,696,870 | |
| Other credits | | | - | | | | 97,339 | | |
| Other | | | 167,522 | | | | 292,556 | | |
| Stock-based compensation | | | | 581,053 | | | | 215,797 | |
Lease obligations
| | | | 1,646,584
| | | | – | |
| Depreciation | | | 91,258 | | | | 31,285 | | | | 44,993 | | | | 139,362 | |
| Deferred tax assets | | | 8,323,551 | | | | 9,676,988 | | |
| Total deferred tax assets | | | | 14,332,958 | | | | 9,553,979 | |
| | | | | | | | | | | | | | | | | |
Right-of-use assets
| | | | (1,538,129
| )
| | | – | |
| Intangibles | | | (341,042 | ) | | | - | | | | (921,807 | ) | | | (968,849 | ) |
| Deferred tax liabilities | | | (341,042 | ) | | | - | | |
| Total deferred tax liabilities | | | | (2,459,936 | ) | | | (968,849 | ) |
| | | | | | | | | | | | | | | |
| |
| Net deferred tax assets before valuation allowance | | | 7,982,509 | | | | 9,676,988 | | | | 11,873,022 | | | | 8,585,130 | |
| Less valuation allowances | | | (8,323,551 | ) | | | (9,676,988 | ) | | | (12,339,348 | ) | | | (9,477,438 | ) |
| Net noncurrent deferred tax liabilities | | $ | (341,042 | ) | | $ | - | | | $ | (466,326 | ) | | $ | (892,308 | ) |
The components of (loss) beforeCompany does not provide for U.S. income taxes consistedon unremitted earnings of foreign subsidiaries as its present intention is to reinvest 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 reconciliationunremitted earnings in the Company’s foreign operations. At December 31, 2019 there were no unremitted earnings of the Federal statutory rate to the effective rate applicable to loss before income taxes is as follows:foreign subsidiaries.
| | | Year Ending December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Federal income tax at statutory rates | | | (34.00 | )% | | | (34.00 | )% | | | (34.00 | )% |
| State income taxes, net of federal benefit | | | 0.09 | % | | | 0.21 | % | | | 0.23 | % |
| Nondeductible expenses | | | 1.04 | % | | | 0.57 | % | | | 1.38 | % |
| Foreign rate differential | | | 2.14 | % | | | - | | | | - | |
| Change in valuation allowance | | | 99.41 | % | | | 114.81 | % | | | 9.46 | % |
| Impact of Tax Act on valuation allowance | | | (60.48 | )% | | | - | | | | - | |
| AMT refund under Tax Act | | | (1.51 | )% | | | - | | | | - | |
| Tax credits | | | (7.07 | )% | | | 0.00 | % | | | (9.46 | )% |
| Other | | | (0.99 | )% | | | 0.04 | % | | | 0.34 | % |
| Income tax (benefit) | | | (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, 2017,2019, the Company does not have a liability for uncertain tax positions.
The Company files Federal and state income tax returns. Taxreturns, Chembio Germany files in Germany, Chembio Brazil files in Brazil and Chembio Malaysia files in Malaysia and has been on tax holiday which expired on December 31, 2018. With few exceptions, tax years for fiscal 2014 2016 through 2016 2019 are open and potentially subject to examination by the federal, state and stateforeign taxing authorities.
NOTE 9 — STOCKHOLDERS’ EQUITY:
During 2019, options to purchase 54,343 shares of the Company’s common stock were exercised for 31,543 shares of common stock at exercise prices ranging from $3.48 to $4.35. During 2018, options to purchase 144,947 shares of the Company’s common stock were exercised for 71,290 shares of common stock at exercise prices ranging from $3.48 to $5.64 by surrendering options and shares of common stock already owned.
In August of 2016,November 2018, the Company closed on an underwritten public offering of 2,300,0002,726,000 shares of its common stock, including the underwriter’s exercise of its overallotment of 355,565 shares, at $6.00$6.75 per share. The net proceeds of the offering, after deducting the underwriters'underwriter’s discounts and other offering expenses payable by the Company, was approximately $12,493,000.$16.5 million.
During 2017, options to purchase 56,969In February 2018, the Company closed on an underwritten registered public offering of 1,783,760 shares of the Company’s common stock were exercised for 22,487 shares ofits common stock at exercise prices ranging from $3.48 to $4.45$6.75 per share. The net proceeds of the offering, after deducting the underwriter’s discounts and other offering expenses payable by surrendering options and shares of common stock already owned.the Company, was approximately $10.9 million.
During 2016, options to purchase 191,804 shares of the Company’s common stock were exercised for 98,599 shares of common stock at exercise prices ranging from $2.80 to $5.56 by paying cash or surrendering options already owned.
During 2015, options to purchase 41,141 shares of the Company’s common stock were exercised for 17,109 shares of common stock at exercise prices ranging from $2.16 to $3.60 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.
| (c) | Options, Restricted Stock, and Restricted Stock Units |
The Compensation Committee of the Board of Directors or its Compensation Committee may issuesissue options, persuantrestricted stock, and restricted stock units pursuant to employee stock optionincentive plans that have been approved by the Company'sCompany’s stockholders.
As of December 31, 2017 and 2016,2019, the Company had nohas 550,000 warrants outstanding to purchase shares of common stock.stock as further discussed in Note 14 – Warrants.
NOTE 10 — RIGHTS AGREEMENT:
In March 2010, the Company entered into a Rights Agreement (the "Rights Agreement") between the Company and Action Stock Transfer Corp., as Rights Agent. The Rights Agreement expired at the end of November 2015. Pursuant to the Rights Agreement, the Company declared a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of Common Stock, $0.01 par value (the "Common Stock"), of the Company. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2010, and the Rights were distributed to the Company’s shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable. The Rights were not exercisable until a Distribution Date. Until a Right was exercised, the holder thereof, as such, would have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights. The Rights were to be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) acquired a Combined Ownership (as defined in the Rights Agreement) of 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:EQUITY INCENTIVE PLANS:
Effective June 3, 2008, the Company’s stockholders voted to approve the 2008 Stock Incentive Plan (“SIP”), with 750,000625,000 shares of Common Stockcommon stock available to be issued. At the Annual Stockholder meetingMeeting on September 22, 2011 the Company’s stockholders voted to approve an increase to the shares of Common Stockcommon stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, which expired during 2018, the Board of Directors or its Compensation Committee of the Company’s Board hashad the discretion to select the persons to whom awards arewere to be granted. Awards cancould be stock options, restricted stock and/or restricted stock units.units (“Equity Award Units”). The awards becomebecame vested at such times and under such conditions as determined by the Board or its Compensation Committee. As ofCumulatively through December 31, 2017,2019, there were 480,1720 options exercised, 228,177and at December 31, 2019, 0 options were outstanding and 41,651 options stillno Equity Award Units were available to be issued under the SIP.
Effective June 19, 2014, the Company’s stockholders voted to approve the 2014 Stock Incentive Plan (“SIP14”), with 800,000 shares of Common Stockcommon stock available to be issued. Under the terms of the SIP14, the Board or its Compensation Committee of the Company’s Board has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/or restricted stock units.in the form of Equity Award Units. The awards become vested at such times and under such conditions as determined by the Board or its Compensation Committee. As ofCumulatively through December 31, 2017,2019, there were 22,00054,343 options exercised, 375,625and at December 31, 2019, 642,625 options were outstanding and 402,375 options148,667 Equity Award Units were still available to be issued under the SIP14.
Effective June 18, 2019, the Company’s stockholders voted to approve the 2019 Omnibus Incentive Plan (“2019 Plan”), with 2,400,000 shares of common stock available to be issued. In addition, shares of Common Stock underlying any outstanding award granted under the 2019 Plan that, following the effective date of the 2019 Plan, expires, or is terminated, surrendered or forfeited for any reason without issuance of such shares shall be available for the grant of new awards under the 2019 Plan. Under the terms of the 2019 Plan, the Board or its Compensation Committee has the discretion to select the persons to whom awards are to be granted. Awards can be in the form of options, stock appreciation rights, restricted stock, restricted stock unit, or other stock-based award under the 2019 Plan (collectively, 2019 Equity Units). The Company'sawards become vested at such times and under such conditions as determined by the Board or its Compensation Committee. Cumulatively through December 31, 2019, there were 375,000 2019 Equity Units awarded under the 2019 Plan, and 2,025,000 2019 Equity Units available to be awarded.
The Company’s results for the years ended December 31, 2017, 20162019 and 20152018 include stock-based compensation expense totaling $384,897, $304,100,$1,655,900 and $334,400$632,805, respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods soldproduct sales ($47,000, $-,10,806 and $-$25,615, respectively), research and development ($89,400, $89,200,228,597 and $62,700$78,831, respectively) and selling, general and administrative expenses ($248,497, $214,900,1,416,497 and $271,700$528,360, respectively).
Stock option compensation expense in the years ended December 31, 2017, 20162019 and 20152018 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 stock compensation expense were $261,088 and $351,556 in December 31, 2019 and 2018, respectively.
No stock options were issued during 2019. The weighted average estimated fair value of stock options granted in the years ended December 31, 2017 and 2016 were $2.77 and $2.75 per share, respectively. The Company did not grant any stock options during the year ended December 31, 2015.2018 was $3.76 per share. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of ourthe Company’s stock and other contributing factors. The expected term is based on the Company’s historical experience with similar type options.
The weighted-average assumptions made in calculating the fair values of options are as follows for the respective years ended:ended December 31:
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | | | 2019 | | | 2018 | |
| Expected term (in years) | | | 5.48 | | | | 4.71 | | | | n/a | | | n/a | | | 4.96 | |
| Expected volatility | | | 43.31 | % | | | 45.78 | % | | | n/a | | | n/a | | | 39.91 | % |
| Expected dividend yield | | | n/a | | | | n/a | | | | n/a | | | n/a | | | n/a | |
| Risk-free interest rate | | | 1.78 | % | | | 0.92 | % | | | n/a | | | n/a | | | 2.70 | % |
The Company granted 267,875 new options during the year ended December 31, 2017 to employees.
The following table provides stock optionsoption activity for the years ended December 31, 2017, 2016,2019 and 2015:2018:
| | | Number of Shares | | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | | | Number of Shares | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | |
| Outstanding at December 31, 2014 | | | 691,869 | | | | 3.66 | | 3.97 years | | $ | 334,636 | | |
| Outstanding at December 31, 2017 | | | | 810,670 | | | $ | 5.18 | | 3.69 years | | $ | 2,477,853 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Granted | | | - | | | | - | | | | | | | | | 93,750 | | | | 9.80 | | | | | | |
| Exercised | | | 41,141 | | | | 2.25 | | | | | 65,449 | | | | 144,947 | | | | 4.83 | | | | | 523,327 | |
| Forfeited/expired/cancelled | | | 1,250 | | | | 4.30 | | | | | | | | | 47,505 | | | | 8.82 | | | | | | |
| Outstanding at December 31, 2015 | | | 649,478 | | | | 3.75 | | 3.21 years | | $ | 1,032,362 | | |
| Outstanding at December 31, 2018 | | | | 711,968 | | | $ | 5.62 | | 3.33 years | | $ | 687,364 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercisable at December 31, 2015 | | | 359,228 | | | | 3.89 | | 2.03 years | | $ | 522,039 | | |
| Exercisable at December 31, 2018 | | | | 396,799 | | | $ | 4.70 | | 2.66 years | | $ | 568,956 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2015 | | | 649,478 | | | | 3.75 | | 3.21 years | | $ | 1,032,362 | | |
| Outstanding at December 31, 2018 | | | | 711,968 | | | $ | 5.62 | | 3.33 years | | $ | 687,364 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Granted | | | 142,875 | | | | 7.08 | | | | | | | | | – | | | $ | 0.00 | | | | | – | |
| Exercised | | | 191,804 | | | | 3.73 | | | | | 629,143 | | | | 54,343 | | | $ | 3.60 | | | | | 172,242 | |
| Forfeited/expired/cancelled | | | - | | | | - | | | | | | | | | 15,000 | | | $ | 5.68 | | | | | – | |
| Outstanding at December 31, 2016 | | | 600,549 | | | | 4.55 | | 3.43 years | | $ | 1,463,052 | | |
| Outstanding at December 31, 2019 | | | | 642,625 | | | $ | 5.79 | | 2.57 years | | $ | 285,925 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercisable at December 31, 2016 | | | 267,549 | | | | 4.14 | | 2.66 years | | $ | 731,997 | | |
| | | | | | | | | | | | | | | |
| Outstanding at December 31, 2016 | | | 600,549 | | | $ | 4.55 | | 3.43 years | | $ | 1,463,052 | | |
| | | | | | | | | | | | | | | |
| Granted | | | 267,875 | | | $ | 6.40 | | | | | | | |
| Exercised | | | 56,969 | | | $ | 4.19 | | | | | 100,018 | | |
| Forfeited/expired/cancelled | | | 785 | | | $ | 5.56 | | | | | | | |
| Outstanding at December 31, 2017 | | | 810,670 | | | $ | 5.18 | | 3.69 years | | $ | 2,477,853 | | |
| | | | | | | | | | | | | | | |
| Exercisable at December 31, 2017 | | | 371,295 | | | $ | 4.44 | | 2.62 years | | $ | 1,409,440 | | |
| Exercisable at December 31, 2019 | | | | 493,958 | | | $ | 5.22 | | 2.20 years | | $ | 285,925 | |
The following table summarizes information about stock options outstanding at December 31, 2017:2019:
| | | Stock Options Outstanding | | | Stock Options Exercisable | | | Stock Options Outstanding | | Stock Options Exercisable | |
Range of Exercise Prices | | Shares | | | Average Remaining Contract Life (Year) | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | | | Shares | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | | | Shares Outstanding | | Average Remaining Contract Life (Year) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Shares Exercisable | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | |
| 1 to 2.79999 | | | - | | | | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | | – | | | | – | | | $ | – | | | $ | – | | | | – | | | $ | – | | | $ | – | |
| 2.8 to 4.59999 | | | 362,750 | | | | 2.68 | | | | 3.51 | | | | 1,702,125 | | | | 244,000 | | | | 3.55 | | | | 1,135,255 | | | | 250,000 | | | | 1.20 | | | | 3.42 | | | | 285,925 | | | | 250,000 | | | | 3.42 | | | | 285,925 | |
| 4.6 to 6.39999 | | | 240,045 | | | | 3.56 | | | | 5.73 | | | | 592,678 | | | | 96,545 | | | | 5.49 | | | | 261,585 | | | | 137,875 | | | | 2.44 | | | | 5.87 | | | | – | | | | 87,125 | | | | 5.89 | | | | – | |
| 6.4 to 8.19999 | | | 161,000 | | | | 6.26 | | | | 7.06 | | | | 183,050 | | | | 12,000 | | | | 7.15 | | | | 12,600 | | | | 207,875 | | | | 4.05 | | | | 7.31 | | | | – | | | | 138,083 | | | | 7.22 | | | | – | |
| 8.2 to 10 | | | 46,875 | | | | 3.44 | | | | 8.86 | | | | - | | | | 18,750 | | | | 8.86 | | | | - | | |
| 8.2 to 12 | | | | 46,875 | | | | 3.60 | | | | 11.45 | | | | – | | | | 18,750 | | | | 11.45 | | | | – | |
| Total | | | 810,670 | | | | 3.69 | | | $ | 5.18 | | | $ | 2,477,853 | | | | 371,295 | | | $ | 4.44 | | | $ | 1,409,440 | | | | 642,625 | | | | 2.57 | | | $ | 5.79 | | | $ | 285,925 | | | | 493,958 | | | $ | 5.22 | | | $ | 285,925 | |
The average remaining contract life for the shares exercisable is 2.2 years, as of December 31, 2019.
As of December 31, 2017,2019, there was $735,946$432,746 of net unrecognized compensation cost related to stock options that are not vested, which is expected to be recognized over a weighted average period of approximately 2.572.00 years. The total fair value of shares vested during the year ended December 31, 2017,2019, was $380,465.$469,032.
The following table summarizes information about restricted stock and restricted stock units outstanding as of December 31, 2019:
| | | Number of Shares & Units | | | Weighted Average Grant Date Fair Value | |
| Unvested at December 31, 2018 | | | 287,564 | | | $ | 9.65 | |
| | | | | | | | | |
| Granted | | | 375,000 | | | | 5.80 | |
| Vested | | | (116,578 | ) | | | 9.65 | |
| Forfeited/expired/cancelled | | | – | | | | – | |
| Unvested at December 31, 2019 | | | 545,986 | | | | 7.47 | |
As of December 31, 2019, there was $3,273,929 of net unrecognized compensation cost related to restricted stock and restricted stock units that are not vested, which is expected to be recognized over a weighted average period of approximately 1.4 years. Stock based compensation cost related to restricted stock and restricted stock units recognized during the years ended December 31, 2019 and 2018 was $1,394,814 and $281,249, respectively.
NOTE 1211 — GEOGRAPHIC INFORMATION AND ECONOMIC DEPENDENCY:
The Company produces only one group of similar products known collectively as “rapid medical tests,” and it operates in a single business segment. Net product sales by geographic area are as follows:
| | | For the years ended | |
| | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
| Africa | | $ | 3,568,455 | | | $ | 2,363,944 | | | $ | 3,673,199 | |
| Asia | | | 1,626,750 | | | | 227,564 | | | | 172,250 | |
| Europe | | | 1,763,274 | | | | 1,131,193 | | | | 1,164,476 | |
| North America | | | 3,887,820 | | | | 5,082,319 | | | | 6,525,951 | |
| South America | | | 8,476,003 | | | | 4,875,087 | | | | 10,350,812 | |
| | | $ | 19,322,302 | | | $ | 13,680,107 | | | $ | 21,886,688 | |
| | | Year Ending December 31, | |
| | | 2019 | | | 2018 | |
| Africa | | $ | 7,564,360 | | | $ | 8,838,632 | |
| Asia | | | 888,800 | | | | 1,404,982
| |
| Europe & Middle East | | | 3,781,761 | | | | 2,208,063 | |
| Latin America | | | 11,808,767 | | | | 12,546,083 | |
| United States | | | 4,801,309 | | | | 2,915,449 | |
| | | $ | 28,844,997 | | | $ | 27,913,209 | |
F-15
| | | 2019 | | | 2018 | |
| Asia | | $ | 393,299 | | | $ | 466,185 | |
| Europe & Middle East | | | 165,029 | | | | 123,752 | |
| Latin America | | | 60,527 | | | | – | |
| United States | | | 5,314,715 | | | | 2,283,983 | |
| | | $ | 5,933,569 | | | $ | 2,873,920 | |
NOTE 1312 — COMMITMENTS, CONTINGENCIES AND CONTINGENCIES:CONCENTRATIONS:
The Company has multi-year contracts with two key employees. The contracts call for salaries presently aggregating $770,000$730,000 per year, and they expire in March 20192020 and March 2020.December 2021. The following table is a schedule of future minimum salary commitments:
| 2020 | | $ | 365,000 | |
| 2021 | | | 365,000 | |
Chembio’s President & CEO, the key employee whose agreement was set to expire in March 2020, resigned effective as of January 3, 2020.
| 2018 | | $ | 770,000 | |
| 2019 | | | 485,500 | |
| 2020 | | | 85,000 | |
The Company has a 401(k) plan established for its employees whereby it matches 40% of the first 5% (or 2% of salary) that an employee contributes to the plan. Matching contribution expenses totaled $91,150, $96,051$93,892 and $90,915$94,544 for the years ended December 31, 2017, 2016,2019 and 2015,2018, respectively.
Obligations Under Operating
Chembio’s leases have historically been limited to its facilities in New York, Germany, Malaysia & Brazil. As of December 31, 2019, the Company was a party to eight leases. One of the leases is subject to a sublease for the remainder of its term, as further described below.
The Company’s leases generally include optional renewal periods. Upon entering into a new lease, the Company leases industrial space used for office, R&Devaluates the leasehold improvements and manufacturing facilities, currentlyregulatory requirements related to its operations in that location. To the extent that the initial lease term of the related lease is less than the useful life of the leasehold improvements and potential regulatory costs associated with moving the facility, the Company concludes that it is reasonably certain that a monthly rentrenewal option will be exercised, and thus that renewal period is included in the lease term and the related payments are reflected in the right-of-use (“ROU”) asset and lease liability. In January 2019 the Company recognized $0.8 million and $0.8 million of $29,773. The current lease expires on April 30, 2019. The lease provides for annual increases of 2.5% percent each year starting May 1, 2016. In February of 2014,right-of-use assets and liabilities, respectively. During 2019, the Company entered into a new lease agreement for officeits new headquarter location in Hauppauge, NY. The right-of-use asset acquired in exchange for right-of-use liabilities was approximately $6.5 million.
The Company’s leases generally include fixed rental payments with defined annual increases. While certain of the Company’s leases are gross leases, the majority of the Company’s leases are net leases in which the Company makes separate payments to the lessor based on the lessor’s property and warehouse space, effective March 1, 2014,casualty insurance costs, the property taxes assessed on the property, and a short distance from its current facility currently with a monthly rentportion of $16,017. The space is used primarily for warehousing and provides for additional office space. The lease expires on April 30, 2020. The lease provides for annual increases of 3.0% percent each year starting March 1, 2016.the common area maintenance where applicable. The Company has elected the practical expedient not to separate lease and nonlease components for all of the Company’s facility leases. The Company has also elected the practical expedient for short-term lease exception for all of its facility leases.
The components of lease expense were as follows:
| | Year Ended December 31, 2019 | |
| Operating lease expense | | $ | 1,655,573 | |
| | | | |
| Finance lease cost | | | | |
| Amortization of right-of-use assets | | $ | 23,372 | |
| Interest on lease liabilities | | | 7,892 | |
| Total finance lease expense | | $ | 31,265 | |
Rent expense was $653,155 for the year ended December 31, 2018.
Supplemental cash flow and other information related to leases were as follows:
|
| Year Ended December 31, 2019 |
|
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows for operating leases | | $ | 632,952 | |
| Operating cash flows for finance leases | | | 7,892 | |
| Financing cash flows for finance leases | | | 19,875 | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | |
| Operating leases | | $ | 7,030,744 | |
| Finance leases | | | 210,350 | |
Supplemental balance sheet information related to leases was as follows:
| | | December 31, 2019 | |
| Operating Leases | | | |
| Operating lease right-of-use assets | | $ | 7,030,744 | |
| | | | – | |
| Current portion of operating lease liability | | | 568,294 | |
| Operating lease liabilities | | | 6,969,603 | |
| Total operating lease liabilities | | $ | 7,537,897 | |
| | | | | |
| Finance Leases | | | | |
| Finance lease right of use asset | | $ | 233,722 | |
| Accumulated depreciation | | | (23,372 | ) |
| Finance lease right of use asset, net | | $ | 210,350 | |
| | | | | |
| Current portion of finance lease liability | | | 41,894 | |
| Finance lease liability | | | 171,953 | |
| Total finance lease liabilities | | $ | 213,847 | |
| Weighted Average Remaining Lease Term | | | |
| Operating leases | | 9.3 years | |
| Finance leases | | 4.8 years | |
| | | |
| Weighted Average Discount Rate | | | |
| Operating leases | | | 8.67 | % |
| Finance leases | | | 7.00 | % |
During 2019, the Company executed an operating sublease related to its former Holbrook, New York facility. The sublease runs conterminously with the base lease in Holbrook, for which the Company remains primarily responsible. In addition, the Company entered into a finance lease agreement relating to office warehouse,furniture in June 2019. The Company recognized the corresponding lease asset and manufacturing spaceliability effective June 30, 2019 and recorded related depreciation starting on July 1, 2019. Monthly payments towards this lease commenced in a single building in Kuala Lumpur, Malaysia persuant to two separate leases that each expire on April 30, 2020 andJuly 2019.
At the time of the initial assessment, the Company did not have an additional three year renewal option with combined monthly rentestablished incremental borrowing rate and the interest rates implicit in each of approximately $3,600.the leases were not readily determinable, therefore the Company used an interest rate based on the market place for public debt. In September 2019, the Company entered into a credit agreement for a $20 million term loan as described on Note 13 - Long Term Debt.
The following is a scheduleMaturities of lease liabilities as of December 31, 2019 were as follows.
| | Operating Leases | | | Finance Leases | |
| 2020 | | $ | 1,205,161 | | | $ | 55,536 | |
| 2021 | | | 1,209,787 | | | | 55,536 | |
| 2022 | | | 1,057,757 | | | | 55,536 | |
| 2023 | | | 1,026,272 | | | | 55,536 | |
| 2024 | | | 1,018,875 | | | | 27,767 | |
| Thereafter | | | 5,773,887 | | | | – | |
| Total lease payments | | $ | 11,291,739 | | | $ | 249,911 | |
| Less: imputed interest | | | (3,753,842 | ) | | | (36,064 | ) |
| Total | | $ | 7,537,897 | | | $ | 213,847 | |
As previously disclosed in the Company’s 2018 Annual Report on Form 10-K, and under the previous lease accounting standard, future minimum rental commitmentslease payments for operating leases having initial or remaining non-cancellable lease terms in excess of one year would have been as follows for the years ending December 31,31:
| 2018 | | $ | 603,335 | | |
| 2019 | | | 371,036 | | | $ | 384,308 | |
| 2020 | | | 84,152 | | | 88,576 | |
| 2021 | | | | – | |
| | | $ | 1,058,523 | | | $ | 472,884 | |
Rent expense was $586,730, $516,708 and $511,900 for the years ended December 31, 2017, 2016, and 2015, respectively.
Customers are considered major customers when net sales exceed 10% of the Company'sCompany’s total net sales for period or outstanding trade receivables exceed 10% of current assets.accounts receivable. The Company had the following major customers for the respective periods:
| | | For the years ended | | | Accounts Receivable | | | For the years ended | | | Accounts Receivable | |
| | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2019 | | | December 31, 2018 | | | December 31, 2019 | | | December 31, 2018 | |
| | | Sales | | | % of Sales | | | Sales | | | % of Sales | | | Sales | | | % of Sales | | | | | | | | | Net Sales | | | % of Net Sales | | | Net Sales | | | % of Net Sales | | | | | | | |
| Customer 1 | | $ | 8,065,217 | | | | 42 | % | | $ | 4,801,577 | | | | 35 | % | | $ | 10,132,512 | | | | 46 | % | | $ | - | | | $ | 828,848 | | | $ | 11,263,573 | | | 39 | % | | $ | 11,333,767 | | | 33 | % | | $ | 941,962 | | | $ | 3,499,340 | |
| Customer 2 | | | - | | | | - | | | | 1,796,477 | | | | 13 | % | | | 4,526,908 | | | | 21 | % | | | - | | | | - | | | 5,782,543 | | | 20 | % | | 4,346,640 | | | 13 | % | | 16,033 | | | 1,033,824 | |
The following table delineates purchases the Company had with vendors in excess of 10% of total purchases for the periods indicated:
| | | For the years ended | | | Accounts Payable | |
| | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2017 | | | December 31, 2016 | |
| | | Purchases | | | % of Purc. | | | Purchases | | | % of Purc. | | | Purchases | | | % of Purc. | | | | | | | |
| Vendor 1 | | $ | * | | | | * | | | $ | 652,273 | | | | 11 | % | | $ | * | | | | * | | | $ | * | | | $ | * | |
| Vendor 2 | | | 746,868 | | | | 12 | % | | | * | | | | * | | | | * | | | | * | | | | * | | | | * | |
| Vendor 3 | | | 849,966 | | | | 14 | % | | | * | | | | * | | | | * | | | | * | | | | * | | | | * | |
| Vendor 4 | | | 884,698 | | | | 14 | % | | | * | | | | * | | | | 794,536 | | | | 11 | % | | | * | | | | * | |
| | | For the years ended | | | Accounts Payable | |
| | | December 31, 2019 | | | December 31, 2018 | | | December 31, 2019 | | | December 31, 2018 | |
| | | Purchases | | | % of Purc. | | | Purchases | | | % of Purc. | | | | | | | |
| Vendor 1 | | | * | | | | * | | | | 1,646,614 | | | | 16 | % | | | * | | | | 164,312 | |
In the tabletables above, an asterisk (*) indicates that purchases from the vendor did not exceed 10% for the period indicated.
The Company purchases materials pursuant to intellectual property rights agreements that are important components in its products. Management believes that other suppliers could provide similar materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which could adverslyadversely affect operating results.
NOTE 14 — QUARTERLY FINANCIAL DATA (UNAUDITED):
From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. The sumoutcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s future financial position or results of operations.
| f) | Governmental Regulation: |
All of the earnings per common share may not equalCompany’s existing and proposed diagnostic products are regulated by the corresponding annual amounts dueU.S. Food and Drug Administration, U.S. Department of Agriculture, certain U.S., state and local agencies, and/or comparable regulatory bodies in other countries. Most aspects of development, production, and marketing, including product testing, authorizations to interim quarter rounding.market, labeling, promotion, manufacturing, and record keeping, are subject to regulatory review. After marketing approval has been granted, Chembio must continue to comply with governmental regulations. 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.
| For the Quarters Ended in Fiscal 2017 | | March 31 | | | June 30 | | | September 30 | | | December 31 | |
| Total revenues | | $ | 6,325,167 | | | $ | 4,114,814 | | | $ | 7,587,374 | | | $ | 5,988,072 | |
| Gross product margin | | | 2,208,212 | | | | 689,099 | | | | 2,067,934 | | | | 1,435,896 | |
| Net loss | | | (1,615,574 | ) | | | (2,173,093 | ) | | | (584,661 | ) | | | (1,998,432 | ) |
| Basic loss per share | | | (0.13 | ) | | | (0.18 | ) | | | (0.05 | ) | | | (0.16 | ) |
| Diluted loss per share | | | (0.13 | ) | | | (0.18 | ) | | | (0.05 | ) | | | (0.16 | ) |
| | | | | | | | | | | | | | | | | |
| For the Quarters Ended in Fiscal 2016 | | March 31 | | | June 30 | | | September 30 | | | December 31 | |
| Total revenues | | $ | 6,601,099 | | | $ | 3,266,405 | | | $ | 3,746,461 | | | $ | 4,254,876 | |
| Gross product margin | | | 2,481,468 | | | | 347,972 | | | | 707,733 | | | | 725,428 | |
| Net loss | | | (303,590 | ) | | | (8,347,482 | ) | | | (2,138,218 | ) | | | (2,557,757 | ) |
| Basic loss per share | | | (0.03 | ) | | | (0.86 | ) | | | (0.19 | ) | | | (0.21 | ) |
| Diluted loss per share | | | (0.03 | ) | | | (0.86 | ) | | | (0.19 | ) | | | (0.21 | ) |
NOTE 1513 — NOTE PAYABLE:LONG-TERM DEBT:
In September 2017, the Company entered into an agreement with an equipment vendor to purchase automated assembly equipment for approximately $660,000. The terms call for prepaymentspayments of 30% down, 60% at time of factory acceptance testing and 10% after delivery. The vendor agreed to lend the Company 15%, 40%, and 10%, of each originally scheduled payment, respectively. The Company will paypaid interest at an annual rate of 12% until delivery. Thirty days after delivery,Beginning in September 2018, the Company will beginbegan making monthly payments of principal and interest of approximately $20,150, at an annual rate of 12% over a twenty-four month period.
NOTE 16 — SUBSEQUENT EVENT: The remaining balance was entirely short-term as of December 31, 2019.
On February 13, 2018,September 3, 2019, the Company closedentered into a Credit Agreement and Guaranty (the “Credit Agreement”) with Perceptive Credit Holdings II, LP (the “Lender”). The Credit Agreement provides for a $20,000,000 senior secured term loan credit facility, which was drawn in full on September 4, 2019. Under the terms of the Credit Agreement, the Company may use the proceeds (i) for general working capital purposes and other permitted corporate purposes, (ii) to refinance certain of the Company’s existing indebtedness and (iii) to pay fees, costs and expenses incurred in connection with the Credit Agreement, including the Lender’s closing cost amount of $550,000, which was netted from the proceeds, and a financing fee of $600,000 (3.0% of gross proceeds) payable to Craig-Hallum Capital Group LLC, the Company’s financial advisor for the financing.
Principal outstanding under the Credit Agreement bears interest at a rate per annum equal to the sum of (a) the greater of the one-month London Interbank Offered Rate and 2.5% plus (b) 8.75%. At any time at which an underwritten registered public offeringevent of 1,783,760default has occurred and is continuing, the interest rate will increase by 4.0%. Accrued interest is payable on a monthly basis. On December 31, 2019 the interest rate was 11.25%.
No principal repayments are due under the Credit Agreement prior to September 30, 2022, unless the Company elects to prepay principal or principal is accelerated pursuant to an event of default identified in the Credit Agreement. Principal installments in the amount of $300,000 are payable on the last day of each of the eleven months from September 2022 through July 2023, and all remaining principal is payable at maturity on September 3, 2023. The Company may prepay outstanding principal from time to time, subject to payment of a premium on the prepaid principal amount equal to 10% through September 3, 2020, 8% from September 4, 2020 through September 3, 2021, and 4% from September 4, 2021 through September 3, 2022. No premium will be due with respect to any prepayment made on or after September 4, 2022.
As of December 31, 2019, the loan balance, net of unamortized discounts and debt issuance costs, was $17.6 million, and the company was in compliance with its loan covenants. Our obligations under the Credit Agreement are secured by a first priority, perfected lien on substantially all of our property and assets, including our equity interests in our subsidiaries.
NOTE 14 — WARRANTS:
In connection with entering into the Credit Agreement, on September 3, 2019, the Company issued to the Lender a seven-year warrant (the “Warrant”) to purchase up to 550,000 shares of itsthe Company’s common stock at a public offeringper-share exercise price of $6.75 per share$5.22. The Warrant is exercisable for gross proceedscash or on a net, or “cashless,” basis, and the exercise price of approximately $12.0 million. The net proceeds,the Warrant is subject to price-based, weighted-average antidilution adjustments for one year after underwriting discounts and commissions, and estimated expenses are approximately $11.0 million. We intend to use the net proceeds for business expansion and working capital, including product development; operational expansion or improvements, such as new automated equipment and a facilities update; clinical trials and other related activities, and sales and marketing.
Schedule IIThe Warrant was evaluated by the Company and classified to stockholder’s equity. Its fair value was estimated using aBlack-Scholes option-pricing model using the assumptions below.
Valuation
| Stock price on issuance date | | $ | 5.40 | |
| Strike Price | | $ | 5.22 | |
| Risk-free interest rate | | | 1.45 | % |
| Volatility | | | 43.65 | % |
| Expected life | | 7 years | |
The fair value of the Warrant was determined to be approximately $1.4 million at $2.49 per share.
As of December 31, 2019, the balance recorded in the Company’s Stockholders’ Equity for the Warrants, net of allocated issuance costs, was $1.2 million.
As of December 31, 2019, no warrants were exercised and Qualifying Accountsno warrants have expired.
| | | | | | Additions | | | | | | | |
| Description | | Balance at beginning of period | | | Charged to statement of income | | | Charged to other accounts | | | Deductions | | | Balance at end of period | |
| Year ended December 31, 2017: | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 52,000 | | | $ | - | | | $ | - | | | $ | 10,000 | | | $ | 42,000 | |
| Inventory Reserve | | $ | 245,000 | | | $ | 119,920 | | | $ | - | | | $ | 170,137 | | | $ | 194,783 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2016: | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 52,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 52,000 | |
| Inventory Reserve | | $ | 218,000 | | | $ | 221,478 | | | $ | - | | | $ | 194,478 | | | $ | 245,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2015: | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 52,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 52,000 | |
| Inventory Reserve | | $ | 218,000 | | | $ | 256,302 | | | $ | - | | | $ | 256,302 | | | $ | 218,000 | |
F-30
F-18