UNITED STATES
Securities and Exchange Commission SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
(Amendment No. 1)
[X]☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017 2019
or
[ ]☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_______ to ______.
Commission File No. 0-30379001-35569
CHEMBIO DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
| Nevada | | 88-0425691 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
3661 Horseblock Road, Medford,555 Wireless Boulevard, Hauppauge, NY | | 1176311788 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code code:(631) 924-1135
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | | Trading symbol | | Name of each exchange on which registered |
Common Stock, $0.01 par value Preferred Share Purchase Rights
| | CEMI | | The NASDAQ Stock Market LLC The NASDAQ Stock Market LLC
|
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered pursuant to section 12(g) of the Act: |
None |
(Title of Class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __☐ No X☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __☐ No X☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X☒ No __☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large“large accelerated filer", "accelerated filer", "smallerfiler,” “accelerated filer,” “smaller reporting company,"” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | ☐ | Accelerated filer [X ] | ☒
|
Non-accelerated filer [ ] | ☐ | Smaller reporting company [ ] | ☒ |
(Do not check if a smaller reporting company) | | Emerging growth company [ ] | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __☐ No _X_☒
As of the last business day of the Company’sregistrant’s most recently completed second fiscal quarter, the aggregate market value of voting and non-voting common equity held by non-affiliates*non-affiliates was $56,453,579.$106,974,102.
As of March 5, 2018,April 24, 2020, the registrant had 14,162,702 common shares outstanding.
* Without asserting that any of the issuer’s directors or executive officers, or the entities that own more than five percent of the outstanding17,548,910 shares of the Registrant’s common stock are affiliates, the shares of which they are beneficial owners have not been included in shares held by non-affiliates solely for this calculation.outstanding.
Documents Incorporated By Reference: None.
EXPLANATORY NOTE
We are filing this Amendment No. 1 on Form 10-K/A, or this Amendment, to amend our Annual Report on Form 10‑K for the fiscal year ended December 31, 2019, or the 2019 Form 10‑K, as filed with the Securities and Exchange Commission, or SEC, on March 13, 2020. The principal purpose of this Amendment is to include in Part III the information that was to be incorporated by reference from the proxy statement for our 2020 Annual Stockholder Meeting. We are also including certain information in Item 9B of Part II in lieu of presenting that information in a Current Report on Form 8-K. This Amendment amends the cover page, Item 9B of Part II, Items 10 through 14 of Part III, Item 15 of Part IV of the 2019 Form 10‑K. In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act, new certifications by our principal executive officer and principal financial officer are filed as exhibits to this Amendment.
No attempt has been made in this Amendment to modify or update the other disclosures presented in the 2019 Form 10‑K. This Amendment does not reflect events occurring after the date of the filing of the 2019 Form 10‑K or modify or update those disclosures that may be affected by subsequent events. Accordingly, this Amendment should be read in conjunction with the 2019 Form 10‑K and with our other filings with the SEC.
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PART I | II | |
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PART II | III | |
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Item 11. | | 14 |
Item 12. | | 19 |
Item 13. | | 21 |
Item 14. | | 22
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| PART IV | |
Item 15. | | 23 |
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Unless the context requires otherwise, the words “Chembio,” “our,” “our company,” “us,” “we” and similar terms refer to Chembio Diagnostics, Inc. and its consolidated subsidiaries.
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PART III | | |
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PART IV | | |
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including exhibitsAmendment contains statements reflecting our views about our future performance that are being filed as part of this report, as well as other statements made by Chembio Diagnostics, Inc. (“Chembio”, the “Company”, “we”, “us”, and “our”), containconstitute “forward-looking statements” that include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.
within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements includeare generally identified through the inclusion of words such things as: investment objectivesas “anticipate,” “believe,” “contemplate,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “objective,” “outlook,” “plan,” “potential,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” or variations of such words or similar expressions. All statements addressing our future operating performance, and statements addressing events and developments that we expect or anticipate will occur in the Company’s ability to make investments in a timely manner on acceptable terms; references to future, successare forward-looking statements within the meaning of the Company’s products; the Company’s business strategy; estimated future capital expenditures; salesPrivate Securities Litigation Reform Act of the Company’s products; competitive strengths1995. Forward-looking statements are based upon currently available information, operating plans, and goals; and, other similar matters.
These forward-looking statements reflect the Company’s current beliefs and expectations with respect toprojections about future events and are based on assumptions and are subject totrends.
Forward-looking statements inherently involve risks and uncertainties and other factors outside the Company’s control that maycould cause actual results to differ materially from those projected. Such factorspredicted or expressed in this Amendment. These risks and uncertainties include but are not limited to, those described under Item 1A entitled “Riskin “Item 1A. Risk Factors”, matters described elsewhere in this Report, and the following: ability to market and sell products, whether through our internal, direct sales force or third parties; ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements; ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements; ability to effectively resolve warning letters, audit observations and other findings or comments from the FDA or other regulatory entities; changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for our products; impact of replacing distributors; inventory levels at distributors and other customers; ability of the Company to achieve its financial and strategic objectives and continue to increase its revenues; ability to identify, complete, integrate and realize the full benefits of future acquisitions; impact of competitors, competing products and technology changes; reduction or deferral of public funding available to customers; competition from new or better technology or lower cost products; ability to develop, commercialize and market new products; market acceptance of our products; changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers for Disease Control and Prevention and other agencies; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product distribution channels; reliance on sole supply sources for critical products and components; availability of related products produced by third parties or products required for use of our products; ability to maintain sustained profitability; volatility of the Company’s stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of litigation relating to patents and other intellectual property; availability of licenses to patents or other technology; obstacles to international marketing and manufacturing of products; ability to sell products internationally, including the impact of changes in international funding sources and testing algorithms; adverse movements in foreign currency exchange rates; loss or impairment of sources of capital; ability to attract and retain qualified personnel; exposure to product liability and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to obtain needed raw materials and components; the impact of terrorist attacks and civil unrest; changes in laws or regulations; global and regional economic conditions, including conditions affecting the credit markets, such as those resulting from the United Kingdom referendum held on June 23, 2016 in which United Kingdom voters approved an exit from the European Union; and general political, business and market conditions.
Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, these are only assumptions, and forward-looking statements should not be read as a guarantee of future performance or results and will probably not be accurate indications of when such performance or results will be achieved.2019 Form 10-K. Investors are cautioned thatnot to place undue reliance on any forward-looking statements, may not be reliable andwhich speak only as of the date they are made and that, except as required by law, the Company undertakesmade. We undertake no obligation to update theseany forward-looking statements to reflect anystatement or statistical estimate, whether as a result of new information, future events or circumstances. All subsequent written or oral forward-looking statements attributable to the Partnership or to individuals acting on its behalf are expressly qualified in their entirety by this section.otherwise.
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information to securities analysts unless and until we have made it publicly available. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
We provide free of charge on our website at www.chembio.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable. Additional information about us can also be found on our website. Members of the public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, and Washington, DC 20549. Members of the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800–SEC–0330. The Internet address of the Commission is www.sec.gov. That website contains reports, proxy and information statements and other information regarding issuers, like Chembio, that file electronically with the Commission. Visitors to the Commission's website may access such information by searching the EDGAR database.
For further information about these and other risks, uncertainties and factors, please review the disclosure included in this report under “Part I, Item 1A, Risk Factors.”
Our Business
General
Chembio Diagnostics develops, manufactures, and commercializes point-of-care (POC) diagnostic tests that are used to detect or monitor diseases. All products that are currently being developed are based on the Company’s patented DPP® technology, a novel 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.
Our product commercialization and product development efforts are focused in three areas: sexually transmitted disease, tropical & fever disease, and technology collaborations. In sexually transmitted disease, we are commercializing tests for HIV and Syphilis. In tropical and fever disease, we are commercializing tests for Zika virus, dengue virus, and chikungunya virus, and developing tests for malaria, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi, individually or as part of a fever panel test. Through technology collaborations, we are developing tests for a specific form of cancer, concussion, bovine tuberculosis, and for an undisclosed biomarker, the latter in collaboration with global biopharmaceutical company AstraZeneca.
LargePART II
On April 23, 2020, the board of directors appointed Gail S. Page to serve in a new role as Executive Chair of the Board, effective immediately. Ms. Page has been a member of the board since 2017. She served as our Interim Chief Executive Officer from January 2020 through March 15, 2020 and, growing markets have beenunder the letter agreement she entered into with us in connection with her service as Interim Chief Executive Officer, was obligated to provide transition services to us for sixty days after the end of her term as Initial Chief Executive Officer at a base rate of $460,000 per annum ($38,333 per month).
The compensation committee of the board of directors is currently considering appropriate compensation terms for Ms. Page's services as Executive Chair of the Board, based in part upon advice of our compensation consultant. Until those terms are established for these kinds of tests, initially in high prevalence regions where they are indispensable for large scale prevention and treatment programs. Our product development is focused on areas where the availability of rapid POC screening, diagnostic, or confirmatory results can improve health outcomes. More generally, we believe there is andagreed upon by Ms. Page, she will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in a rapid, cost-effective mannercompensated at the pointbase rate that was paid for her transition services. For additional information regarding Ms. Page, see “Item 10. Directors, Executive Officers and Corporate Governance - Background of care.Directors and Executive Officers - Executive Officers” in Part III below.
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.
Our Products
Products: Commercially Available
Following is a summary of our point-of-care products, including regulatory and commercial status:
Product
| | Description
| | Regulatory Status
| | Commercial Status
|
DPP® HIV 1/2 Assay
| | A rapid, point-of-care assay for the detection of HIV-1 and HIV-2 antibodies in finger stick, venous blood, serum, plasma or oral fluid | | Premarket approval (“PMA”) by U.S. FDA
CLIA (Clinical Laboratory Improvement Amendments of 1988) waived
CE marked (European Union/Caribbean)
World Health Organization (“WHO”) pre-qualification
Agência Nacional de Vigilância Sanitária (“ANVISA”) approved (Brazil)
Also registered in various other countries
| | Marketed
|
DPP® HIV-Syphilis Assay
| | A rapid, point-of-care assay for the detection of HIV-1 and HIV-2 antibodies and for antibodies to Treponema pallidum (the causative agent of Syphilis) in finger stick, venous blood, serum or plasma
| | CE marked (European Union/Caribbean)
ANVISA approved (Brazil)
Also registered in various other countries
| | Marketed
|
DPP® Syphilis Screen and Confirm Assay
| | A rapid, point-of-care assay for the simultaneous detection of IgG and IgM antibodies to Treponema pallidum (the causative agent of Syphilis) and IgG and IgM antibodies to RPR in finger stick, venous blood, serum or plasma
| | CE marked (European Union/Caribbean)
Also registered in various other countries
| | Marketed
|
SURE CHECK® HIV 1/2 Assay
| | A rapid, point-of-care assay for the detection of HIV-1 and HIV-2 antibodies in finger stick or venous blood | | PMA approved by U.S. FDA
CLIA waived
CE marked (European Union/Caribbean)
WHO pre-qualification
Designated eligible for procurement by Global Fund
Also registered in various other countries
| | Marketed |
HIV 1/2 STAT-PAK® Assay
| | A rapid, point-of-care assay for the detection of HIV-1 and HIV-2 antibodies in finger stick, venous blood, serum or plasma | | PMA approved by U.S. FDA
CLIA waived
CE marked (European Union/Caribbean)
WHO pre-qualification
Designated eligible for procurement by Global Fund
Also registered in various other countries
| | Marketed |
DPP® Dengue IgM/IgG Assay
| | A rapid, point-of-care assay for the simultaneous and separate detection of both IgG and IgM antibodies to Dengue virus in finger stick, venous blood, serum or plasma | | Malaysia Medical Device Authority ("MDA") approved
Additional regulatory approvals pending
| | Marketed
|
DPP® Dengue NS1 Antigen Assay
| | A rapid, point-of-care assay for the detection of NS1 antigen to Dengue virus in finger stick, venous blood, serum or plasma | | Malaysia MDA approved
Additional regulatory approvals pending
| | Marketed
|
DPP® Zika IgM Assay
| | A rapid, point-of-care assay for the detection of IgM antibodies to Zika virus in finger stick, venous blood, serum or plasma | | U.S. FDA Emergency Use Authorized
Additional regulatory approvals pending
| | Marketed
|
DPP® Zika IgM/IgG Assay
| | A rapid, point-of-care assay for the separate and simultaneous detection of IgM and IgG antibodies to Zika virus in finger stick, venous blood, serum or plasma | | CE marked (European Union/Caribbean)
ANVISA approved (Brazil)
Additional regulatory approvals pending
| | Marketed
|
DPP® Chikungunya IgM/IgG Assay
| | A rapid, point-of-care assay for the separate and simultaneous detection of IgM and IgG antibodies to Chikungunya virus in finger stick, venous blood, serum or plasma | | Malaysia MDA Approved
Additional regulatory approvals pending
| | Marketed |
DPP® Zika, Dengue, Chikungunya IgM/IgG Assay
| | A rapid, point-of-care assay for the separate and simultaneous detection of IgM and IgG antibodies to Zika, Dengue, Chikungunya virus in finger stick, venous blood, serum or plasma | | Malaysia MDA Approved
Additional regulatory approvals pending
| | Marketed |
DPP® Vet TB Assay
(Veterinary Application)
| | A rapid, point-of-care assay for the detection of Mycobacterium bovis antibodies in Elk, Red Deer, White-tailed Deer and Fallow Deer | | USDA approved | | Marketed |
Chagas STAT-PAK® Assay
| | A rapid, point-of-care assay for the detection of antibodies to Trypanosoma cruzi in finger stick, venous blood, serum or plasma
| | CE marked (European Union/Caribbean)
Additional regulatory approvals pending
| | Marketed |
RVR® Dengue IgM/IgG Assay
| | A rapid, point-of-care assay for the detection of IgM and IgG antibodies to the Dengue virus in finger stick, venous blood serum or plasma | | Malaysia MDA approved
Additional regulatory approvals pending
| | Marketed
|
RVR® Dengue NS1 Assay
| | A rapid, point-of-care assay for the detection of NS1 antigen to Dengue virus in finger stick, venous blood, serum or plasma | | Malaysia MDA approved
Additional regulatory approvals pending
| | Marketed |
RVR® Dengue Combo Assay
| | A rapid, point-of-care assay for the simultaneous and separate detection of IgG and IgM antibodies and NS1 antigen to Dengue virus in finger stick, venous blood, serum or plasma | | Malaysia MDA approved
Additional regulatory approvals pending
| | Marketed |
Products: Under Clinical Evaluation
Following is a summary of our point-of-care products under clinical evaluation, including regulatory and commercial status:
Product
| | Description
| | Regulatory Status
| | Commercial Status
|
DPP®HIV-Syphilis Assay System
| | A rapid, point-of-care assay for the detection of HIV-1 and HIV-2 antibodies and for antibodies to Treponema pallidum (the causative agent of Syphilis) in finger stick, venous blood, serum or plasma
| | Filed Premarket Approval (“PMA”) Application to U.S. FDA | | Not Marketed
|
DPP® Malaria/Ebola Assay
| | A rapid, point-of-care assay for the separate and simultaneous detection of Ebola VP40 antigen and Malaria antigen P.f/P.v in finger stick, venous blood, serum or plasma | | Under clinical evaluation | | Not Marketed
|
DPP® Ebola Assay
| | A rapid, point-of-care assay for the detection of Ebola VP40 antigen in finger stick, venous blood, serum or plasma | | Under clinical evaluation | | Not Marketed |
DPP® Fever Panel Assay - Africa
| | A rapid, point-of-care assay for the separate and simultaneous detection of antigens to Malaria pf/Pan species, Ebola, Lassa Fever, Marburg, Zika, Dengue and Chikungunya in finger stick, venous blood, serum or plasma | | Under clinical evaluation | | Not Marketed |
Products: Under Development
Following is a summary of our point-of-care products under development, including regulatory and commercial status:
Product
| | Description
| | Regulatory Status
| | Commercial Status
|
DPP® Malaria Antigen P.f/P.V Assay
| | A rapid, point-of-care assay for the separate detection of Malaria antigen P.F/P.V in finger stick, venous blood, serum or plasma | | Under development | | Not Marketed |
DPP® Fever Panel Assay - Asia
| | A rapid, point-of-care assay for the separate and simultaneous detection of antigens to Malaria pf/Pan Rickettsia typhi, Orientia tsutsugamushi, Leptospira Burkholderia pseudomallei, Dengue virus, Chikungunya virus and Zika virus in finger stick, venous blood, serum or plasma
| | Under development | | Not Marketed |
DPP® Undisclosed Biomarker Assay
| | A rapid, semi-quantitative point-of-care assay for an undisclosed novel biomarker in finger stick, venous blood, serum or plasma | | Under development
| | Not Marketed |
DPP® Cancer Assay
| | A rapid, quantitative point-of-care assay for an undisclosed novel biomarker in finger stick, venous blood, serum or plasma | | Under development
| | Not Marketed |
DPP® Concussion Assay
| | A rapid, quantitative point-of-care assay for an undisclosed novel biomarker in finger stick, venous blood, serum or plasma | | Under development
| | Not Marketed |
DPP® BovidTB Assay
(Veterinary Application)
| | A rapid, point-of-care assay for the detection of Mycobacterium bovis antibodies in serum of cattle | | Under development | | Not Marketed |
DPP® Technology & Development
The Company’s commercially available products employ either our patented Dual Path Platform (DPP®) technology or traditional lateral flow technology. We believe products developed using the Company’s DPP® technology can provide superior diagnostic performance compared with products that utilize traditional lateral flow technology.
Chembio is executing its strategy to leverage the DPP® intellectual property, as well as the Company’s scientific and operational expertise, to create new collaborations where Chembio will serve as an exclusive development and manufacturing partner. Examples of such collaborations include the following:
| ● | In October 2014, we entered into an agreement with an international diagnostics company to develop a POC diagnostic test for the early detection and monitoring of a specific type of cancer. At that time, the cancer project represented the first application of the DPP® technology outside the infectious disease field.
|
| ● | In January 2015, we entered into an agreement with the Concussion Science Group (CSG) Division of Perseus Science Group LLC to utilize our DPP® technology to develop a POC diagnostic test for traumatic brain injury (TBI), including sports-related concussions.
|
| ● | In January 2015, we were awarded a grant from The Bill & Melinda Gates Foundation to expedite the feasibility testing and development of a DPP® Malaria POC rapid diagnostic to accurately identify individuals infected with Plasmodium falciparum parasite.
|
| ● | In October 2015, we were awarded a grant from The Paul G. Allen Family Foundation to develop a POC test to identify multiple life-threatening febrile illnesses. Under the $2.1 million dollar grant, we used our DPP® technology to develop a DPP® Fever Panel Assay, a POC multiplex assay to simultaneously detect Malaria, Dengue, Zika, Chikungunya, Ebola, Lassa and Marburg.
|
| ● | In October 2015, we signed an agreement with opTricon (Berlin, Germany), a leading developer of mobile analysis devices for rapid diagnostic tests. The DPP® Micro Reader provides customers with various options to capture, record, transmit and store test results. With one-button operation, the palm-sized and battery-operated DPP® Micro Reader is simple, fast, portable, and cost-effective.
|
| ● | In October 2017, we signed a development agreement with AstraZeneca for the development of a quantitative point-of-care assay for a novel biomarker based on our DPP® assay and DPP® Micro Reader technologies.
|
Sales, Marketing & Distribution
We continue to target the following geographies: United States, Europe, Latin America, Africa and Southeast Asia. We reach our target markets through a combination of direct sales, strategic local distributors and OEM partners. Our efforts are focused on raising awareness of Chembio’s products and technology through global and regional marketing activities such as tradeshows and working with local key opinion leaders, local distributors, and strategic partners. We are also increasing our digital and social media activities to drive awareness of our products.
Competition
Many of our competitors are significantly larger and have greater financial, research, manufacturing, and marketing resources. Important competitive factors include product quality, analytical performance, ease of use, price, customer service and reputation. Industry competition is based on these and the following additional factors:
| ● | Ability to develop and market products and processes |
| ● | Ability to obtain required regulatory approvals |
| ● | Ability to manufacture cost-effective products that meet applicable regulatory requirements |
| ● | Access to adequate capital |
5
PART III
| ● | Ability to attract and retain qualified personnelDIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
We believe
Set forth below are the name, age and positions of each of our scientific capabilitiesdirectors and proprietary know-how relatingexecutive officers as of April 24, 2020
Name | Age | Position(s) |
| Non-Employee Directors | | |
| Katherine L. Davis | 63 | Director |
| Mary Lake Polan | 76 | Director |
| John G. Potthoff | 52 | Director |
| Executive Officers | | |
| Richard L. Eberly | 59 | Chief Executive Officer and President |
| Gail S. Page | 64 | Executive Chair of the Board |
| Neil A. Goldman | 52 | Executive Vice President and Chief Financial Officer |
| Javan Esfandiari | 53 | Chief Science and Technology Officer |
| Robert Passas | 66 | Senior Vice President, Chief Commercial Officer |
Background of Directors and Executive Officers
Non-Employee Directors
| Katherine L. Davis | Director |
Chair of Nominating and Corporate Governance Committee
Member of Audit Committee and Compensation Committee
Ms. Davis has served as a Director since 2007 and was Chair of the Board from March 2014 until April 23, 2020. She has been the owner of Davis Design Group LLC, a provider of analytical and visual tools for public policy design, since 2007. She was the Chief Executive Officer of Global Access point, a start-up company with products for data transport, data processing, and data storage network and hub facilities, from 2005 to our patented DPP® technology2006. She was the Lieutenant Governor of the State of Indiana from 2003 to 2005, and lateral flow technology are very strong, particularlythe Controller of the City of Indianapolis from 2000 to 2003. She has been a Financial Advisor to the Mayor of Indianapolis since January 2016. Ms. Davis has a Masters in Business Administration degree from Harvard Business School, and a Bachelor of Science degree in mechanical engineering from the Massachusetts Institute of Technology. Ms. Davis' longstanding quality service as a member of the Board, along with her experience in business, political and financial industries, qualify her to serve as a member of the board of directors.
Chair of Compensation Committee
Member of Audit Committee and Nominating and Corporate Governance Committee
Ms. Polan has served as a Director since August 2018. She has been a Clinical Professor in the Department of Clinical Obstetrics, Gynecology and Reproductive Sciences at Yale University School of Medicine since 2014. She previously was an Adjunct Professor in Obstetrics and Gynecology department at Columbia University School of Medicine from 2007 to 2014, and a Visiting Professor in the same department from 2005 to 2007. Ms. Polan previously served as Chair of Department of Obstetrics and Gynecology at Stanford University School of Medicine from 1990 to 2005. She has been Chair of Scientific Advisory Board in Women’s Health for the developmentProcter and manufactureGamble Company since 1997, and Managing Director of tests forGolden Seeds, an angel investing group investing in women-led companies, since 2007. Ms. Polan is the detectionauthor of antibodies to infectious diseases such as sexually transmitted diseases, fevermore than 130 books, articles and tropical diseases,chapters in her areas of research. Ms. Polan has a Master of Public Health (Maternal and other diseases.
Our ability to developChild Health Program) degree from the University of California, Berkeley, a Medical Doctor degree from Yale University School of Medicine, a Doctor of Philosophy degree in Molecular Biophysics and market other products is in large measure dependent on our having additional resources and/or collaborative relationships. SomeBiochemistry from Yale University School of our product development efforts have been funded onMedicine and a project or milestone basis. We believe that our proprietary know-how relating to our patented DPP® technologyBachelor of Arts degree from Connecticut College. Ms. Polan has been instrumentala member of the board of directors of Motif Bio plc (AIM/NASDAQ:MTFB), a clinical-stage biopharmaceutical company specializing in our obtaining the collaborations we havedeveloping novel antibiotics, since 2004, and that we continue to pursue. We believe that our patent protection enhances our ability to both develop more profitable, collaborative relationships and expand licensing revenue. However, there areof Quidel Corporation (NASDAQ:QDEL), a numberdeveloper of competitive technologies used and/or seeking to be used by others in point-of-care settings.
Although we have no specificdiagnostic solutions, since 1993. Ms. Polan’s extensive medical research experience, knowledge of anythe diagnostic industry, academic credentials, service as a director of other competitors’ products that could render our products obsolete, if we failorganizations and leadership experience qualify her to maintain and enhance our competitive position or fail to introduce new products and product features, our customers may decide to useserve as a member of the products developed by our competitors, which could result in a lossboard of revenues and cash flow.directors.
Research and Development
During 2017, 2016 and 2015, we spent $8.6 million, $8.4 million and $6.4 million, respectively, on research and development (including regulatory activities). These expenses were in part funded by R&D milestone and grant revenues of $4.0 million in 2017, $3.7 million in 2016 and $2.3 million in 2015.
Employees
At December 31, 2017, we employed approximately 165 people.
Governmental Regulation
Certain of our activities are subject to regulatory oversight by the Food & Drug Administration (FDA) under provisions of the Federal Food, Drug, and Cosmetic Act and regulations thereunder, including regulations governing the development, marketing, labeling, promotion, manufacturing, and export of diagnostic products. Our clinical laboratory is subject to oversight by Centers for Medicare and Medicaid Services (CMS) pursuant to CLIA (defined below), as well as agencies in various states. Failure to comply with applicable requirements can lead to sanctions, including withdrawal of products from the market, recalls, refusal to authorize government contracts, product seizures, civil money penalties, injunctions, and criminal prosecution.
FDA Approval/Clearance Requirements
Unless an exemption applies, each medical device that we market or wish to market in the U.S. must receive 510(k) clearance or Premarket Approval, or “PMA.” Medical devices that receive 510(k) clearance are “cleared” by the FDA to market, distribute, and sell in the United States. Medical devices that obtain a PMA by the FDA are “approved” to market, distribute, and sell in the United States. We cannot be sure that 510(k) clearance or PMA approval will ever be obtained for any products that have not already obtained 510(k) clearance or PMA approval. Descriptions of the PMA and 510(k) clearance processes are provided below.
The FDA decides whether a device line must undergo either the 510(k) clearance or PMA based on statutory criteria that utilize a risk-based classification system. PMA is the FDA process of scientific and regulatory review to evaluate the safety and effectiveness of Class III medical devices and, in many cases, Class II medical devices. Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury. The FDA uses these criteria to decide whether a PMA or a 510(k) is appropriate, including the level of risk that the agency perceives is associated with the device and a determination by the agency of whether the product is a type of device that is similar to devices that are already legally marketed. Devices deemed to pose relatively less risk are placed in either Class I or II. In many cases, the FDA requires the manufacturer to submit a 510(k) requesting clearance (also referred to as a premarket notification), unless an exemption applies. The 510(k) must demonstrate that the manufacturer’s proposed device is “substantially equivalent” in intended use and in safety and effectiveness to a legally marketed predicate device. A “predicate device” is a pre-existing medical device to which equivalence can be drawn, that is either in Class I, Class II, or is a Class III device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for submission of a PMA application.
Device classification depends on the device’s intended use and its indications for use. In addition, classification is risk-based, that is, the risk the device poses to the patient and/or the user is a major factor in determining the class to which it is assigned. Class I includes devices with the lowest risk and Class III includes those with the greatest risk.
Class I devices are those for which safety and effectiveness can be assured by adherence to the FDA’s general regulatory controls for medical devices, or the General Controls, which include compliance with the applicable portions of the FDA’s quality system regulations, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) process described below.
Class II devices are subject to the FDA’s General Controls, and any other special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) process. Pursuant to the Medical Device User Fee and Modernization Act of 2002 (MDUFMA), as of October 2002, unless a specific exemption applies, 510(k) submissions are subject to user fees. Certain Class II devices are exempt from this premarket review process.
Class III includes devices with the greatest risk. Devices in this class must meet all of the requirements in Classes I and II. In addition, Class III devices cannot be marketed until they receive Premarket Approval.
The safety and effectiveness of Class III devices cannot be assured solely by the General Controls and the other requirements described above. These devices require formal clinical studies to demonstrate safety and effectiveness. Under MDUFMA, PMA applications (and supplemental premarket approval applications) are subject to significantly higher user fees than 510(k) applications, and they also require considerably more time and resources.
Rapid HIV tests intended for diagnostic use are regulated as Class III devices. Responsibility for assuring the safety and effectiveness of these tests lies within the Center for Biologics Evaluation and Research’s Office of Blood Research and Review, with oversight by the Blood Products Advisory Committee (BPAC). Approved Rapid HIV tests must meet the regulations in the 21 CFR 800 series subparts, under the Investigational Device exemption (IDE) and PMA pathways.
Premarket Approval Pathway
Chair of Audit Committee
We manufacture, market,Member of Compensation Committee and distribute three rapid HIV testsNominating and Corporate Governance Committee
Dr. Potthoff has served as a Director since May 2018. He has been the Chief Executive Officer, co-founder and director of Elligo Health Research, a clinical research company, since March 2016. Dr. Potthoff previously served as President and Chief Executive Officer of Theorem Clinical Research Inc., a global contract research organization providing comprehensive clinical services, from 2011 until its acquisition by Chiltern International in September 2015. He was the U.S: our HIV 1/2 STAT-PAK® Assay, SURE CHECK® HIV 1/2 Assay,Chief Operating Officer of INC Research Holdings, Inc. from its acquisition of Tanistry, Inc. in 2001 until its acquisition by private equity investors in 2010. Dr. Potthoff was the Chief Executive Officer and DPP® HIV 1/2 Assay, allfounder of which haveTanistry, Inc., a contract research organization focused on the central nervous system, from 2000 to 2001. Dr. Potthoff received FDA PMA approval. A PMA application must be submitted if a device cannot be cleared throughDoctor of Philosophy degree in Psychology from the 510(k) process. A PMA application must be supported byUniversity of Texas-Austin, a Master of Arts degree in Psychology from the University of Texas-Austin, and a Bachelor of Arts degree in Psychology from the University of Texas-Austin. Mr. Potthoff’s extensive data including, but not limited to, analytical, preclinical,experience, knowledge and relationships in clinical trials, manufacturing, statutory preapproval inspections,research and labeling to demonstrate to the FDA’s satisfaction the safety and effectivenessother aspects of the device for its intended use. Before a PMA is submitted, a manufacturer must apply for an investigational device exemption, or “IDE.” If the device presents a “significant risk,” as defined by the FDA, to human health, the FDA requires the device sponsor to file an IDE application with the FDAdiagnostics and obtain IDE approval prior to initiation of enrollment of human subjects for clinical trials. The IDE provides the manufacturer with a legal pathway to perform clinical trials on human subjects where without the IDE, only approved medical devices may be used on human subjects.
The IDE application must be supported by appropriate data, such as analytical, animal and laboratory testing results, manufacturing information, and an Investigational Review Board (IRB) approved protocol showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. If the clinical trial design is deemed to have “non-significant risk,” the clinical trial may be eligible for “abbreviated” IDE requirements; and, in some instances, IVD clinical trials may be exempt from the more burdensome IDE requirements if certain labeling requirements are met.
A clinical trial may be suspended by either the FDA or the IRB at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the study. Even if a study is completed, clinical testing results may not demonstrate the safety and efficacy of the device, or they may be equivocal or otherwise insufficient to obtain approval of the product being tested. After the clinical trials have been completed, if at all, and the clinical trial data and results are collected and organized, a manufacturer may complete a PMA application.
After a PMA application is sufficiently complete, the FDA will accept the application and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the “accepted application,” although, generally, review of the application can take between one and three years, but it may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The preapproval inspections conducted by the FDA include an evaluation of the manufacturing facility to ensure compliance with the Quality Systems Regulations (QSR),pharmaceutical industries, as well as inspectionshis experience as a chief executive officer, qualify him to serve as a member of the clinical trial sites byboard of directors.
Executive Officers
| Richard L. Eberly | Chief Executive Officer and President |
Mr. Eberly has served as our Chief Executive Officer and President since March 16, 2020. He was the Bioresearch Monitoring groupManaging Director at Solid Rock Principled Capital LLC, a private equity firm focused on biomedical companies, from March 2018 to evaluate compliance with good clinical practiceMarch 2020. Mr. Eberly served at Meridian Bioscience, Inc. as Executive Vice President & President, Chief Commercial Officer from July 2016 to February 2018, as President of Meridian Life Science from October 2012 to July 2016, as Chief Commercial Officer from February 2011 to February 2018, as Executive Vice President from 2005 to 2011, as Executive Vice President, General Manager of Meridian Life Science from 2003 to 2005, as Executive Vice President from 2000 to 2003, and human subject protections. New PMA applications or PMA supplements are requiredas Vice President of Sales and Marketing from 1997 to 2000. Prior to his appointment to Vice President of Sales and Marketing, Mr. Eberly served as the Director of Sales for modifications that affect the safety or effectivenessMeridian. Before joining Meridian, he held sales and marketing positions at Abbott Diagnostics, Division of Abbott Laboratories. Mr. Eberly received a Masters in Business Administration degree from Xavier University and a Bachelor of Science degree in Biochemistry from Juniata College.
| Gail S. Page | Executive Chair of the Board |
Ms. Page has served as our Executive Chair of the device, including,Board since April 23, 2020 and as a Director since 2017. Ms. Page served as our Interim Chief Executive Officer from January 2020 through March 15, 2020 and provided transitional services from March 16, 2020 through April 22, 2020. She has been a Venture Partner at Turret Capital Management, L.P., an international healthcare-focused investment management fund since September 2018. She was the Managing Partner and founder of Vineyard Investment Advisors, LLC, a firm assisting with new product and services development, from 2014 to November 2018. She was the co-founder and director of Consortia Health Holdings LLC, a rehabilitation services provider focused on pelvic disorders, from 2013 to June 2018. Ms. Page previously served as the President, Chief Executive Officer and director of Vermillion, Inc., a developer and manufacturer of novel diagnostic blood tests, from 2006 to 2012. She was the Executive Vice President and Chief Operating Officer of Luminex Corporation, a developer of testing solutions for example, certain typeslife science applications, from 2000 to 2003, and Senior Vice President of modificationsRoche Biomedical Laboratories, Inc. / Laboratory Corporation of America, a healthcare diagnostic company, from 1988 to 2000. Ms. Page has a Bachelor of Science degree in Medical Technology from the device’s indication for use, manufacturing process, labelingUniversity of Florida, and design. Significant changescompleted an executive management program at the Kellogg School in Chicago. Ms. Page’s experience and relationships in the diagnostic industry, service as our interim Chief Executive Officer, and extensive experience as an executive of other firms in the healthcare industry qualify her to an approved PMA requireserve as a 180-day supplement, whereas less substantive changes may utilize a 30-day notice, or a 135-day supplement. Premarket approval supplements often require submissionmember of the same type of information as a premarket approval application, except that the supplement is limited to information needed to support any changes from the device covered by the original premarket approval application, and it may not require as extensive clinical data or the convening of an advisory panel.Board.
Our HIV 1/2 STAT-PAK® Assay PMA application number BP050009/0 and our SURE CHECK® 1/2 HIV Assay PMA application number BP050010/0 were approved by the FDA on May 25, 2006. Our DPP® HIV 1/2 Assay PMA application number BP120032/0 was approved by the FDA on December 19, 2012.
510(k) Clearance Pathway
We do not currently market, distribute, or sell a product that has market clearance by the FDA. However, we are currently developing products that either will or are likely to require an FDA 510(k) clearance, and we anticipate submitting a 510(k) for each such product to demonstrate that such proposed device is substantially equivalent to a respective previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for the submission of 510(k). FDA's 510(k) clearance pathway usually takes from three to twelve months but could take longer. In some cases the FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence.
If a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, a PMA. The FDA requires each device manufacturer to determine whether the proposed change requires submission of a new 510(k) or a PMA, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA of the modified device is obtained.
If the FDA requires us to submit a new 510(k) or PMA for any modifications to a previously cleared product, or if we obtain 510(k) clearance for a device in the future, we may be required to submit a separate new 510(k) or PMA application for such modifications.
Clinical Laboratory Improvement Amendments of 1988 (CLIA)
A manufacturer of a test categorized as moderately complex may request that categorization of the test as waived through a CLIA Waiver by Application (CW) submission to the FDA. When a test is categorized as waived, it may be performed by laboratories with a Certificate of Waiver, such as a physician’s office outreach setting. In a CW submission, the manufacturer provides evidence to the FDA that a test meets the CLIA statutory criteria for waiver, 42 U.S.C. 263a(d)(3). Congress passed CLIA in 1988, which provided CMS authority over all laboratory testing, except research that is performed on humans in the United States. The Division of Laboratory Services, within the Survey and Certification Group, under the CMS, has the responsibility for implementing the CLIA program.
The CLIA program is designed to establish quality laboratory testing by ensuring the accuracy, reliability and timeliness of patient test results. Under CLIA, a laboratory is a facility that does laboratory testing on specimens derived from humans and used to provide information for the diagnosis, prevention or treatment of disease, or impairment of, or assessment of health. Under the CLIA program, unless waived, laboratories must be certified by the government, satisfy governmental quality and personnel standards, undergo proficiency testing, be subject to inspections and pay fees. We have received a CLIA waiver for both of our lateral flow rapid HIV tests that we market in the U.S. Specifically, the CLIA waiver was granted by the FDA for HIV 1/2 STAT-PAK® on November 20, 2006 and for SURE CHECK® HIV 1/2 on October 22, 2007. In 2008 the FDA revised its CLIA waiver requirements so that an additional prospective trial is required in order to demonstrate clinical utility by showing that the device is capable of identifying new infections when used by untrained users. Our DPP® HIV 1/2 test received a CLIA waiver under these newer requirements on October 29, 2014.
Pervasive| Neil A. Goldman | Executive Vice President and Chief Financial Officer |
Mr. Goldman has served as our Executive Vice President and Continuing FDA RegulationChief Financial Officer since December 2017. He previously served as the Executive Vice President-Corporate Development and Chief Financial Officer at J.S. Held LLC, a construction consulting firm, from May 2015 to May 2017. He was the Global Finance Director for the Delphi Data Connectivity division of Delphi Corp. (now Aptiv plc), an automotive supplier, from October 2014 to April 2015. At Unwired Technology LLC, a tier-1 global automotive electronics manufacturer and distributor, he was the Executive Vice President-Corporate Development and Chief Financial Officer from 2013 to September 2014, the Senior Vice President-Chief Operating and Financial Officer from 2006 to 2013, and Chief Financial Officer from 2005 to 2006. He served as the Chief Financial Officer at EPPCO Enterprises, Inc., a mechanics tools manufacturer, from 2003 to 2005, and as a Senior Manager at Ernst & Young LLP and its successor Cap Gemini Ernst & Young LLC, from 1989 to 2002. Mr. Goldman is a Certified Public Accountant, and received a Bachelor of Science degree in Business-Accountancy from Miami University (Ohio).
A host| Javan Esfandiari | Executive Vice President and Chief Science and Technology Officer |
Mr. Esfandiari has served as our Executive Vice President and Chief Science and Technology Officer since 2004. He was previously our Director of regulatory requirements applyResearch and Development from 2000 to 2004. Mr. Esfandiari was Co-founder and Director of Research and Development of Sinovus Biotech AB, a developer of lateral flow technology, from 1997 to 2000. He served as the Director of Research and Development with On-Site Biotech/National Veterinary Institute, a government agency for veterinary medicine, from 1993 to 1997. Mr. Esfandiari received a Master of Science degree in Molecular Biology, and a Bachelor of Science degree in Clinical Chemistry, from Lund University, Sweden.
| Robert Passas | Senior Vice President, Chief Commercial Officer |
Mr. Passas has served as our approved devices, including the quality system regulation (which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures), the Medical Reporting Regulations (MDR) regulations (which require that manufacturers report to the FDA specified types of adverse events involving their products), labeling regulations,Senior Vice President, Chief Commercial Officer since October 2016. He was previously a Director and the FDA’s general prohibition against promotingGroup Commercial Director for Worldwide Sales, Marketing, and Technical and Customer Support at The Binding Site Group Ltd, a supplier of clinical diagnostic tools, from 2011 to 2016. Mr. Passas was Senior Director-International at Quidel Corporation, a manufacturer of diagnostic healthcare products, from 2010 to 2011. He served as Executive Vice President for unapproved or “off-label” uses. Class II devices also can have special controls such as performance standards, post-market surveillance, patient registries,Global Sales and FDA guidelines that do not applyMarketing, from 2007 to Class I devices.
A noncomprehensive list2010 and Vice President of Sales and Marketing, from 2006 to 2007 at Trinity Biotech plc, a developer, manufacturer and marketer of diagnostic test kits. Mr. Passas was Regional Director at Abbott Diabetes Care, a manufacturer of blood glucose monitors and meters, from 2003 to 2006. Mr. Passas received a Doctor of Philosophy degree in Analytical Chemistry and a Bachelor of Science degree in Medical Biochemistry from the regulatory requirements that apply to our approved products classified as medical devices or IVDs includes:
· | product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action; |
· | QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the development and manufacturing process; |
· | labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication; |
· | clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices; |
· | approval of product modifications that affect the safety or effectiveness of one of our cleared devices; |
· | medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur; |
· | post-approval restrictions or conditions, including post-approval study commitments; |
· | post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; |
· | the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations; |
· | regulations pertaining to voluntary recalls; and, |
· | notices of corrections or removals. |
Our Medford, New York facility is currently registered as an establishment with the FDA. We and any third-party manufacturers are subject to announced and unannounced inspections by the FDA to determine our compliance with quality system regulation and other regulations.
21st Century Cures Act
The 21st Century Cures Act, enacted in December 2016, contains several sections specific to medical device innovations. The Company believes that implementationUniversity of the 21st Century Cures Act may have a positive impact on its businesses by facilitating innovation and/or reducing the regulatory burden imposed on medical device manufacturers.
Government Regulation of Medical Devices for Animal Subjects
We currently sell, market, or distribute two veterinary devices in the United States: DPP® VetTB Assay for Cervids and DPP® VetTB Assay for Elephants. Diagnostic tests for animal health infectious diseases, including our veterinary devices for the prevention and/or treatment of animal disease, are regulated in the U.S. by the Center for Veterinary Biologics within the United States Department of Agriculture (USDA) Animal and Plant Health Inspection Service (APHIS) under the Virus, Serum, and Toxin Act of 1913. As a requirement, our veterinary devices were approved by APHIS before they could be sold in the U.S.
The APHIS regulatory approval process involves the submission of product performance data and manufacturing documentation. Following regulatory approval to market a product, APHIS requires that each lot of product be submitted for review before release to customers. In addition, APHIS requires special approval to market products where test results are used in part for government-mandated disease management programs.
Environmental Laws
To date, we have not encountered any costs relating to compliance with any environmental laws.Surrey.
Intellectual PropertyFamily Relationships
Intellectual Property StrategyThere are no family relationships among our directors and executive officers.
Our intellectual property strategy is to: (1) build our own intellectual property portfolio around our DPP® technology; (2) pursue licenses, trade secrets and know-how within the area of rapid point-of-care testing; and, (3) develop and acquire proprietary positions to certain reagents.
DPP® Intellectual PropertyCorporate Governance and Board Structure
We have obtained patent coverage onBoard of Directors Overview
Under our DPP® technology, including numerous patents in the United States, China, Malaysia, Eurasia, Mexico, Singapore, Japan, Australia, Indonesia, KoreaBylaws and the U.K. Additional patent applications onNevada Revised Statutes, our DPP® technologybusiness and affairs are pending inmanaged by or under the U.S., as well as in many foreign countries such as Brazil, Canada,direction of the European Union, India, Israel, and South Africa. board of directors, which selectively delegates responsibilities to its standing committees.
The DPP® technology provides us with our own intellectual property. We believe it provides us with freedomboard generally expects to operate, which enables ushold four regular meetings per year and to develop tests with better performancemeet on other occasions when circumstances require. Directors spend additional time preparing for board and unmatched capabilities compared with tests built on traditional lateral flow platforms. These advantages have allowed us to enter into multiple technology collaborations based upon the DPP® technology, which we believe will provide new manufacturing and marketing opportunities. We have filed other patent applications that we believe will strengthen the DPP® intellectual property and have also filed for patent protection for certain other point-of-care technologies or applications thereof.
Trademarks
We have filed and obtained trademarks for our products, including DPP®, SURE CHECK®, STAT-VIEW®, and STAT-PAK®, as well as for the SampleTainer®, which is used with certain DPP® products. Our trademarks have been obtained in the United States and certain other countries around the world.
Trade Secrets and Know-How
We have developed a substantial body of trade secrets and know-how relating to the development and manufacture of lateral flow and DPP®-based diagnostic tests, including but not limited to the sourcing and optimization of materials for such tests, and methods to maximize sensitivity, speed-to-result, specificity, stability and reproducibility of our tests. We possess proprietary know-how to develop tests for multiple conditions using colored particles. Our formulations enable long shelf lives of our rapid HIV and other tests, providing us with an important competitive advantage.
Lateral Flow Technology and Reagent Licenses
As of February 3, 2015 the royalty expenses related to certain lateral flow technology expired. These now allow us to produce STAT-PAK®, SURE CHECK®, STAT-VIEW®, DIPSTICK®, and veterinary product lines free of those royalties.
Although we believe our DPP® IP is outside of the scope of all lateral flow patents of which we are aware, we consult with patent counsel, and seek licenses and/or redesigns of products that we believe to be in our best interests. Because of the costs and other negative consequences of time-consuming patent litigation, we often attempt to obtain a license on reasonable terms. Nevertheless, there is no assurance that the Alere lateral flow patents we have licensed will not be challenged or that other patents containing claims relevant to our lateral flow or DPP® products will not be granted to third parties and that licenses to such patents, will be available on reasonable terms, if any.
The peptides used in our rapid HIV tests were licensed to us by one or more third parties. We also have licensed the antigens used in other tests including our Syphilis, Tuberculosis, Leptospirosis, Leishmaniasis and Chagas tests,committee meetings, and we may enter other license agreements. In prior years, we concluded license agreements relatedcall upon directors for advice between meetings. We encourage our directors to intellectual property rights ownedattend director education programs.
The board held twenty meetings in 2019, each of which included an executive session with only non-employee directors in attendance. Each of the then-serving directors participated in at least 75% of the meetings of the board during 2019.
The board maintains an audit committee, a compensation committee, and a nominating and corporate governance committee. The board has adopted charters for each of the committees, and those charters are to be reviewed annually by the United States associated with HIV-1,committees and during the first quarterboard. Our website provides access to:
the audit committee charter at: chembiodiagnosticsinc.gcs-web.com/static-files/9834f839-d259-45c5-8b25-f6fce52b724a;
the compensation committee charter at: chembiodiagnosticsinc.gcs-web.com/static-files/bd718df4-ee68-4a84-affa-c24f79ceec81; and
the nominating and corporate governance committee charter at: chembiodiagnosticsinc.gcs-web.com/static-files/264bc05a-d241-4fc8-88d6-9aded84378fb.
The committees have the functions and responsibilities described in the sections below.
Independence of 2008, we entered intoDirectors
The board of directors must consist of a sub-license agreement for HIV-2 with Bio-Rad Laboratories N.A.,majority of independent directors under the exclusive licenseeapplicable requirements of the Pasteur Institute's HIV-2 intellectual property estate.
Nasdaq Global Market, or Nasdaq.
Corporate Information
We areUnder Nasdaq rules, independent directors must comprise a Nevada corporationmajority of a listed company’s board. In addition, Nasdaq rules require that, was formed in December 1985. Since inception, we have been involved in developing, manufacturing, sellingsubject to specified exceptions, each member of a listed company’s audit, compensation, and distributing medical diagnostic tests,nominating and corporate governance committees be independent. Audit committee members must also satisfy additional independence criteria, including rapid tests that detect a number of diseases and other conditions in humans and animals.
Stockholder Rights Agreement
On March 8, 2016, we entered into a Rights Agreement (the "Rights Agreement") between us and Action Stock Transfer Corp., as Rights Agent. Pursuant to the Rights Agreement, we declared a dividend distribution of one Preferred Share Purchase Right (a "Right") for each outstanding share of our common stock, par value $0.01 (the "Common Stock"), in the manner described below. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2016, and the Rights were distributed to our shareholders of record on that date. The Rights Agreement also provides that Rights are issued with respect to any shares of our common stock that are newly issued after March 8, 2016, such as with respect to the Company's underwritten public offering in February 2018. The description and terms of the Rights arethose set forth in the Rights Agreement.
Rights Initially Not Exercisable
The Rights are not exercisable until a Distribution Date. Until a Right is exercised, the holder thereof, as such, has no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights
The Rights are to be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) has acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date") or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A)10A-3 under the Securities Exchange Act, of 1934, as amended, the consummation of which would resultand compensation committee members must also satisfy additional independence criteria, including those set forth in any person having Combined Ownership of 20% or moreRule 10C-1 of the outstanding sharesSecurities Exchange Act. Under Nasdaq rules, a director will qualify as an “independent director” only if, in the opinion of that company’s board, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3 under the Securities Exchange Act, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the Common Stock,audit committee, the board or (B) if such a tenderany other board committee (a) accept, directly or exchange offer has been published, announced, sentindirectly, any consulting, advisory or given beforeother compensatory fee from the datelisted company or any of its subsidiaries, other than compensation for board service or (b) be an affiliated person of the Rights Agreement, thenlisted company or any of its subsidiaries.
In order to be considered independent for purposes of Rule 10C-1 under 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 actionSecurities Exchange Act, each member of the Boardcompensation committee must be a member of Directors priorthe board of the listed company and must otherwise be independent. In determining independence requirements for members of compensation committees, the national securities exchanges and national securities associations are to consider relevant factors, including: (a) the source of compensation of a member of the board of a listed company, including any consulting, advisory or other compensatory fee paid by the listed company to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i)member; and (ii), which date may include any such date that is after the date(b) whether a member of the Rights Agreement but prior toboard of a listed company is affiliated with the issuancelisted company, a subsidiary of the Rights, being calledlisted company or an affiliate of a subsidiary of the "Distribution Date").listed company.
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Glossary Board Committees
AIDS | Acquired Immunodeficiency Syndrome. AIDS is caused by the Human Immunodeficiency Virus, HIV. |
ALGORITHM (parallel or serial) | For rapid HIV testing, this refers both to method or protocol (in developing countries to date) for using rapid tests from different manufacturers in combination to screen and confirm patients at the point-of-care, and may also refer to the specific tests that have been selected by an agency or ministry of health to be used in this way. A parallel algorithm uses two screening tests from different manufacturers and a tie-breaker test only if there is a discrepancy between the screening tests results. A serial algorithm only uses a second confirmatory test if there is a positive result from the screening test, meaning that the number of confirmatory tests used is equal to the positivity rate in the testing venue. A tie-breaker test resolves discrepancies between the screen and the confirmatory test. |
ANTIBODY | A protein which is a natural part of the human immune system produced by specialized cells to neutralize antigens, including viruses and bacteria that invade the body. Each antibody-producing cell manufactures a unique antibody that is directed against, binds to and eliminates one, and only one, specific type of antigen. |
ANTIGEN | Any substance which, upon entering the body, stimulates the immune system leading to the formation of antibodies. Among the more common antigens are bacteria, pollens, toxins, and viruses. |
ANVISA | The National Health Surveillance Agency of Brazil. |
ARVs | Anti-retroviral medications developed to fight AIDS. |
CDC | United States Centers for Disease Control and Prevention. |
CLIA waiver | Clinical Laboratory Improvement Act designation that allows simple tests to be performed in point-of-care settings such as doctor’s offices, walk-in clinics and emergency rooms. |
DIAGNOSTIC | Pertaining to the determination of the nature or cause of a disease or condition. Also refers to reagents or procedures used in diagnosis to measure proteins in a clinical sample. |
FIOCRUZ | The Oswaldo Cruz Foundation of Brazil. |
FDA | United States Food and Drug Administration. |
IgG | IgG or Immunoglobulin are proteins found in human blood. This protein is called an “antibody” and is an important part of the body’s defense against disease. When the body is attacked by harmful bacteria or viruses, antibodies help fight these invaders. |
IgM | IgM or Immunoglobulin M are proteins found in human blood. This protein is called an "antibody" and is an important part of the body's defense against disease. When the body is attacked by harmful bacteria or viruses, antibodies help fight these invaders. |
NGO | Non-Governmental Organization. |
OTC | Over-the-Counter. |
PEPFAR | The President’s Emergency Plan for AIDS Relief. |
PMA | Pre-Marketing Approval –FDA approval classification for a medical device that is not substantially equivalent to a legally marketed device or is otherwise required by statute to have an approved application. Rapid HIV tests must have an approved PMA application before marketing of such a product can begin. |
PROTOCOL | A procedure pursuant to which an immunodiagnostic test is performed on a particular specimen in order to obtain the desired reaction. |
REAGENT | A chemical added to a sample under investigation in order to cause a chemical or biological reaction which will enable measurement or identification of a target substance. |
RETROVIRAL | A type of virus which contains the enzyme Reverse Transcriptase and is capable of transforming infected cells to produce diseases in the host such as AIDS. |
SENSITIVITY | Refers to the ability of an assay to detect and measure small quantities of a substance of interest. The greater the sensitivity, the smaller the quantity of the substance of interest the assay can detect. Also refers to the likelihood of detecting the antigen when present. |
SPECIFICITY | The ability of an assay to distinguish between similar materials. The greater the specificity, the better an assay is at identifying a substance in the presence of substances of similar makeup. |
USDA | U.S Department of Agriculture. |
WHO | World Health Organization. |
The principal responsibilities of the audit committee are:
You should carefully considerappointing, approving the compensation of, and assessing the independence of our independent auditor;
approving all audit and non-audit services of the independent auditor;
evaluating our independent auditor’s qualifications, performance and independence;
reviewing our financial statements and financial disclosure;
conducting periodic assessments of our accounting practices and policies;
furnishing the audit committee report required by SEC rules;
reviewing and approving of all related-party transactions;
setting hiring policies for the hiring of employees and former employees or our independent auditor and ensuring that those policies comply with all applicable regulations;
developing and monitoring compliance with a code of ethics for senior financial officers and a code of conduct for all Chembio employees, officers and directors;
establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters;
establishing procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters;
overseeing the work of our independent auditor, including resolution of disagreements between management and the independent auditor; and
reviewing and discussing our annual and quarterly financial statements and related disclosures with management and the independent auditor.
Our independent auditor is ultimately accountable to the audit committee. The audit committee has the ultimate authority and responsibility to select, evaluate, approve terms of retention and compensation of, and, where appropriate, replace the independent auditor.
The current members of the audit committee are John G. Potthoff, who serves as chair, Katherine L. Davis and Mary Lake Polan. The board has determined that each of the following risk factors and all of the other information provided in this Form 10-K in considering whether to make or continue to hold an investment in our Common Stock. The risks described below are those we currently believe may materially affect us. An investment in our Company involves a high degree of risk, and should be considered only by persons who can afford the loss of their entire investment. Although we believe that these risks are the most important for you to consider, you should read this section in conjunction with our financial statements, the notes to those financial statements and our management's discussion and analysis of financial condition and results of operations included in our periodic reports and incorporated into this Form 10-K by reference.
Risks Related to Our Business
There are competing products that could significantly reduce our U.S. sales of rapid HIV tests.
In 2006 Alere, Inc. acquired a division from Abbott Diagnostic located in Japan that manufactured and marketed a rapid HIV test product line called Determine®. The Determine® format was developed for the developing world and remote settings and, central to the needs of that market. The formataudit committee members is essentially a test strip that is integrated into a thin foil wrapper. When opened, the underside of the wrapper serves as the test surface for applying the blood sample and performing the test. This design reduces costs and shipping weights and volumes and provides an advantage for the developing world markets it serves. Some of the disadvantages of the platform are the amount of blood sample that is needed (50 microliters versus 2.5, 5 and 10 for our lateral flow barrel, lateral flow cassette, and DPP® products respectively), the open nature of the test surface, and the absence of a true control that differentiates biological from other kinds of samples.
The so-called "3rd generation" version of this product has been marketed for many yearsfinancially literate and is a “non-employee director” as defined in Rule 16b‑3 promulgated under the leading rapid HIV testSecurities Exchange Act. The board also determined that each of Dr. Potthoff, Ms. Davis and Ms. Polan is used in a large majority of the national algorithms of countries funded by PEPFAR and the Global Fund,independent, as well as many other countriesdefined in the world. That product is not FDA-approved though it is CE marked. The newest Determine® HIV version, which was developed and manufactured by Alere's subsidiary in Israel, Orgenics, is the so-called "4th Generation" version Determine® test. According to its claims, this product detects HIV antibodies and P24 HIV antigens. Because the P24 antigen is known to occur in HIV-positive individuals' blood samples before antibodies do, the 4th generation Determine® test is designed to detect HIV infection earlier than tests that solely rely on antibody detection. Chembio's tests, as well as alllisting standards of the other currently FDA-approved rapid HIV tests, only detect antibodies. There are however laboratory tests that are FDA-approved that are "4th generation" tests, but they are neither rapid nor point-of-care.
The initial "4th generation" Alere Determine® rapid test product that was also CE marked and that Alere launched internationally some years ago has not been successfully commercialized to the best of our knowledge and at least certain published studies were not favorable for this product. The 4th generation product that is now FDA-approved was apparently modified as compared to the initial international version, and it may perform more satisfactorily. Alere received FDA approval of this modified product in August 2013 and CLIA waiver for it in December 2014. Alere is also aggressively pursuing development of the market for this product. Moreover there is support by a number of key opinion leaders for the public health value of such 4th generation tests, and this product represents a significant competitive threat to Chembio as well as to each of the other rapid HIV test manufacturers (OraSure and Trinity primarily).
During 2011, Biolytical, Inc. of Vancouver, Canada received FDA approval and in 2012 received CLIA waiver of a flow-through rapid HIV test called "INSTI". The flow-through technology used in the INSTI test is older than lateral flow, and requires handling of multiple components (3 vials of solution) to perform the test in multiple steps. However, these steps can be accomplished in less than ten minutes, and the actual test results occur in only one minute after those steps are completed. Therefore sample-to-result time is shorter than any of the competitive products. The product also has good performance claims. There are settings where that reduced total test time, despite the multiple steps required, may be a distinct advantage, and we believe Biolytical has made some progress in penetrating certain public health markets.
Therefore, even though our lateral flow products currently enjoy a substantial market share in the U.S. rapid HIV test market, and we have an additional rapid HIV test, the DPP® HIV 1/2 Assay, there a number of risks and uncertainties concerning current and anticipated developments in this market. Although we have no specific knowledge of any other new product that is a significant competitive threat to our products, or that will render our products obsolete, if we fail to maintain and enhance our competitive position or fail to introduce new products and product features, our customers may decide to use products developed by our competitors, which could result in a loss of revenues and cash flow.
More generally, the point-of-care diagnostics industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. As new technologies become introduced into the point-of-care diagnostic testing market, we may be required to commit considerable additional efforts, time and resources to enhance our current product portfolio or develop new products. We may not have the available time and resources to accomplish this, and many of our competitors have substantially greater financial and other resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers, which would materially harm our operating results.
Although we own our DPP® patent, lateral flow technology is still a competitive platform to DPP®, and lateral flow technology has a lower cost of manufacture than DPP® products. Although the DPP® platform has shown improved sensitivity as compared with conventional lateral flow platforms in a number of studies, several factors go into the development and performance attributes of products. Therefore the ability of our products to successfully compete will depend on several other factors, including but not limited to our having a patented rapid test platform technology that differentiates DPP® from lateral flow as well as from other diagnostic platform technologies.
We believe that our DPP® is outside of the scope of currently issued patents in the field of lateral flow technology, thereby offering the possibility of greater freedom to operate. However there can be no assurance that our patents or our products incorporating the patent claims will not be challenged at some time in the future.
Our Competitors May Develop and Commercialize More Effective or Successful Products, and Our Research, Development and Commercialization Efforts May Not Succeed.
We must regularly commit substantial resources to research and development and the commercialization of our new or enhanced products. The research and development process usually takes a long time from inception to commercial launch. During each stage of this process there is a substantial risk that we will not achieve our goals in a timely fashion, or at all, and we may have to abandon a new or enhanced product in which we have invested substantial time and money. We expect to continue to incur significant costs related to our research and development activities.
Our products require significant development and investment prior to commercialization, including testing to demonstrate the products performance capabilities, cost-effectiveness or other benefits. We must obtain regulatory approval before most products may be sold and additional development efforts on these products may be required before the products will be reviewed. However, regulatory authorities may not approve these products for commercial sale or may substantially delay or condition such approval. There may be little or no market for the product and entry into or development of new markets for our products may require an investment of substantial resources even if all applicable regulatory approvals are obtained. Furthermore, we may spend a significant amount of money on advertising or other activities and still fail to develop a market for the product. The success of our efforts may be affected by our ability to manufacture products in a cost-effective manner, whether we can obtain necessary intellectual property rights and protection and our ability to obtain reimbursement authorizations in the markets where the product will be sold. Therefore, if we fail to develop and gain commercial acceptance for our products, or if competitors develop more effective products or a greater number of successful new products, customers may decide not to purchase our products.
Our Products May Not be Able to Compete With New Diagnostic Products or Existing Products Developed by Well-Established Competitors, Which Would Negatively Affect Our Business.
The diagnostic industry is focused on the testing of biological specimens in a laboratory or at the point-of-careNasdaq, and is highly competitive and rapidly changing. Somean “outside director” as that term is defined in Section 162(m) of our principal competitors may have considerably greater financial, technical and marketing resources than we do. Several companies produce diagnostic tests that compete directly with our testing product line, including but not limited to, OraSure Technologies, Alere and Trinity Biotech. Furthermore these and/or other companies have or may have products incorporating molecular and/or other advanced technologies that over time could directly compete with our testing product line. As new products incorporating new technologies enter the market, our products may become obsolete or a competitor's products may be more effective or more effectively marketed and sold.
Our Business Prospects May be Negatively Affected if We Fail to Achieve Our Financial and Strategic Objectives.
There is no assurance that we will be successful in implementing our financial and strategic objectives, including our efforts to increase sales of our products. For example, the funds for research, clinical development and other projects have in the past come primarily from our business operations. If the sale of our products slows and we have less money available to fund research and development and clinical programs, we will have to cut certain programs. If adequate financial, personnel, equipment or other resources are not available, we may be required to delay or scale back our business. If our total revenue and gross profits do not correspondingly increase or if our technology, product, clinical and market development efforts are unsuccessful or delayed, our operations will be negatively affected. Furthermore, our failure to successfully introduce new or enhanced products and develop new markets could have a material adverse effect on our business and prospects.
Our Future Revenues and Operating Results May be Negatively Affected by the Ongoing Consolidation in the Healthcare Industry.
There has been a significant amount of consolidation in the healthcare industry. This consolidation has increased the competition to provide goods and services to customers. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. Due to ongoing consolidation, there could be additional pressure on the prices of our products.
Our Continued Growth Depends on Retaining Our Current Key Employees and Attracting Additional Qualified Personnel, and We May Not Be Able to Do So.
Our success will depend to a large extent upon the skills and experience of our executive officers, management and sales, marketing, operations and scientific staff. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among medical products businesses, geographic considerations, our ability to offer competitive compensation, relocation packages, benefits, and/or other reasons.
If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products to meet the demands of our strategic partners in a timely fashion, or to support internal research and development programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms.
We have entered into employment contracts with our Chief Executive Officer, John Sperzel; our Chief Financial Officer, Neil Goldman; our President of the Americas, Sharon Klugewicz; and our Chief Scientist & Technology Officer , Javan Esfandiari. Due to the specific knowledge and experience of these executives regarding the industry, technology and market, the loss of the services of any one of them could have a material adverse effect on the Company. The contract with Mr. Sperzel expires March 2020. The contract with Mr. Esfandiari has a term of three years ending March 2019. The contract with Ms. Klugewicz expires May 2019. The contract with Mr. Goldman expires December 2018. The Company has obtained a key man insurance policy on Mr. Esfandiari.
We May Not Generate the Expected Benefits of Our Acquisitions or Investments and They Could Disrupt Our Ongoing Business, Distract Our Management, Increase Our Expenses and Negatively Affect Our Business.
As a way for us to grow our business, we may pursue strategic acquisitions or investments. These activities, and their impact on our business, are subject to many risks, including the following: (i) the benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new businesses or markets, general economic conditions and increased competition; (ii) we may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products and/or technology into our business; (iii) we may not be able to accurately forecast the performance or ultimate impact of an acquired business; and (iv) an acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business.
If these factors occur, we may be unable to achieve all or a significant part of the benefits expected from an acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial and strategic objectives.
Third-Party Reimbursement Policies and Potential Cost Constraints Could Negatively Affect Our Business.
The list of our product end-users includes hospitals, physicians and other healthcare providers. If these end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors, the use of our products could be negatively impacted. Furthermore, the net sales of our products could also be adversely affected by changes in reimbursement policies of government or private healthcare payors.
Hospitals, physicians and other healthcare providers who purchase diagnostic products in the United States generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product. Due to the overall escalating cost of medical products and services, there is increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States, available levels of reimbursement may change for our existing products or products under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for our products or our ability to sell our products on a profitable basis.
To the Extent That We Are Unable to Collect Our Outstanding Accounts Receivable, Our Operating Results Could be Materially Harmed.
There may be circumstances and timing that require us to accept payment terms, including delayed payment terms, from distributors or customers, which, if not satisfied, could cause financial losses.
We generally accept payment terms which require us to ship product before the contract price has been paid fully, and there also are circumstances pursuant to which we may accept further delayed payment terms pursuant to which we may continue to deliver product. To the extent that these circumstances result in significant accounts receivables and those accounts receivables are not paid on a timely basis, or are not paid at all, especially if concentrated in one or two customers, we could suffer financial losses.
The Ongoing Changes in Healthcare Regulation Could Negatively Affect Our Revenues, Business and Financial Condition.
There have been several proposed changes in the United States at the federal and state level for comprehensive reforms regarding the payment for, the availability of and reimbursement for healthcare services. These proposals have ranged from fundamentally changing federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (the “Affordable Care Act”).
Healthcare reform initiatives will continue to be proposed, and may reduce healthcare related funding in an effort. It is impossible to predict the ultimate content and timing of any healthcare reform legislation and its resulting impact on us. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase our costs or otherwise negatively effect on our financial condition and results of operations.
We Believe Our Success Depends In Part on the Continued Funding of and Our Ability to Participate in Large Testing Programs in the U.S. and Worldwide. Funding of These and or Similar Programs May be Reduced, Discontinued and/or We May Not be Able to Participate for Other Reasons.
We believe it to be in our best interests to meaningfully participate in large testing programs. Moreover many of these programs are funded by governments and other donors, and there can be no assurance that funding will not be reduced or completely discontinued. Participation in these programs also requires alignment and engagement with the many other participants in these programs, including WHO, CDC, U.S. Agency for International Development, foreign governments and their agencies, non-governmental organizations, and HIV service organizations. If we are unsuccessful in our efforts to participate in these programs, our operating results could be materially harmed.
In December 2013 President Obama signed into law the PEPFAR Stewardship and Oversight Act, which is the most recent reauthorization of PEPFAR. However, unlike the 2008 PEPFAR authorization, which authorized approximately $45 billion in funding, the new law does not authorize a specific dollar amount for funding.
Developing Testing Guidelines Could Negatively Affect The Sales of Our Products.
Government agencies may issue diagnostic testing guidelines or recommendations, which can alter the usage of our HIV testing products. New laws or guidelines, or changes to existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied, could impact the degree to which our testing products are used. These developments could affect the frequency of testing, the number of people tested and whether the testing products are used broadly for screening large populations or in a more limited capacity. These factors could in turn affect the level of sales of our products and our results of operations.
Legislative and Other Regulatory Changes Could Have An Effect On Our Business.
The current U.S. Presidential Administration has promised to repeal and replace the Affordable Care Act, expressed concerns with respect to existing trade agreements, and has indicated a desire to make other regulatory changes during his administration. Changes in regulatory or economic conditions or in the laws and policies governing foreign trade, taxes, manufacturing, and development in the United States could impact our business. Economic and regulatory changes could also affect foreign currency exchange rates which, in turn, could affect our reported financial results and our competitiveness on a worldwide basis.
Developments Related To The U.K.’s Referendum On Membership in The E.U. Could Adversely Affect Us.
On June 23, 2016, the United Kingdom (“U.K.”) voted in favor of leaving the European Union, or E.U. Following this “Brexit” referendum there has been increased political and economic uncertainty, particularly in the U.K. and E.U. and this uncertainty may last for the foreseeable future. Until the terms and timing of the U.K.’s exit from the E.U. are finalized, it will be difficult to predict the impact of Brexit. Our business in the U.K., the E.U. and world-wide could be negatively affected during this period of uncertainty, and perhaps longer. The decision of voters in the U.K. to exit the E.U. could cause volatility in global financial markets, such as global currency exchanges, resulting in a slow-down in economic activity in the U.K., Europe or globally, and result in significant regulatory changes and uncertainty. These events could make it more difficult or costly to sell our products, particularly in the U.K. and Europe, and negatively affect our revenues and results of operations. The Brexit referendum may also influence other countries and result in additional countries deciding to leave the E.U. This in turn could result in additional changes and uncertainty, any or all of which could negatively impact our business.
We Could be Exposed To Liability if We Experience Security Breaches or Other Disruptions and it Could Harm Our Reputation and Business.
We may be subject to cyber-attacks whereby computer hackers may attempt to access our computer systems or our third party IT service provider’s systems and, if successful, misappropriate personal or confidential information. In addition, a contractor or other third party with whom we do business may attempt to circumvent our security measures or obtain such information, and may purposefully or inadvertently cause a breach involving sensitive information. We will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, but cyber-attacks are becoming more sophisticated and frequent and the techniques used in such attacks change rapidly. Even though we take cyber-security measures that are continuously reviewed and updated, our information technology networks and infrastructure may still be vulnerable due to sophisticated attacks by hackers or breaches.
Even the most well protected IT networks, systems, and facilities remain potentially vulnerable because the techniques used in security breaches are continually evolving and generally are not recognized until launched against a target and, in fact, may not be detected. Any such compromise of our or our third party’s IT service providers’ data security and access, public disclosure, or loss of personal or confidential business information, could result in legal claims proceedings, liability under laws to protect, privacy of personal information, and regulatory penalties, disrupt our operations, require significant management attention and resources to remedy any damages that result, damage our reputation and customers willingness to transact business with us, any of which could adversely affect our business.
Our Ability to Efficiently Operate Our Business is Reliant on Information Technology and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Business.
We rely heavily on complex information technology systems across our operations and on the internet, including for management of inventory, invoices, purchase orders, shipping, interactions with our third-party logistics provider, revenue and expense accounting, consumer call support, online business, and various other processes and transactions. Our ability to effectively manage our business, coordinate the production, distribution and sale of our products, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the reliability and capacity of these systems and the internet.
If any of the foregoing systems fails to operate effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales and reduced efficiency of our operations. Significant expenditures could be required to fix any such problem.
If There is an Increase in Demand for Our Products, it Could Require Us to Expend Considerable Resources or Harm Our Customer Relationships if We are Unable to Meet That Demand.
If there are significant or unexpected increases in the demand for our products, we may not be able to meet that demand without expending additional capital resources. This would increase our capital costs, which could negatively affect our earnings. In addition, new manufacturing equipment or facilities may require FDA approval before they can be used to manufacture our products. To the extent we are unable to obtain or are delayed in obtaining such approvals, our ability to meet the demand for our products could be adversely affected. Furthermore, our suppliers may be unable or unwilling to expend the necessary capital resources or otherwise expand their capacity, which could negatively affect our business.
Our business could be negatively affected if we or our suppliers are unable to develop necessary manufacturing capabilities in a timely manner. If we fail to increase production volumes in a cost effective manner or if we experience lower than anticipated yields or production problems as a result of changes that we or our suppliers make in our manufacturing processes to meet increased demand, we could experience shipment delays or interruptions and increased manufacturing costs, which could also have a material adverse effect on our revenues and profitability.
If there are unexpected increases in demand for our products, we may be required to obtain additional raw materials in order to manufacture products to meet the increase in demand. However, some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. It is also possible that one or more of our suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits.
If we are unable to meet customer demand for our products, it could also harm our relationships with our customers and impair our reputation within the industry. This, in turn, could have a material adverse effect on our business.
Risks Related to Our Products
For Our Business to Succeed in the Future, Our Current and Future Products Must Receive Market Acceptance.
The market acceptance and the timing of such acceptance, of our new products or technologies is necessary for our future success. To achieve market acceptance, we and/or our distributors will likely be required to undertake substantial efforts and spend significant funds to inform every one of the existence and perceived benefits of our products. We also may require government funding for the purchase of our products may be needed to help create market acceptance and expand the use of our products.
It may be difficult evaluate the market reaction to our products and our marketing efforts for new products may not be successful. The government funding we receive may be limited for new products. As such, there can be no assurance that any products will obtain significant market acceptance and fill the market need that is perceived to exist on a timely basis, or at all.
We May Not Have Sufficient Resources to Effectively Introduce and Market Our Products, Which Could Materially Harm Our Operating Results.
Introducing and achieving market acceptance for our rapid HIV tests and other new products will require substantial marketing efforts and will require us and/or our contract partners, sales agents, and/or distributors to make significant expenditures of time and money. In some instances we will be significantly or totally reliant on the marketing efforts and expenditures of our contract partners, sales agents, and/or distributors. If they do not have or commit the expertise and resources to effectively market the products that we manufacture, our operating results will be materially harmed.
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 May Reduce or Eliminate the Demand For Our Products.
The development and commercialization of products outside of the diagnostics industry could adversely affect sales of our products. For example, the development of a safe and effective vaccine to HIV or treatments for other diseases or conditions that our products are designed to detect, could reduce or eventually eliminate the demand for our HIV or other diagnostic products and result in a loss of revenues.
The Sales Cycles for Our Products Can Be Lengthy, Which Can Cause Variability and Unpredictability in Our Business.
Some of our products may require lengthy and unpredictable sales cycles, which makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Our products may involve sales to large public and private institutions which may require many levels of approval and may be dependent on economic or 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.
Our Insurance May be Inadequate to Cover Our Potential Business Risks.
We believe that our present product liability and other insurance coverage is sufficient to cover our current estimated exposures, but we cannot be sure that we will not incur liabilities in excess of our policy limits. Although we believe that we will be able to continue to obtain adequate coverage in the future, there is no assurance that we will be able to do so.
Due to the Use of Our Products, We May Face Product Liability Claims for Injuries.
If any of our products, or any product which is made with the use or incorporation of any of our technologies, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage, we may subject to liability. We may not be successful in defending any product liability lawsuits brought against us. Regardless of merit or eventual outcome, product liability claims could result in (i) decreased demand for our products; (ii) damage to our image or reputation; (iii) lost revenues; and (iv) incurrence of damages payable to plaintiffs
Legal Proceedings May Cause Us to Suffer Monetary Damages or Incur Substantial Costs.
In the future we may become involved in various legal proceedings arising out of our businesses. These may include negligence claims, commercial disputes or other lawsuits arising in the ordinary course of business. These lawsuits may result in damages, sometimes in substantial amounts, for commercial or personal injuries allegedly suffered. An adverse ruling or rulings in one or more such lawsuits could result in the termination or modification of a material contract or otherwise have a material adverse effect on our business.
Our Customers May Not Adopt Rapid Point-of-Care Diagnostic Testing.
Rapid point-of-care tests are beneficial because, among other things, they can be administered by healthcare providers in their own facilities or used by consumers at home without sending samples to central laboratories. But currently the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. are provided by clinical reference laboratories and hospital-based laboratories. In some international markets, such as Europe, diagnostic testing is performed primarily by centralized laboratories. Future sales of our products will depend, in part, on our ability to expand market acceptance of rapid point-of-care testing and successfully compete against laboratory testing methods and products. However, we expect that clinical reference and other hospital-based laboratories will continue to compete vigorously against our rapid point-of-care products. Even if we can demonstrate that our products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. If we fail to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers, it would have a negative effect on our future sales growth.
If Our Products Do Not Perform Properly, It May Affect Our Revenues, Stock Price and Reputation.
Our products may not perform as expected. For example, a defect in one of our diagnostic products or a failure by a customer to follow proper testing procedures may cause the product to report inaccurate information. Identifying the root cause of a product performance or quality issue can be difficult and time consuming.
If our products do not to perform in accordance with the applicable label claims or otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be negatively affected. If this occurs, we may be required to implement holds or product recalls and incur warranty obligations. Furthermore, the poor performance by one or more of our products could have an adverse effect on our reputation, our continuing ability to sell products and the price of our Common Stock.
If We Expand Our International Presence, It May Increase Our Risks and Expose Our Business to Regulatory, Cultural or Other Challenges.
We will continue to try to increase revenue derived from international sales of our products. There are several of factors that could adversely affect the performance of our business and/or cause us to incur substantially increased costs because of our international presence and sales, including: (i) uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; (ii) cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of our products; (iii) exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or representatives; (iv) trade protection measures, trade sanctions and import/export licensing requirements; (v) our inability to obtain or maintain regulatory approvals or registrations for our products; (vi) Economic conditions, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign countries; (vii) Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign countries; (viii) our inability to identify international distributors and negotiate acceptable terms for distribution agreements; and (ix) restrictions on our ability to repatriate investments and earnings from foreign operations.
Economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of the supply of our products could reduce revenues or cause us to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of manufacturing our products in foreign countries.
Financial Results, Economic, and Financing Risks
The Success of Our Business Depends On, in Addition to the Market Success of Our Products, Our Ability to Raise Additional Capital Through the Sale of Debt or Equity or Through Borrowing, and We May Not be Able to Raise Capital or Borrow Funds on Attractive Terms and/or in Amounts Necessary to Continue Our Business, or At All.
We were profitable for five consecutive years through 2013. Nevertheless, prior to 2009 we sustained significant operating losses since 2004, and we incurred an operating loss each year for 2014 through 2017. We estimate that our resources are sufficient to fund our needs through the end of 2018 and beyond. We have already made, and may continue to make, significant financial commitments to invest in our sales and marketing organization, regulatory approvals, research and development including new technologies, and production capacity, including expanded facilities.
Our liquidity and cash requirements will depend on several factors. These factors include, among others, (1) the level of revenues; (2) the extent to which, if any, that revenue level improves operating cash flows; (3) our investments in research and development, facilities, marketing, regulatory approvals, and other investments we may determine to make; and (4) our investment in capital equipment and the extent to which it improves cash flow through operating efficiencies. There are no assurances that we will generate positive cash flow for 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. Our ability to re-achieve profitability in the future will primarily depend on our ability to increase sales of our products based on having made the aforementioned expenditures to reduce production and other costs, and to successfully introduce new products and enhanced versions of our existing products into the marketplace. If we are unable to increase our revenues at a rate that is sufficient to achieve profitability, or adequately control and reduce our operating costs, our operating results would be materially harmed.
We Base Our Estimates or Judgments Relating to Critical Accounting Policies on Assumptions That Can Change or Prove to be Incorrect.
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States and our discussion and analysis of financial condition and results of operations is based on such statements. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We continuously evaluate significant estimates used in preparing our financial statements, including those related to (i) revenue recognition; (ii) stock-based compensation; (iii) allowance for uncollectible accounts receivable; (iv) customer sales returns and allowances; (v) contingencies; and (vi) income taxes.
Our estimates are based on historical experience and various other assumptions that we believe to be reasonable, as set forth in our discussion and analysis of financial condition and results of operations, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these and other estimates if our assumptions change or if actual circumstances differ from those in our assumptions. If our operating results fall below the expectations of securities analysts and investors, the price of our Common Stock may decline.
We May Fail to Meet Our Financial Projections and There May be Fluctuations in Our Financial Results.
From quarter to quarter and year to year, our operating results can fluctuate, which could cause our growth or financial performance to fail to meet the expectations of investors and securities analysts. Our financial projections are based on a number of assumptions, including the estimated demand for our products. However, sales to our distributors and other customers may not meet expectations because of lower than expected customer demand or other factors, including continued economic volatility and disruption, reduced governmental funding, and other circumstances described elsewhere in this Form 10-K. A variety of factors could also contribute to the variability of our financial results, including infrequent, unusual or unexpected changes in revenues or costs.
Different products provide dissimilar contributions to our gross product margin. Accordingly, our operating results could also fluctuate and be negatively affected by the mix of products sold and the relative prices and gross product margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts could adversely affect our reputation and the price of our Common Stock.
Our Operating Results May be Negatively Affected by Changes in Foreign Currency Exchange Rates.
In the past our exposure to foreign currency exchange rate risk has not been material. Nevertheless, sales of our products are subject to currency risks, since changes in the values of foreign currencies relative to the value of the U.S. Dollar can render our products comparatively more expensive. The fluctuations in the exchange rate could negatively impact international sales of our products, as could changes in the general economic conditions.
The revenues and expenses of Chembio Diagnostics Malaysia, one of our subsidiaries, are recorded in Malaysian Ringgit. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of reporting our consolidated financial results. Our expectation is that the Chembio Diagnostics Malaysia business will continue to grow and, consequently, our exposure to foreign currency exchange rates may grow as well.
Chembio Diagnostics Malaysia’s revenues and expenses and the translation of Chembio Diagnostics Malaysia’s financial results into U.S. Dollars may be negatively affected by fluctuations in the exchange rate. Favorable movement in exchange rates have benefited us in prior periods. However, where there are unfavorable currency exchange rate fluctuations, our consolidated financial statements could be negatively affected. Furthermore, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, we have not generally entered into hedging instruments to manage our currency exchange rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. If we are unable to successfully hedge against unfavorable foreign currency exchange rate movements, our consolidated financial results may be adversely impacted.
Economic Volatility Around the World Could Adversely Affect Our Results.
Volatility in the economy may continue or exist in the future. This could negatively impact our financial performance or those of our customers and suppliers. These circumstances could inhibit our access to liquidity needed to conduct or expand our business. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of economic conditions. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase our products or supply us with necessary equipment, raw materials or components. Even with the improvement of economic conditions, it may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of an economic recovery.
The New U.S. Tax Cuts and Jobs Act of 2017 and Any Subsequent Tax Law Changes Could Adversely Affect Us.
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reforms the Internal Revenue Code of 1986, as amended.amended, or the Code. The TCJA includes, among other matters, changes to U.S. federal tax rates, allows forboard has also determined that each of Dr. Potthoff, Ms. Davis and Ms. Page is an audit committee financial expert in accordance with the expensing of capital expenditures, imposes significant additional limitations on the deductibility of interest, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We do not expect tax reform to have a material impact to our projection of minimal cash taxes or to our net operating losses. Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate of 21 percent, and the impact will be recognized in our tax expense in the year of enactment. We continue to evaluate the TCJA may have on our business. The impact of this tax reform on holders of our common stock is uncertain and could be adverse. In addition, subsequent unforeseen changes in U.S. or other countries’ tax laws could adversely affect us. We urge our stockholders to consult with their legal and tax advisors with respect to the TCJA and the potential tax consequences of investing in our common stock.
We May Require Additional Capital in the Future.
Our liquidity and ability to meet capital requirements will depend on numerous factors, including, but not limited to, the following: (i) the costs and timing of expansion of sales and marketing activities; (ii) the extent to which we gain or expand market acceptance for existing, new or enhanced products; (iii) the timing and successstandards of the commercial launchSEC.
During 2019, the audit committee met seven times. During those meetings, the audit committee met privately with representatives of new products; (iv)BDO USA, LLP, our independent auditor for 2019, on five occasions, met privately with our management on all seven occasions, and held five executive sessions with only non-employee directors in attendance. Each of the successthen-serving members participated in all 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.meetings of the audit committee during 2019.
If we require new financing, we may seek to raise funds by selling equity or other securities or through bank borrowings. There can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all.
Compensation Committee
Our Business May be Negatively Affected by Terrorist Attacks or Natural Disasters.
Terrorist attacks or natural disasters could cause economic instability. These events could negatively affect economic conditions both within and outside the United States and harm demand for our products. The operations of our customers and suppliers could be negatively impacted and eliminate, reduce or delay our customers’ ability to purchase and use our products and our suppliers’ ability to provide raw materials and finished products.
Our facilities, including some pieces of manufacturing equipment and our computer systems, may be difficult to replace. Various types of disasters, including fires, earthquakes, floods and acts of terrorism, may affect our facilities and computer systems. In the event our existing facilities or computer systems are affected by man-made or natural disasters, we may have difficulty operating our business and may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business.
Risks Related to Intellectual Property
Our Success Depends on Our Ability to Protect Our Proprietary Technology. We Rely on Trade Secret Laws and Agreements With Our Key Employees and Other Third Parties to Protect Our Proprietary Rights, and We Cannot be Sure That These Laws or Agreements Adequately Protect Our Rights.
Our industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in other countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenues and gross profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other technologies may not be adequate for the operation of our business.
As appropriate, we intend to file patent applications and obtain patent protection for our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to the use or manufacture of those products. However, there have been changes to the patent laws and proposed changes to the rulesprincipal responsibilities of the U.S. Patent and Trademark Office, which may impact our abilitycompensation committee are to protect our technology and enforce our intellectual property rights. For example, in 2011, the U.S. enacted sweeping changes to the U.S. patent system under the Leahy-Smith America Invents Act (the “AIA”), including changes that would transition the U.S. from a “first-to-invent” system to a “first-to-file” system and alter the processes for challenging issued patents. These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.
We believe that factors such as the technological and creative skills of our personnel, strategic relationships, new product developments, frequent product enhancements and name recognition are essential to our success. All our management personnel are bound by non-disclosure agreements. If personnel leave our employment, in some cases we would be required to protect our intellectual property rights pursuant to common law theories which may be less protective than provisions of employment, non-competition or non-disclosure agreements.
We seek to protect our proprietary products under trade secret and copyright laws, enter into license agreements for various materials and methods employed in our products, and enter into strategic relationships for distribution of the products. These strategies afford only limited protection. We currently have some foreign patents issued, and we are seeking additional patent protection in several other foreign jurisdictions for our DPP® technology. We have licenses to reagents (antigens and peptides) used in several of our products and products under development. Despite our efforts to protect our proprietary assets, and respect the intellectual property rights of others, we participate in several markets where intellectual property rights protections are of little or no value. This can place our products and our company at a competitive disadvantage.
Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how.
To facilitate development and commercialization of a proprietary technology base, we may need to obtain additional licenses to patents or other proprietary rights from other parties. Obtaining and maintaining these licenses, which may not be available, may require the payment of up-front fees and royalties. In addition, if we are unable to obtain these types of licenses, our product development and commercialization efforts may be delayed or precluded.
If We Become Involved in Intellectual Property Disputes, Such Disputes Could Increase Our Costs and Limit or Eliminate Our Ability to Sell Products or Use Certain Technologies.
We may be required to expend substantial resources in asserting or protecting our intellectual property rights, or in defending suits related to intellectual property rights. We may seek to enforce our patents or other intellectual property rights through litigation. Such litigation is prevalent and is expected to continue. In our business, there are a large number of patents and patent applications similar to our products, and additional patents may be issued to third parties relating to our product areas. We, our customers or our suppliers may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of our products. We may also have disputes with parties that license patents to us if we believe the license is no longer needed for our products or the licensed patents are no longer valid or enforceable.
There are a large number of patents in our industry, and the claims of these patents appear to overlap in many cases. Therefore there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing that cover technologies we incorporate in our products. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third party’s proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another party’s proprietary rights.
If we are involved in litigation or other legal proceedings with respect to patents or other intellectual property and proprietary technology, it could adversely affect our revenues, results of operations, market share and business because (i) it could consume a substantial portion of managerial and financial resources; (ii) its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by our products; (iii) the pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products; (iv) a court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products; and (v) an adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect our future earnings.
Under certain contracts with third parties, we may indemnify the other party if our products or activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Furthermore, our products may contain technology provided to us by third parties, and we may be unable to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the event that an infringement or misappropriation claim is asserted against us.
There may also be other types of disputes that we become involved in regarding intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reissue, patent reexamination, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office as well. These proceedings permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Risks Related to Our Third Party Collaborators
Our Use of Third-Party Suppliers, Some of Which May Constitute Our Sole Supply Source, for Certain Important Product Components Presents a Risk That Could Have Negative Consequences for Our Business.
A number of our components and critical raw materials are provided by third-party suppliers, some of which may be sole-source suppliers, which impacts our ability to manufacture or sell certain products if our suppliers cannot or will not deliver those materials in a timely fashion, or at all, due to an interruption in their supply, quality or technical issues, or any other reason. If this occurs, we could incur substantial expense and time to be able to reestablish the appropriate quality, cost, regulatory and market-acceptance circumstances needed for commercial success. Even with the needed expense and time, we may not be able to reestablish any or all of these factors. The absence of any one or more of these factors could prevent us from being able to commercially produce and market the affected product or products.
If Needed, We May Work with Strategic Collaborators to Assist in Developing and Commercializing Our Products.
Some business opportunities that require a technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic collaborators. As part of our strategy for development and commercialization of our products, we may enter into arrangements with distributors or other third-parties. Relying on such collaborative relationships could be risky to our business for a number of reasons, including: (i) we may be required to transfer material rights to such strategic collaborators, licensees and others; (ii) our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; (iii) our collaborators may decide to terminate our collaborative arrangement or become insolvent; (iv) our collaborators may develop technologies or components competitive with our products; (v) disagreements with collaborators could result in the termination of the relationship or litigation; and (vi) we may not be able to agree to future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all.
We expect our collaborators will have an economic motivation to succeed in performing their contractual responsibilities under our agreements, there is no assurance that they will do so. Due to our reliance on strategic agreements, it can make it difficult to accurately forecast our future revenues and operating results.
If We Fail to Maintain Existing Distribution Channels, or Develop New Distribution Channels, It May Result in Lower Revenues.
We collaborate with laboratories, diagnostic companies and distributors in order to sell our products. The sale of our products depends in large part on our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate and work with.
By relying on distributors or third-parties to market and sell our products could negatively impact our business for various reasons, including: (i) we may not be able to find suitable distributors for our products on satisfactory terms, or at all; (ii) agreements with distributors may prematurely terminate or may result in litigation between the parties; (iii) our distributors or other customers may not fulfill their contractual obligations and distribute our products in the manner or at the levels we expect; (iv) our distributors may prioritize their own private label products that compete with our products; (v) Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements with other distributors; and (vi) we may not be able to negotiate new or renew existing distribution agreements on acceptable terms, or at all.
We will try to maintain and expand our business with distributors and customers and make every effort to require that they fulfill their contractual obligations, but there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. If we are unable to do so, our business will be negatively impacted.
Risks Related to Regulations
Because We May Not Be Able to Obtain or Maintain the Necessary Regulatory Approvals for Some of Our Products, We May Not Generate Revenues in the Amounts We Expect, or in the Amounts Necessary to Continue Our Business. Our Existing Products as well as Our Manufacturing Facility Must Meet Quality Standards and are Subject to Inspection by a Number of Domestic Regulatory and Other Governmental and Non-Governmental Agencies.
All of our proposed and existing products are subject to regulation in the U.S. by the U.S. Food and Drug Administration, the U.S. Department of Agriculture and/or other domestic and international governmental, public health agencies, regulatory bodies or non-governmental organizations. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products. The process of obtaining required approvals or clearances varies according to the nature of, and uses for, a specific product. These processes can involve lengthy and detailed laboratory testing, human or animal clinical trials, sampling activities, and other costly, time-consuming procedures. The submission of an application to a regulatory authority does not guarantee that the authority will grant an approval or clearance for that product. Each authority may impose its own requirements and can delay or refuse to grant approval or clearance, even though a product has been approved in another country.
The time taken to obtain approval or clearance varies depending on the nature of the application and may result in the passage of a significant period of time from the date of submission of the application. Delays in the approval or clearance processes increase the risk that we will not succeed in introducing or selling the subject products, and we may determine to devote our resources to different products.
Changes in government regulations could increase our costs and could require us to undergo additional trials or procedures, or could make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all.
Changes in government regulations may adversely affect our financial condition and results of operations because we may have to incur additional expenses if we are required to change or implement new testing, manufacturing and control procedures. If we are required to devote resources to develop such new procedures, we may not have sufficient resources to devote to research and development, marketing, or other activities that are critical to our business.
We can manufacture and sell our products only if we comply with regulations and quality standards established by government agencies such as the FDA and the USDA as well as by non-governmental organizations such as the ISO and WHO. We have implemented a quality control system that is intended to comply with applicable regulations. Although FDA approval is not required for the export of our products, there are export regulations promulgated by the FDA that specifically relate to the export of our products that require compliance with FDA quality system regulation ("QSRs") and that also require meeting certain documentary requirements regarding the approval of the product in export markets.
If We Do Not Comply With FDA or Other Regulatory Requirements, We May Be Required to Suspend Production or Sale of Our Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues.
FDA Regulations and regulations by other federal, state and foreign regulatory agencies has an effect on many aspects of our operations, and the operations of our suppliers and distributors, including packaging, labeling, manufacturing, adverse event reporting, recalls, distribution, storage, advertising, promotion and record keeping. We are subject to routine inspection by the FDA and other agencies to determine compliance with QSRs and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. We believe that our facilities and procedures are in material compliance with the FDA requirements and ISO standards, but the regulations may be unclear and are subject to change, and we cannot be sure that the FDA or other regulators will agree with our compliance with these requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products. Regulatory agencies may impose restrictions on our or our distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market.
Our inability to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, recall or seizure of products, civil penalties, withdrawal of product registrations, total or partial suspension of production, refusal to grant premarket clearance or PMA approval for devices, marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations.
We must frequently make judgment decisions with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with how we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. Our reputation could be substantially impaired if we are assessed any civil and criminal penalties and limit our ability to manufacture and market our products which could have a material adverse effect on our business.
Demand For Our Products May be Affected by FDA Regulation of Laboratory-Developed Tests and Genetic Testing.
Regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical laboratories is covered by the FDA. The FDA has previously taken the position that it has regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion by not regulating most LDTs performed by high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. These laboratories are subject to CLIA regulation but such laboratories have previously not been subject to regulation by FDA under the agency’s medical device requirements.
However, the FDA has announced that it would begin regulating LDTs, and in October 2014 the FDA issued proposed guidance on the regulation of LDTs for public comment. But, on November 18, 2016, the FDA announced that it would not finalize the proposed guidance prior to the end of the Obama administration. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. We cannot predict what policies the Trump administration will adopt with respect to LDTs. If the FDA increases regulation of LDTs, it could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could reduce demand for our products and adversely impact our revenues.
In Addition to FDA Requirements, We Are Subject to Several Government Regulations, the Compliance With Which Could Increase Our Costs and Affect Our Operations.
In addition to the FDA regulations previously described, laws and regulations in some states may restrict our ability to sell products in those states.
We must comply with numerous laws related to safe working conditions, environmental protection, disposal of hazardous substances, fire hazard control, manufacturing practices and labor or employment practices. Compliance with these laws or any new or changed laws regulating our business could result in substantial costs. Due to the number of laws and regulations governing our industry, and the actions of a number of government agencies that could affect our operations, it is impossible to reliably predict the full nature and impact of these laws and regulations. To the extent the costs and procedures associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely affected.
We May Incur Additional Costs If We Do Not Comply With Privacy, Security and Breach Notification Regulations.
We believe we are not a covered entity nor a business associate of a covered entity and the Company is not responsible for complying with the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”). Even though the Company is likely not a covered entity under HIPAA, the Company does have in place administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information.] The Company is required to comply with varying state privacy, security and breach reporting laws. If we fail to comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. Also, there are other federal and state laws that protect the privacy and security of consumers’ personal information, and we may be subject to enforcement by various governmental authorities and courts resulting in complex compliance issues. We could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information.
If We Are Not Able to Manufacture Products in Accordance With Applicable Requirements, It Could Adversely Affect Our Business.
Our products must meet detailed specifications, performance standards and quality requirements. As a result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in materials or production methods, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our label claims or the expectations of our customers.
If we are not able to meet the applicable specifications, performance standards, quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations.
Healthcare Fraud and Abuse Laws Could Adversely Affect Our Business and Results of Operations.
There are various federal and state laws targeting fraud and abuse in the healthcare industry that the Company is subject to, including anti-kickback laws, laws constraining the sales, false claims laws, marketing and promotion of medical devices by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. There are other laws the Company is subject to that require the Company to report certain transactions between it and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs. Many of the existing requirements are new and have not been definitively interpreted by state authorities or courts, and available guidance is limited. We could face enforcement action and fines and other penalties, and could receive adverse publicity, unless and until we are in full compliance with these laws, all of which could materially harm the Company. Furthermore, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require us to change our business practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations.
Our Compliance With Regulations Governing Public Companies is Complex and Expensive.
Public companies are subject to various laws and regulations, which have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. For example, we are subject to the Sarbanes-Oxley Act of 2002, The Dodd-Frank Wall Street Reform and Consumer Protection Act, the requirements of The NASDAQ Global Market, and the SEC’s requirements for public companies to provide financial statements in interactive data format using the eXtensible Business Reporting Language (“XBRL”). The implementation of certain aspects of these laws and regulations has required and will continue to require substantial management time and oversight and may require us to incur significant additional accounting and legal costs. We continually review changes with respect to new and proposed rules and cannot predict or estimate the amount of additional costs, and the timing of such costs, we may incur. There are several interpretations of these laws and regulations, in many cases due to their lack of specificity, and as a result, their application in practice may change as new guidance is provided by regulatory and governing bodies. This may result in continuing uncertainty regarding compliance matters and higher costs. We are committed to maintaining high standards of corporate governance and public disclosure, but if we fail to comply with any of these requirements, legal proceedings may be initiated against us, which may adversely affect our business.
Although We 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 investors may not be able to sell as much stock as they want at prevailing market prices.
The average daily trading volume of our Common Stock on the NASDAQ market was approximately 16,368 shares per day over the three months ended December 31, 2017 as compared with approximately 19,300 shares per day over the three months ended December 31, 2016. The liquidity of our stock depends on several factors, including but not limited to the financial results of the Company and overall market conditions, so it is not possible to predict whether this level of liquidity will continue, be sustained, or decrease.
Decreased trading volume in our stock would make it more difficult for investors to sell their shares in the public market at any given time at prevailing prices. Our management and larger stockholders exercise significant control over the Company.
The Price of Our Common Stock Could Continue to be Volatile.
The price of our Common Stock has been volatile and may be volatile in the future. The following factors, among others, could have a significant impact on the market for our Common Stock: (i) the performance of our business; (ii) clinical results with respect to our products or those of our competitors; (iii) the gain or loss of significant contracts and availability of funding for the purchase of our products; (iv) actions undertaken by the Congress or the Presidential Administration; (v) changes in our relations with our key customers, distributors or suppliers; (vi) developments in patent or other proprietary rights; (vii) litigation or threatened litigation; (viii) general market and economic conditions; (ix) the relatively low trading volume for our Common Stock; (x) changes in competition; (xi) Complaints or concerns about the performance or safety of our products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; (xii) failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; (xiii) announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or our customers; (xiv) changes in our operating results; and (xv) terrorist attacks, civil unrest, war and national disasters.
Overall, the stock market has experienced price and volume fluctuations that have affected the market price of our Common Stock, as well as the stock of many other similar companies. Such price fluctuations are generally unrelated to the operating performance of the specific companies whose stock is affected.
After the volatility in the market price of a company’s stock, class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and the attention and resources of our management could be diverted, each of which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities.
Sales of Our Common Stock by Existing Stockholders, Executive Officers or Directors Could Depress the Market Price of Our Common Stock.
If our existing stockholders, officers or directors sell our Common Stock in the public market, or the perception that such sales may occur, it could negatively affect the price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors.
Institutional stockholders own significant amounts of our Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, the prevailing price of our Common Stock could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock.
We Do Not Intend to Pay Cash Dividends on Our Common Stock, Therefore an Investor in Our Common Stock Will Benefit Only if the Value of Our Common Stock Increases.
We do not expect to pay any cash dividends on our Common Stock and currently intend to retain our earnings, if any, to finance the expansion of our business. Therefore, the success of an investment in our Common Stock will depend entirely upon any future increase in value of our Common Stock. There is no guarantee that our Common Stock will gain value or even maintain the price at which investors purchased their shares.
If We and/or Our Independent Registered Public Accounting Firm Conclude That Our Internal Control Over Financial Reporting is Not Effective, Investor Confidence and the Value of Our Common Stock May be Adversely Impacted.
The SEC has adopted rules requiring us, as a public company, to include a report in our Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must report on the effectiveness of these internal controls.
We believe our internal controls will continue to evolve as our business develops. We continue to review our internal control over financial reporting in an effort to ensure compliance with SEC rules and regulations, any control system, regardless of how well designed and operated, can provide only reasonable assurance that its objectives will be met. In addition, the overall quality of our internal controls may be affected by the internal control over financial reporting implemented by any business we acquire and our ability to assess and successfully integrate the internal controls of any such business.
If our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, implemented, or tested, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then it may issue a report noting such dissatisfaction. We also could conclude that our internal control over financial reporting is not effective. These events could result in an adverse reaction in the financial marketplace, which ultimately could negatively impact the market price of our Common Stock.
Any Future Issuances of Shares of Our Common Stock by Us Could Harm the Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings.
Any future sales of a substantial number of our shares of Common Stock or other equity-related securities, or the perception that such sales may occur, could adversely affect the price of our Common Stock, and could impair our ability to raise capital through future offerings of equity or equity-related securities.
Our 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 byassist the board of directors or our stockholders. Asin fulfilling its responsibilities relating to:
developing an executive compensation philosophy and establishing and annually reviewing and approving executive compensation programs and policies;
reviewing and approving corporate goals and objectives for chief executive officer compensation, evaluating chief executive officer performance based on those goals, and setting chief executive officer compensation;
reviewing chief executive officer recommendations with respect to, and approving annual compensation for, other executive officers;
establishing and administering annual and long-term incentive compensation plans for key executives;
recommending to the board for approval incentive compensation plans and equity-based plans;
reviewing and approving all special executive employment, compensation and retirement arrangements;
recommending to the board changes to executive compensation policies and programs;
recommending to the board all Internal Revenue Service tax-qualified retirement plans;
recommending the board all nonqualified benefit plans and periodically reviewing such plans;
reviewing management’s recommendations for other nonexecutive corporate incentive plans;
provide minutes of committee meetings to the board and reporting any significant matters arising from the committee’s work;
preparing the report on executive compensation required by SEC rules;
determining procedures for selection of the chief executive officer and other senior management;
determining procedures for board review of the chief executive officer and other senior management;
developing guidelines for, and monitoring compliance with, long-range succession planning;
developing and maintaining, in consultation with the chair of the board and the chief executive officer, a result, they may be able to:short-term succession plan for unexpected situations affecting the senior management; and
| · | control the composition of our board of directors; |
| · | control our management and policies; |
| · | determine the outcome of significant corporate transactions, including changes in control that may be beneficial to stockholders; and, |
| · | act in each of their own interests, which may conflict with or differ from the interests of each other or the interests of the other stockholders. |
ITEM 1B. Unresolved Staff Comments.
Not Applicable
Our corporate headquarters and U.S. manufacturing, administrative offices, and research facilities are located in leased space in Medford, New York, together with nearby warehouse space and additional administrative offices in Holbrook, New York. Our Southeast Asia manufacturing, warehouse, and commercial facilities are located in leased space in Kuala Lumpur, Malaysia. We regularly review our real estate portfolio and develop footprint strategies to support our customers’ global plans, while at the same time supporting our technical needs and controlling operating expenses.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigationmonitoring procedures relating to claims arising out of our operations in the normal course of business. We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest that is adverse to our interest.executive development.
ITEM 4. MINE SAFETY DISCLOSURESNot Applicable.
PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket 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, 2018, there were approximately 1,590 record owners of our common stock (including nominee holders such as banks and brokerage firms who hold shares for beneficial owners).
Dividends
The Company has never paid cash dividends on its common stock and has no plans to do so in the foreseeable future. Any future declaration of dividends will be determined by our Board of Directors in its sole discretion and will depend on, among other things, our earnings, capital requirements, financial condition, prospects and any other factors the Board of Directors may deem relevant.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the year ended December 31, 2017 that were not previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the fourth quartercurrent members of the fiscal year ended December 31, 2017.
ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial data were derived from our audited consolidated financial statementsMs. Davis, Dr. Polan 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”)Dr. Potthoff 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 Statements and Supplementary Data. Our MD&A is presented in six sections:
| ● | Consolidated Results of Operations |
| ● | Liquidity and Capital Resources |
| ● | Significant Accounting Policies and Critical Accounting Estimates |
| ● | Recently Issued Accounting Pronouncements |
Executive Overview
Our Business
Through our wholly-owned subsidiaries, Chembio Diagnostic Systems Inc. and Chembio Diagnostics Malaysia Sdn Bhd, we develop, manufacture, and commercialize point-of-care (“POC”) diagnostic tests that are used to detect or monitor diseases. All products that are currently being developed are based on the Company’s patented DPP® technology, a novel POC diagnostic platform that offers certain customer advantages as compared to traditional lateral flow technology. Chembio was formed in 1985.
Business Strategy
Recent accomplishments and highlights:
● | Achieved total revenue of $24.0 million for full year 2017, an increase of 34% over prior year |
● | Achieved product sales of $19.3 million for full year 2017, an increase of 41% over prior year |
● | Received purchase commitment from Bio-Manguinhos related to DPP® HIV Assays and DPP® Leishmania Assays in Brazil, with a total value of $8.5 million in 2018 |
● | Received conditional award from UNICEF to purchase DPP® Zika System, for a total value of $1.5 million to $4.9 million, in 2018-2019
|
● | Submitted PMA Application to the FDA for the DPP® HIV-Syphilis Assay and DPP® Micro Reader following completion of U.S. clinical trials
|
● | Entered collaboration with AstraZeneca to develop a quantitative DPP® Assay to detect an undisclosed biomarker, from which Chembio will receive up to $2.9 million in R&D funding over 18 months
|
● | Won three-year tender from the Ethiopian Pharmaceuticals Fund and Supply Agency to deliver HIV STAT-PAK® Assay, with a total contract value of $15.8 million between 2018-2020
|
In addition, in February 2018, we strengthened our balance sheet with net proceeds of $11.0 million in capital from an underwritten public offering, which is more fully discussed under “Recent Developments”.
Our product commercialization and product development efforts are focused in three areas: sexually transmitted disease, tropical & fever disease, and technology collaborations. In sexually transmitted disease, we are commercializing tests for HIV and Syphilis. In tropical and fever disease, we are commercializing a test for Zika virus, dengue virus, and chikungunya virus, and developing tests for malaria, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi, individually or as part of a fever panel test. Through technology collaborations, we are developing tests for a specific form of cancer, concussion, bovine tuberculosis, and for an undisclosed biomarker, the latter in collaboration with global biopharmaceutical company AstraZeneca.
Large and growing markets have been established for these kinds of tests, initially in high prevalence regions where they are indispensable for large scale prevention and treatment programs. Our product development is focused on areas where the availability of rapid POC screening, diagnostic, or confirmatory results can improve health outcomes. More generally, we believe there is and will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the point of care.
Our products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally, under our STAT-PAK®, SURE CHECK®, STAT-VIEW® or DPP® registered trademarks, or under the private labels of our marketing partners.
Consolidated Results of Operations
2017 compared to 2016
The results of operations for the years ended December 31, 2017 and 2016 were as follows:
| | | December 31, 2017 | | | December 31, 2016 | |
| | | | | | | | | | | | | |
| TOTAL REVENUES | | $ | 24,015,427 | | | 100 | % | | $ | 17,868,841 | | | 100 | % |
| | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | |
| Cost of product sales | | | 12,921,157 | | | 54 | % | | | 9,417,505 | | | 53 | % |
| Research and development expenses | | | 8,555,381 | | | 36 | % | | | 8,427,554 | | | 47 | % |
| Selling, general and administrative expenses | | | 9,021,439 | | | 38 | % | | | 7,595,559 | | | 43 | % |
| | | | 30,497,977 | | | | | | | 25,440,618 | | | | |
| LOSS FROM OPERATIONS | | | (6,482,550 | ) | | | | | | (7,571,777 | ) | | | |
| | | | | | | | | | | | | | | |
| OTHER INCOME | | | 22,485 | | | | | | | 25,548 | | | | |
| | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (6,460,065 | ) | | (27 | )% | | | (7,546,229 | ) | | (42 | )% |
| | | | | | | | | | | | | | | |
| Income tax (benefit) provision | | | (88,305 | ) | | | | | | 5,800,818 | | | | |
| NET LOSS | | $ | (6,371,760 | ) | | | | | $ | (13,347,047 | ) | | | |
Percentages in the table reflect the percent of total revenues.
Total Net Revenues
Total net revenues during the year ended December 31, 2017 were $24.0 million, an increase of $6.1 million, or 34% compared to 2016. The increase in total net revenues was comprised of the following:
| ● | $5.6 million, or 41.2% increase in net product sales, reflecting gains in every region of the world except North America, which in 2016 benefited on a one-time basis from a former U.S. distributor's "end-of-contract purchase" of certain products following our notice of termination of that distribution agreement. The last of those products reached their normal expiration date in February 2018, and the Company has been building its own distribution channels consistent with our commercial strategy. As part of these regional successes and as highlighted above, during 2017, the Company re-secured its DPP® HIV Assay and DPP® Leishmania Assay sales to Brazil and established both a commercial and lower cost manufacturing footprint with its acquisition of RVR Diagnostics Sdn Bhd (now Chembio Diagnostics Malaysia Sdn Bhd). Refer to Note 2 – Acquisition to the audited consolidated financial statements included herein for further information regarding the acquisition.
|
| ● | $0.5 million, or 12.0% increase in R&D milestone and grant, and license and royalty revenues compared to 2016, reflecting the Company’s continued success in securing governmental, non-governmental, and commercial partnerships, in particular associated with our DPP® technology platform.
|
Gross Product Margin
Cost of sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross product margin percentage is gross product margin as a percentage of net product sales.
Gross product margin increased by $2.1 million, or 50.2% compared to 2016. The following schedule calculates gross product margin:
| | | For the years ended | | | | | | | |
| | | December 31, 2017 | | | December 31, 2016 | | | | | | % Change | |
| | | | | | | | | | | | | |
| Net product sales | | $ | 19,322,302 | | | $ | 13,680,107 | | | $ | 5,642,195 | | | | 41.2 | % |
| Less: Cost of product sales | | | (12,921,157 | ) | | | (9,417,505 | ) | | | (3,503,652 | ) | | | 37.2 | % |
| Gross product margin | | $ | 6,401,145 | | | $ | 4,262,602 | | | $ | 2,138,543 | | | | 50.2 | % |
| Gross product margin % | | | 33.13 | % | | | 31.16 | % | | | | | | | | |
The $2.1 million increase in gross product margin was comprised of the following:
| ● | $1.7 million from favorable product sales volume as described above, and |
| ● | $0.4 million from favorable product margins, principally related to favorable overhead application. |
Research and Development
This category includes costs incurred for clinical & regulatory affairs and other research & development, as follows:
| | | For the years ended | | | | | | | |
| | | December 31, 2017 | | | December 31, 2016 | | | | | | % Change | |
| Clinical & regulatory affairs | | $ | 2,298,206 | | | $ | 1,444,410 | | | $ | (853,796 | ) | | | (59.1 | %) |
| Other research & development | | | 6,257,175 | | | | 6,983,144 | | | | 725,969 | | | | 10.4 | % |
| Total Research and Development | | $ | 8,555,381 | | | $ | 8,427,554 | | | $ | (127,827 | ) | | | (1.5 | %) |
The increase in clinical & regulatory affairs costs for the year ended December 31, 2017 as compared to 2016 is primarily associated with the Company’s U.S. clinical trial evaluating its DPP® HIV-Syphilis System, which it completed in December 2017, as discussed above. The decrease in other research & development costs is primarily associated with a reduction in spending on materials & supplies associated with R&D milestone and grant revenue-related projects.
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A”) includes administrative expenses, sales and marketing costs including commissions, and other corporate items.
The $1.4 million, or 18.8%, increase in SG&A for the year ended December 31, 2017 as compared to 2016 is primarily associated with increases in the following: $0.7 million compensation, travel, entertainment, and trade show costs associated with the growth in our sales and commercial team, $0.4 million intangible asset amortization related to the acquisition of RVR Diagnostics in January 2017, and $0.3 million corporate regulatory costs.
Other Income and Expense
Other income and expenses are principally interest income earned on the Company's deposits, which decreased by approximately $3,000 for the year ended December 31, 2017 as compared to 2016.
Income Tax Provision
For the year ended December 31, 2017 the Company recognized a tax benefit of $88,000 associated with anticipated refunds of accumulated alternative minimum tax (AMT) credits to be received between 2019 and 2021 pursuant to recently enacted tax legislation net of state tax provisions. Accordingly, the benefit had no cash impact in 2017. In 2016, the Company recorded a non-cash income tax provision and decreased its deferred tax assets by $5.8 million as the Company took a full valuation allowance against its carryforward losses.
2016 versus 2015
The results of operations for the years ended December 31, 2016 and 2015 were as follows:
| | | December 31, 2016 | | | December 31, 2015 | |
| | | | | | | | | | | | | |
| TOTAL REVENUES | | $ | 17,868,841 | | | 100 | % | | $ | 24,255,485 | | | 100 | % |
| | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | |
| Cost of product sales | | | 9,417,505 | | | 53 | % | | | 13,768,658 | | | 57 | % |
| Research and development expenses | | | 8,427,554 | | | 47 | % | | | 6,377,839 | | | 26 | % |
| Selling, general and administrative expenses | | | 7,595,559 | | | 43 | % | | | 7,663,035 | | | 32 | % |
| | | 25,440,618 | | | | | | | 27,809,532 | | | | |
| LOSS FROM OPERATIONS | | | (7,571,777 | ) | | | | | | (3,554,047 | ) | | | |
| | | | | | | | | | | | | | | |
| OTHER INCOME | | | 25,548 | | | | | | | (3,238 | ) | | | |
| | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (7,546,229 | ) | | (42 | %) | | | (3,557,285 | ) | | (15 | %) |
| | | | | | | | | | | | | | | |
| Income tax provision (benefit) | | | 5,800,818 | | | | | | | (1,160,243 | ) | | | |
| NET LOSS | | $ | (13,347,047 | ) | | | | | $ | (2,397,042 | ) | | | |
| | | | | | | | | | | | | | | |
Percentages in the table reflect the percent of total revenues.
Total Net Revenues
Total net revenues during the year ended December 31, 2016 were $17.9 million, a decrease of $6.4 million, or 26.3% compared to 2015. The decrease in total net revenues was comprised of the following:
| ● | $8.2 million, or 37.5% decrease in net product sales compared to 2015, reflecting decreased sales in Brazil and Mexico, partially offset by increased sales in the U.S., which in 2016 benefited on a one-time basis from a former U.S. distributor's "end-of-contract purchase" of certain products following our termination of that distribution agreement. |
| ● | $1.8 million, or 76.8% increase in R&D milestone and grant revenues compared to 2015, reflecting the Company’s continued success in securing governmental, non-governmental, and commercial partnerships, in particular associated with our DPP® technology platform.
|
Gross Product Margin
Cost of sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross product margin percentage is gross product margin as a percentage of net product sales.
Gross product margin fell by $3.9 million, or 47.5% compared to 2015. The following schedule calculates gross product margin:
| | | For the years ended | | | | | | | |
| | | December 31, 2016 | | | December 31, 2015 | | | Favorable/ (unfavorable) | | | % Change | |
| | | | | | | | | | | | | |
| Net product sales | | $ | 13,680,107 | | | $ | 21,886,688 | | | $ | (8,206,581 | ) | | | (37.5 | )% |
| Less: Cost of product sales | | | (9,417,505 | ) | | | (13,768,658 | ) | | | 4,351,153 | | | | (31.6 | )% |
| Gross product margin | | $ | 4,262,602 | | | $ | 8,118,030 | | | $ | (3,855,428 | ) | | | (47.5 | )% |
| Gross product margin % | | | 31.16 | % | | | 37.09 | % | | | | | | | | |
The $3.9 million decrease in gross product margin was comprised of the following:
| ● | $3.0 million from unfavorable product sales volume as described above, and |
| ● | $0.9 million from unfavorable product margins, reflecting the increased absorption of overhead at lower unit volumes. |
Research and Development
This category includes costs incurred for clinical & regulatory affairs and other research & development, as follows:
| | | For the years ended | | | | | | | |
| | | December 31, 2016 | | | December 31, 2015 | | | | | | % Change | |
| Clinical & regulatory affairs | | $ | 1,444,410 | | | $ | 982,366 | | | $ | (462,044 | ) | | | (47.0 | )% |
| Other research development | | | 6,983,144 | | | | 5,395,473 | | | | (1,587,671 | ) | | | (29.4 | )% |
| Total Research and Development | | $ | 8,427,554 | | | $ | 6,377,839 | | | $ | (2,049,715 | ) | | | (32.1 | )% |
Expenses for Clinical & Regulatory Affairs increased by $0.5 million for the year ended December 31, 2016, as compared to 2015, primarily related to an increase in clinical trial expenses and additional wages and related costs.
Other R&D expenses increased by $1.6 million in the year ended December 31, 2016, as compared to 2015. The increase is primarily related to an increase in wages, benefits, materials, and supplies to support the growth in sponsored research and internal development programs.
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A”) includes administrative expenses, sales and marketing costs including commissions, and other corporate items.
The $0.1 million decrease in SG&A for the year ended December 31, 2016 as compared to 2015 reflects reduced commissions (principally for lower sales in Brazil) and other selling costs related to the lower 2016 sales volume, somewhat offset by increases in wages and travel costs associated with the growth in our sales and commercial team.
Other Income and Expense
Other income and expenses are principally interest income earned on the Company's deposits, which increased by approximately $29,000 for the year ended December 31, 2016 as compared to 2015, reflecting interest on funds raised in the 2016 public offering.
Income Tax Provision
For the year ended December 31, 2016, the Company recognized a $5.8 million non-cash income tax provision and decreased its deferred tax assets by a corresponding amount, together with a full valuation allowance. By comparison, for the year ended December 31, 2015, the Company recognized a $1.2 million non-cash income tax benefit and increased its deferred tax assets by a corresponding amount.
Liquidity and Capital Resources
Overview
Our liquidity requirements are primarily to fund our business operations, including capital expenditures and working capital requirements, as well as to fund opportunistic investments that align with our focused business strategy. Our primary sources of liquidity are cash flows from operations, our existing cash balance, and as necessary, additional capital. We will continually explore ways to enhance our capital structure.
Acquisition
On January 9, 2017, Chembio acquired 100% of the equity interests of RVR Diagnostics Sdn Bhd, a Malaysia manufacturer and distributor of rapid medical assays, for $1.4 million in cash and for common shares with a value at closing of approximately $1.7 million. As further described in Note 2 – Acquisition to the audited consolidated financial statements 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.
Government, Non-Governmental Organization, and Non-Profit Programs
Chembio commonly seeks research and development programs that may be awarded by government, non-governmental organization (“NGO”), and non-profit entities including private foundations. Chembio currently has or has recently undertaken development programs that are competitively awarded from agencies of the U.S. Federal Government including the U.S. Department of Health and Human Services and U.S. Department of Agriculture, as well as from FIND, the Bill & Melinda Gates Foundation, and The Paul G. Allen Family Foundation.
Contractual Commitments
The following table summarizes the Company’s expected cash outflows resulting from financial contracts and commitments as of December 31, 2017, with amounts denominated in foreign currencies translated using foreign currency rates as of December 31, 2017.
| | | Payments due by period | |
| | | Total | | | Less than one year | | | 1 - 3 years | | | 3-5 years | | | Thereafter | |
Operating leases1 | | $ | 1,058,000 | | | $ | 603,000 | | | $ | 455,000 | | | $ | - | | | $ | - | |
Employment contracts2 | | | 1,341,000 | | | | 770,000 | | | | 571,000 | | | | - | | | | - | |
Purchase obligations3 | | | 548,000 | | | | 548,000 | | | | - | | | | - | | | | - | |
Minimum commitments under contracts4 | | | 239,000 | | | | 56,000 | | | | 112,000 | | | | 51,000 | | | | 20,000 | |
| Total | | $ | 3,186,000 | | | $ | 1,977,000 | | | $ | 1,138,000 | | | $ | 51,000 | | | $ | 20,000 | |
1Represents payments required under our operating leases.
2Represents salary payments payable under the terms of employment agreements with certain executives with terms that extend beyond December 31, 2018.
3Represents payments required by non-cancellable purchase orders related to capital expenditures.
4Represents payments required pursuant to certain licensing agreements. Such agreements are cancellable within a specified number of days following notice by the Company.
Cash Flows
As of December 31, 2017, we had cash and equivalents of $3.8 million and no outstanding debt except for a $0.1 million seller-financed note payable associated with automated manufacturing equipment.
| | | For the years ended | | | | | | | |
| | | December 31, 2017 | | | December 31, 2016 | | | | | | % Change | |
| | | | | | | | | | | | | |
| Net cash used in operating activities | | $ | (5,034,515 | ) | | $ | (6,704,734 | ) | | $ | 1,670,219 | | | | 24.9 | % |
| Net cash used in investing activities | | | (1,876,954 | ) | | | (668,706 | ) | | | (1,208,248 | ) | | | (180.7 | )% |
| Net cash provided by financing activities | | | 134,280 | | | | 12,550,973 | | | | (12,416,693 | ) | | | (98.9 | )% |
| Effect of exhange rate changes on cash | | | 13,027 | | | | - | | | | 13,027 | | | | 100.0 | % |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | $ | (6,764,162 | ) | | $ | 5,177,533 | | | $ | (11,941,695 | ) | | | (230.6 | )% |
The Company's cash as of December 31, 2017 decreased by $6.8 million vs. December 31, 2016, primarily due to net cash used in operating and investing activities.
Cash used in operating activities in 2017 was $5.1 million, primarily due to the net loss adjusted for non-cash items of $4.9 million and a $1.1 million increase in inventory, offset by a $1.3 million reduction in accounts receivable related to favorable collections.
Cash used in investing activities during 2017 related to the acquisition of RVR Diagnostics and the purchase of manufacturing equipment and other fixed assets.
During 2016, the Company completed an underwritten registered public offering, whereas no such offering occurred during 2017. Please see the “Recent Developments” section, below, for further information regarding the Company’s February 2018 underwritten registered public offering.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements,independent, as defined in Item 303(a)(4)(ii)the listing standards of Regulation S-KNasdaq, is a “non-employee director” as defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934,and is an “outside director” as amended.that term is defined in Code Section 162(m).
Recent Developments
As described in Note 16 – Subsequent EventThe compensation committee has the sole authority 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 discountsretain, oversee and commissions, and estimated expenses, are approximately $11.0 million.
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 estimateterminate any compensation consultant to be critical if:
| ● | It requires us to make assumptions about matters that were uncertain at the time we were making the estimate, and |
| ● | Changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations. |
The 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 ASC 605. Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.
For certain contracts, we recognize revenue from R&D, milestone and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned. For certain collaborative research projects, we recognize revenue by defining milestones at the inception of the agreement and applying the milestone method of revenue recognition for relevant contracts.
Stock-Based Compensation
We recognize the fair value of equity-based awards as compensation expense in our statement of operations. The fair value of our stock option awards was estimated using a Black-Scholes option valuation model. This valuation model’s computations incorporate highly subjective assumptions, such as the expected stock price volatility and the estimated life of each award. The fair value of the options, after considering the effect of expected forfeitures, is then amortized, generally on a straight-line basis, over the related vesting period of the option.
Research & Development Costs
Research and development activities consist primarily of new product development, continuing engineering for existing products, and regulatory and clinical trial costs. Costs related to research and development efforts on existing or potential products are expensed as incurred.
Inventories
Inventories are stated at the lower of cost or market, using the first-in, first-out method (FIFO) to determine cost. Our policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a reserve for any inventory considered slow moving or obsolete. For example, each additional 1% of obsolete inventory would reduce such inventory by approximately $44,000.
Accounts Receivable
Our policy is to review our accounts receivable on a periodic basis, no less frequently than monthly. On a quarterly basis an analysis is made of the adequacy of our allowance for doubtful accounts and adjustments are made accordingly. The current allowance is approximately 2% of accounts receivable. For example, each additional 1% of accounts receivable that becomes uncollectible would reduce such balance of accounts receivable by approximately $21,000.
Acquisitions
In accordance with accounting guidance for the provisions in FASB ASC 805, Business Combinations, we allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. In addition, an acquisition may include a contingent consideration component, such as our acquisition agreements for RVR Diagnostics. The fair value of the contingent consideration is estimated as of the date of the acquisition and is recorded as part of the purchase price. This estimate is updated in future periods and any changes in the estimate, which are not considered an adjustment to the purchase price, are recorded in our consolidated statements of operations.
We use all available information to estimate fair values. We typically engage outside appraisal firmsused to assist in the fair value determinationevaluation of identifiable intangible assets and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed.
Our purchase price allocation methodology contains uncertainties because it requires management to make assumptionsexecutive compensation and to apply judgment to estimateapprove the fair valueconsultant’s fees and retention terms.
The compensation committee held thirteen meetings in 2019, each of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying valuewhich included an executive session with only non-employee directors in attendance. Each 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 usedthen-serving members participated in determining fair value include, but are not limited to, future cash flows or income related to intangibles, market rate assumptions, actuarial assumptions for benefit plans and appropriate discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but that are inherently uncertain, and therefore, may not be realized. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
Goodwill and Intangible Assets
We periodically review goodwill for impairment indicators. We review goodwill for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company performs the goodwill impairment review at the reporting unit level. We perform a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If so, we perform the step discussed hereafter. Our qualitative assessment involves significant estimates, assumptions, and judgments, including, but not limited to, macroeconomic conditions, industry and market conditions, financial performanceleast 75% of the Company, reporting unit specific events and changes in the Company's share price.
If the fair valuemeetings of the reporting unit is greater than its carrying amount, goodwill is not consideredcompensation committee during 2019.
Nominating and Corporate Governance Committee
The principal responsibilities of the nominating and corporate governance committee are:
reviewing, approving and recommending director candidates to be impaired. We would recognize an impairment chargethe board of directors;
preparing proxy statement disclosure for the
amount by whichprocess used to identify and evaluate nominees for the
carrying amount exceedsboard of directors, including an explanation of the
reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocateddirector nomination process and shareholder communications to the
reporting unit. board;
We review indefinite-lived intangible assets for impairment annually or more frequently if events or changes in circumstances indicate the assets might be impaired. Similarperiodically reviewing appropriateness of board size and restrictions on board service;
recommending to the goodwill assessment described above,board standards regarding our definition of independence as it relates to directors;
establishing, coordinating and reviewing with 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 fairchair of the asset, based upon its forecasted cash flows, to its carrying value. Other intangible assets with definite lives are amortized over their useful livesboard the criteria 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 accountedmethod for under ASC 740 authoritative guidance (“Guidance”), which requires the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
The Guidance also requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s current and past performance, the market environment in which the company operates, length of carryback and carryforward periods and existing contracts that will result in future profits. The Company believes that it 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, 2017 are described.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, has no material derivative risk to report under this Item. As of December 31, 2017, the Company did not have any foreign currency exchange contracts nor purchase currency options to hedge local currency cash flows.
We are exposed to market risks from changes in currency exchange rates and certain commodity prices. All sales from our U.S. subsidiary, regardless of the customer location, are denominated in U.S. dollars. Sales denominated in foreign currencies are associated with a portion of the sales from our subsidiary Chembio Diagnostics Malaysia and comprised approximately 6.1% of our total net revenues for the year ended December 31, 2017.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and schedules that constitute Item 8 are attached at the end of this Annual Report on Form 10-K. An index to these Financial Statements and schedules is also included on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES(a) Disclosure Controls and Procedures. Under the supervision and with the participation of our senior management, consisting of our chief executive officer and our chief financial officer, we conducted an evaluation ofevaluating the effectiveness of the designboard;
developing and operation of our disclosure controls andrecommending to the board procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), asfor selection of the endchair of the period covered by this report (the "Evaluation Date"). Based on that evaluation,board and for board review of and for communications of such review to, the Company’s management, including our chief executive officer and chief financial officer, concluded that aschair of the Evaluation Date our disclosure controlsboard;
monitoring the process and procedures were effectivescope of director access to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our Exchange Act reports is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Our internal control over financial reporting is a process, under the supervision of our chief executive officer and chief financial officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. These internal controls over financial reporting processes include policies and procedures that:
a. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
b. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and employees and communications between 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) 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 ofemployees;
coordinating the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), we conducted an evaluation of the effectivenessboard's oversight of our internal control over financial reporting, asincluding disclosure controls;
developing board meeting procedures;
recommending to the board the number, type, functions, structure and independence of December 31, 2017, based on the framework and criteria in the 2013 Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s evaluation and those criteria, the CEO and CFO concluded that its system of internal control over financial reporting was effective as of December 31, 2017. committees;
annually recommending to the Company's independent registered public accounting firm that auditedboard membership on board committees and advising board and committees with regard to the Company's consolidated financial statements included in this report, has issued an attestation report onselection of chairs of committees;
determining criteria and procedures for selection of committee members and chairs and establishing and coordinating with the applicable committee chair criteria and method for evaluating the effectiveness of the Company's internal control overcommittees;
periodically reviewing and revisions of the director orientation program and monitoring, planning and supporting director continuing education activities;
developing, reviewing and recommending corporate governance policies and monitoring compliance with such policies; and
providing minutes of committee meetings to the board and reporting significant matters arising from committees’ work.
The current members of the nominating and corporate governance committee are Mary Lake Polan, who serves as chair, Katherine L. Davis and John G. Potthoff. All three members are standing for re-election at the Annual Meeting. The board has determined that each of Dr. Polan, Ms. Davis and Dr. Potthoff is independent, as defined in the listing standards of Nasdaq.
The nominating and corporate governance committee has the sole authority to retain, oversee and terminate any consulting or search firm to be used to identify director candidates or assist in evaluating director compensation and to approve any such firm’s fees and retention terms.
The nominating and corporate governance committee held one meeting in 2019, which was attended by all of the then-serving members of the committee and did not include an executive session with only non-employee directors in attendance.
There have been no changes in the past year to the procedures by which stockholders may recommend nominees for director to the board. For a stockholder recommendation for a director to be considered for nomination by the board at the next annual meeting of stockholders, the recommendations must be made by a stockholder of record entitled to vote. Stockholder nominations must be made by notice in writing, delivered or mailed by first-class U.S. mail, postage prepaid, to our Secretary at our principal business address, not less than 60 days nor more than 90 days prior to any meeting of the stockholders at which directors are to be elected. Each notice of nomination of directors by a stockholder shall set forth the nominee’s name, age, business address, if known, residence address of each nominee proposed in that notice, the principal occupation or employment of each nominee for the five years preceding the date of the notice, the number of shares of common stock beneficially owned by each nominee, and any arrangement, affiliation, association, agreement or other relationship of the nominee with any Chembio stockholder.
Board Oversight of Risk
The board of directors has responsibility for the oversight of our risk management processes and, either as a whole or through its committees, regularly discusses with management our major risk exposures, their potential impact on our business and the steps we take to manage them. The risk oversight process includes receiving regular reports from board committees and members of senior management to enable the board to understand our risk identification, risk management and risk mitigation strategies with respect to areas of potential material risk, including operations, finance, legal, regulatory, strategic and reputational risk.
The audit committee reviews information regarding liquidity and operations, and oversees our management of financial risks. Periodically, the audit committee reviews our policies with respect to risk assessment, risk management, loss prevention and regulatory compliance. Oversight by the audit committee includes the Chief Financial Officer reporting directly to the audit committee at least quarterly to provide an update on management’s efforts to manage risk.
Matters of significant strategic risk, including cybersecurity risks, are considered by the board as a copy of which appears on the following page.whole.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Chembio Diagnostics, Inc.
Medford, New YorkLeadership Structure
OpinionThe board of directors recognizes that it is important to determine an optimal board leadership structure to ensure the independent oversight of management as we continue to grow. The board has determined that separating the positions of chair of the board and chief executive officer is the best structure to fit our current needs. This structure is preferable because it provides a greater role for the independent directors in the oversight of our company and active participation of the independent directors in setting agendas and establishing priorities and procedures for the work of the board. We do not, however, have a policy on Internal Control over Financial Reportingwhether the offices of chair of the board and chief executive officer should be separate.
On April 23, 2020, the board appointed Gail S. Page to serve in a new role as Executive Chair of the Board, effective immediately, to support our management team. For additional information, see “Item 9B. Other Information” in Part II above.
The board believes our leadership structure is appropriate at this time, but it will continue to periodically review the leadership structure and may make such changes in the future as it deems appropriate.
Compensation Committee Interlocks and Insider Participation
During 2019 none of the members of the compensation committee was an officer or employee of our company or our subsidiaries and none of our executive officers served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on the board or compensation committee.
Code of Ethics
We have auditeda Code of Business Conduct and Ethics, or the Conduct Code, applicable to all directors, officers and employees of Chembio Diagnostics, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2017, basedand its subsidiaries. We have posted the Conduct Code on criteria established in Internal Control – Integrated Framework (2013) issued byour website at www.chembiodiagnosticsinc.gcs-web.com/static-files/bca4f259-b35e-4280-a17f-2509fb6ff007. We will post any amendments to the Committee of Sponsoring OrganizationsConduct Code on our website. In accordance with the requirements of the Treadway Commission (the “COSO criteria”). InSEC and Nasdaq, we will also post waivers applicable to any of our opinion,officers or directors from provisions of the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, basedConduct Code on the COSO criteria.our website. We have not granted any such waivers to date.
We also have audited, in accordance withimplemented whistleblower procedures, which establish format protocols for receiving and handling complaints from employees. Any concerns regarding accounting or auditing matters reported under these procedures are to be communicated to the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Companyaudit committee or our Chief Executive Officer and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedule and our report dated March 8, 2018 expressed an unqualified opinion thereon.President.
Basis for OpinionSection 16(a) Beneficial Ownership Reporting Compliance
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 regulationsSection 16(a) of the Securities Exchange Act requires our executive officers and Exchange Commissiondirectors and any persons owning ten percent or more of the PCAOB.common stock to file reports with the SEC to report their beneficial ownership of and
We conducted our audit of internal control over financial reporting in accordance with the standardsBased solely upon a review of the PCAOB. Those standards require thatSection 16(a) reports furnished to us, along with written representations from our executive officers and directors, 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 all required reports were timely filed during 2019, except that one report on behalf of John J. Sperzel, our audit provides a reasonable basis for our opinion.
former Chief Executive Officer and President, that reported one transaction, was filed on an untimely basis.
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, NY
March 8, 2018
(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the Company’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. 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 |
Summary Compensation Table
We are eligible, and have chosen, to comply with the executive and director compensation disclosure rules applicable to a “smaller reporting company,” as defined in applicable SEC rules.
The following table provides information concerning the compensation paid for 2019 and 2018 to our “named executive officers” as of December 31, 2019, who consisted of our former Chief Executive Officer and President and our next two most highly compensated executive officers during 2019.
2019 Summary Compensation Table
| Name and Principal Position | Year | | Salary | | | Bonus | | | Stock Awards (1) | | | All Other Compensation | | | Total | |
| John J. Sperzel III(2) | 2019 | | $
| 463,846 | | | $
| — | | | $
| 2,175,000 | | | $
| — | | | $
| 2,638,877 | |
| Former Chief Executive Officer and President | 2018 | | | 416,847 | | | | 89,250 | | | | 950,000 | | | | — | | | | 1,456,097 | |
| Neil A. Goldman | 2019 | | | 319,039 | | | | 23,767 | | | | — | | | | 4,130 | | | | 347,026 | |
| Executive Vice President and Chief Financial Officer | 2018 | | | 294,231 | | | | 50,400 | | | | 300,000 | | | | 2,769 | | | | 647,000 | |
| Javan Esfandiari | 2019 | | | 373,299 | | | | 27,983 | | | | — | | | | 8,697 | | | | 410,009 | |
| Executive Vice President and Chief Science and Technology Officer | 2018 | | | 357,807 | | | | 72,450 | | | | 375,000 | | | | 7,391 | | | | 791,948 | |
| (1) | Reflects the aggregate grant date fair value of any restricted common stock granted determined in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation. Assumptions used in the calculation of this amount are included in Note 10. Equity Incentive to the Consolidated Financial Statements included in our Annual Report. This amount does not reflect the actual economic value realized by each named executive officer. |
| (2) | Mr. Sperzel resigned as our Chief Executive Officer and President and one of our directors effective as of January 3, 2020. For additional information, including severance benefits paid to Mr. Sperzel, see “—Employment Agreements” below. |
Narrative Explanation of Summary Compensation Table
The compensation paid to our named executive officers consists of the following components:
performance-based cash bonuses;
long-term incentive compensation in the form of restricted stock units and stock options; and
benefits consisting principally of housing subsidies and health and welfare plan contributions.
2019 Annual Incentive Bonus Plan
We have established an annual incentive bonus plan, or the bonus plan, intended to enhance stockholder value by aligning our performance with the variable-based compensation of our executive officers. Participants are eligible to receive incentive bonuses based on their individual performance, the performance of our company, the performance of the operating group in which they work, or other performance metrics established by the compensation committee with respect to a calendar year. In order to be eligible for a bonus for a calendar year, an individual must be identified by the compensation committee as a participant under the bonus plan for such year and must continue to be employed as of December 31 of that year and as of the payment date of the bonus. A participant hired after commencement of a plan year is eligible for a pro-rated bonus, based on the date of hire. For 2019, the compensation committee did not make any awards under the Annual Bonus Plan.
2019 Discretionary Bonuses
In light of numerous changes and developments during 2019, many of which could not be foreseen as of the beginning of 2019, and their individual performance during 2019, in March 2020 the compensation committee awarded discretionary bonuses to Neil A. Goldman, in the amount of $23,767, and Javan Esfandiari, in the amount of $27,983.
2019 Equity Awards
The following table sets forth certain information with respect to a grant of plan-based awards to John Sperzel, the only named executive officer to whom we granted an award in 2019. Please see “—Outstanding Equity Awards at December 31, 2019” below for additional information regarding the vesting parameters applicable to this award.
| Grantee | Grant Date | Award Type | Number of Securities | Equity Compensation Plan |
John J. Sperzel III | June 18, 2019 | Restricted stock | 375,000 | 2019 Omnibus Incentive Plan |
On February 20, 2020, the board of directors adopted Equity Award Grant Guidelines, or the Guidelines, in the form recommended by the compensation committee. The Guidelines are intended to establish procedures for granting of equity-based awards that minimize the opportunity – or the perception of an opportunity – for Chembio to time an equity award grant in a manner that could take advantage of any material nonpublic information or could result in an assertion that the equity award has been are priced at a value less than the fair market value of common stock on the grant date. Under the Guidelines, the compensation committee generally is to consider and, if approved, grant equity awards to our employees once annually during the first quarter of the fiscal year, on the first Monday that follows the date on which we file our Annual Report on Form 10-K. The Guidelines contemplate that the compensation committee may, from time to time, determine that it is in our best interests to deviate from the foregoing terms with respect to the grant of an equity award, in which case such Equity Award must be reviewed and approved by the board.
Outstanding Equity Awards at December 31, 2019
The following table sets forth information regarding outstanding equity awards held by each of our named executive officers as of December 31, 2019:
Outstanding Equity Awards at December 31, 2019
| | | Option Awards | | Stock Awards | |
| Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | | | Number of Securities Underlying Unexercised Options (#) Unexercisable(1) | | | Option Exercise Price | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested(#)(2) | | | Market Value of Shares or Units of Stock That Have Not Vested | |
| John J. Sperzel III | | | 250,000 | | | | — | | | $
| 3.4163 | | 3/21/21 | | | 440,631(3 | ) | | $
| 2,808,339 | |
| | | | 5,000 | | | | — | | | | 5.25 | | 3/15/22 | | | — | | | | — | |
| | | | — | | | | 20,000(4 | ) | | | 5.3666 | | 3/31/24 | | | — | | | | — | |
| Neil A. Goldman | | | 83,334 | | | | 41,667(5 | ) | | | 7.04 | | 12/18/24 | | | 20,725(6 | ) | | | 199,996 | |
| Javan Esfandiari | | | 20,000 | | | | — | | | | 5.64 | | 3/11/21 | | | 25,907(6 | ) | | | 250,003 | |
| (1) | As of December 31, 2019, the aggregate number of unexercisable option awards outstanding was 148,667. |
| (2) | As of December 31, 2019, the aggregate number of unvested stock awards outstanding was 545,986. |
| (3) | 375,000 shares of common stock were to vest on November 11, 2022, and one-half of the remaining 65,631 shares of common stock were to vest on each of October 8, 2020 and 2021. All of these unvested shares were forfeited upon Mr. Sperzel’s termination of employment as of January 3, 2020. |
| (4) | All of these options were to vest and become exercisable on March 31, 2020. Mr. Sperzel’s right to purchase these unvested shares was cancelled upon the termination of his employment. |
| (5) | All of these options will vest and become exercisable on December 18, 2020. |
| (6) | One-half of these shares will vest and become exercisable on each of October 8, 2020 and 2021. |
For information regarding the vesting acceleration provisions applicable to the options held by our named executive officers, please see “—Employment Agreements” below.
Employment Agreements
Richard L. Eberly
Effective as of March 16, 2020, we entered into an employment agreement with Richard L. Eberly to serve as our Chief Executive Officer and President. The employment agreement provides for our at-will employment of Mr. Eberly as our Chief Executive Officer and President for an initial term commencing March 16, 2020 and expiring December 31, 2021. The term will extend automatically for additional calendar years as of each January 1 (commencing January 1, 2022), unless either party delivers, by no later than the immediately preceding October 1 (initially October 1, 2021), a written notice to the other party that the term will not be extended. Under the terms of the employment agreement, we will pay Mr. Eberly an annual base salary of $400,000, which amount is subject to annual review by the compensation committee and may be increased, but not decreased. In accordance with the terms of the employment agreement, we granted to Mr. Eberly on March 16, 2020 a restricted stock unit, or RSU, award to acquire, without payment of any purchase price, up to 233,589 shares of common stock. Subject to Mr. Eberly’s continued service with us, the RSU award will vest in three equal installments as of March 16 of each of 2021, 2022 and 2023, except that vesting will accelerate in full upon the occurrence of a Change in Control or upon his death or Permanent Disability (each such capitalized term as defined in the employment agreement). If Mr. Eberly’s employment is terminated or not renewed by us without Cause or by Mr. Eberly for Good Reason (each such capitalized term as defined in the employment agreement), the RSU award will vest in full and, in addition, we will be required to pay to Mr. Eberly an amount equal to his base salary and a pro rata bonus amount, each with respect to the year in which the termination occurs.
Mr. Eberly's employment agreement also contemplates that the board will nominate Mr. Eberly for election as a director at our 2020 Annual Meeting of Stockholders.
Gail S. Page
Effective January 9, 2020, we entered into a letter agreement with Gail S. Page with respect to her appointment to serve as our Interim Chief Executive Officer. The information required in responseletter agreement provided for the at-will employment of Ms. Page as our Interim Chief Executive Officer for a term which expired on March 16, 2020, upon the appointment of Richard L. Eberly to this Item 11 is incorporated herein by reference toserve as our Definitive Proxy Statement to be filed withChief Executive Officer and President. Under the SEC pursuant to Regulation 14Aterms of the Exchange Act not later than 120letter agreement, we agreed to pay Ms. Page a base salary at an annualized rate of $460,000 during the term of her service and we granted to her, under our 2019 Omnibus Incentive Plan, a total of 30,864 restricted shares of common stock, which shares vested upon the appointment of Mr. Eberly. In addition, in the letter agreement Ms. Page agreed to make herself reasonably available to consult with our representatives on transition matters for a period of sixty days afterfollowing the end of the fiscalterm of the letter agreement, for which she is entitled to receive transition service fees totaling $76,667 over the sixty-day period.
Neil A. Goldman
Effective as of December 18, 2017 and as amended on January 21, 2019, we entered into an employment agreement with Neil A. Goldman to serve as our Chief Financial Officer and Executive Vice President. In the event Mr. Goldman's employment is terminated by reason of “disability” or for “cause,” each as defined in Mr. Goldman’s employment agreement, or due to Mr. Goldman's resignation or voluntary termination, all compensation, including his base salary, his right to receive a performance bonus, and benefits, and the vesting of any unvested equity awards, will cease as of his termination date, and Mr. Goldman will receive no severance benefits. If we terminate Mr. Goldman's employment without cause or Mr. Goldman terminates his employment for a “reasonable basis”, as defined in his employment agreement (which includes involuntary termination within a six-month period upon a “Change of Control”), then we will be required to pay Mr. Goldman his base salary and our monthly share of health insurance premiums for a period of twelve months as severance, and all of his unvested equity awards will vest immediately. Mr. Goldman’s employment agreement also contains provisions prohibiting Mr. Goldman from (i) soliciting our employees for a period of twenty-four months following his termination, (ii) soliciting our customers, agents, or other sources of distribution of our business for a period of twelve months following his termination, and (iii) except where termination is involuntary upon a “Change in Control”, for a period of twelve months following termination of Mr. Goldman’s employment agreement (or for a period of six months after termination if Mr. Goldman is not entitled to severance under his employment agreement), competing with us. Mr. Goldman’s employment agreement continued in effect through December 31, 2019, and commencing on January 1, 2020 and each January 1 thereafter, the term will be automatically extended for one additional year.
Javan Esfandiari
Effective as of March 5, 2016 and as amended on March 20, 2019, we entered into an employment agreement with Javan Esfandiari to continue as our Chief Scientific & Technology Officer and Executive Vice President for an additional term through December 31, 2021. In the event Mr. Esfandiari's employment is terminated by reason of “disability” or for “cause,” each as defined in Mr. Esfandiari’s employment agreement, or due to Mr. Esfandiari's resignation or voluntary termination, all compensation, including his base salary, his right to receive a performance bonus, and benefits, and the vesting of any unvested equity awards, will cease as of his termination date, and Mr. Esfandiari will receive no severance benefits. If Mr. Esfandiari’s employment agreement is terminated by us without cause, or if Mr. Esfandiari terminates his employment agreement for a “reasonable basis”, as defined in his employment agreement, including within 12 months of a change in control, we will be required to pay his base salary and our monthly share of health insurance premiums for a period of twelve months as severance, and all of his unvested equity awards will vest immediately. Mr. Esfandiari’s employment agreement also contains provisions prohibiting Mr. Esfandiari from (i) soliciting our employees for a period of 24 months following his termination, (ii) soliciting our customers, agents, or other sources of distribution of our business for a period of twelve months following his termination, and (iii) except where termination is involuntary upon a “Change in Control”, for a period of twelve months following his termination, competing with us.
John J. Sperzel III
Effective as of March 13, 2017, we entered into an employment agreement with John J. Sperzel III, which we refer to as the Sperzel Employment Agreement, to serve as Chief Executive Officer for a term of three years. Under the Sperzel Employment Agreement:
if Mr. Sperzel's employment were to be terminated by reason of “disability” or for “cause,” each as defined in the employment agreement, all compensation, including his base salary, his right to receive a performance bonus, and the vesting of any unvested equity awards, would cease as of his termination date and he would receive no severance benefits; and
we would be required to pay Mr. Sperzel severance benefits that included continued base salary for twelve months, a pro rata annual bonus (based on actual performance), continued payment of our monthly share of health insurance premiums for twelve months, and accelerated vesting of his outstanding equity awards if:
| o | Mr. Sperzel's employment were to be terminated by us without “cause” or by Mr. Sperzel for a “reasonable basis” (each as in Sperzel Employment Agreement, which included involuntary termination within a six-month period upon a defined change of control of Chembio); or |
| o | we and Mr. Sperzel did not enter into a new employment agreement prior to expiration of the Sperzel Employment Agreement for any reason. |
The Sperzel’s Employment Agreement contained provisions prohibiting Mr. Sperzel from (i) soliciting our employees for a period of two years following his termination, (ii) soliciting our customers, agents and other sources of distribution for a period of one year coveredfollowing his termination, and (iii) except where termination is involuntary upon a defined change in control, competing with us during the period in which he is entitled to severance, or for a period of six months if he is not entitled to severance payments under his employment agreement.
Effective as of January 7, 2020, we entered into a Separation and Release Agreement with Mr. Sperzel, which we refer to as the Separation Agreement, under which Mr. Sperzel’s resignation was deemed effective as of 5 p.m. (Eastern time) on January 3, 2020. The Separation Agreement provided for our payment to Mr. Sperzel of unpaid base salary and unreimbursed business expenses through his separation date, together with a severance payment of $1,000,000 payable over twelve months, as would have been required under the Sperzel Employment Agreement as the result of a replacement employment agreement with Mr. Sperzel not being executed. In consideration for the severance payment, Mr. Sperzel agreed to: (a) release claims in favor of our company and our subsidiaries and affiliated companies; (b) consult with us on transition matters for ninety days; (c) comply with various restrictive covenants, including a perpetual nondisparagrement covenant, a perpetual confidentiality covenant, a covenant not to solicit our employees for two years, a covenant not to interfere with our customers and business partners for one year, and a covenant not to compete with our business activities for one year; and (d) assist us in connection with any litigation or other disputes. As described in the preceding paragraph, under the Sperzel Employment Agreement, we were obligated to pay certain severance benefits to Mr. Sperzel if we did not enter into a new employment agreement with him by thisMarch 13, 2020. Those severance benefits under the Sperzel Employment Agreement included continued base salary for twelve months, a pro rata annual bonus (based on actual performance), continued payment of our monthly share of health insurance premiums for twelve months, and accelerated vesting of his outstanding equity awards. Under the Separation Agreement, Mr. Sperzel agreed that none of his 440,631 restricted shares of common stock and none of his unvested options to acquire 8,333 shares of common stock would accelerate, notwithstanding the terms of the Sperzel Employment Agreement.
Director Compensation
Our director compensation program is intended to enhance our ability to attract, retain and motivate non-employee directors of exceptional ability and to promote the common interest of directors and stockholders in enhancing the value of the common stock. The board of directors reviews director compensation at least annually based on recommendations by the nominating and governance committee. The nominating and governance committee has the sole authority to engage a consulting firm to evaluate director compensation.
Under our current non-employee director compensation program, each qualifying non-employee director is eligible to receive compensation for board and committee service consisting of annual cash retainers and equity awards. Directors also may be paid for serving on ad hoc committees of the board. In 2019, our qualifying non-employee directors received the following compensation for their service on the board:
Non-Employee Director Annual Retainers
| Position | | Annual Cash Retainer | |
| Non-Executive Chair of the Board | | $
| 65,000 | |
| All Other Independent Directors | | | 30,000 | |
| Audit Committee Chair | | | 12,500 | |
| Other Audit Committee Members | | | 5,000 | |
| Compensation Committee Chair | | | 8,500 | |
| Other Compensation Committee Members | | | 3,500 | |
| Nominating and Governance Committee Chair | | | 5,000 | |
| Other Nominating and Governance Committee Members | | | 2,000 | |
2019 Non-Employee Director Compensation Table
| Director | | Fees Earned or Paid in Cash(1) | | | Option Awards | | | Total | |
| Katherine L. Davis | | $
| 73,500 | | | $
| — | | | $
| 73,500 | |
| Gail S. Page(2) | | | 43,500 | | | | — | | | | 43,500 | |
| Mary Lake Polan | | | 40,500 | | | | — | | | | 40,500 | |
| John G. Potthoff | | | 44,500 | | | | — | | | | 44,500 | |
| (1) | Consist of annual retainer fees, as described in the preceding table. |
| (2) | Effective January 9, 2020, Ms. Page was appointed as interim Chief Executive Officer, at which time she was no longer considered a non-employee director. Ms. Page served as interim Chief Executive Officer until March 16, 2020 and is serving as transitional advisor through May 15, 2020. She was appointed to serve as Executive Chair of the Board commencing on April 23, 2020. |
As discussed under “—Outstanding Equity Awards at December 31, 2019” above, on February 20, 2020, the board of directors adopted the Guidelines in the form recommended by the compensation committee. The Guidelines provide for the grant of equity awards to non-employee directors once annually, on the date of our annual meeting of stockholders at which the non-employee directors are elected (or re-elected) to the board unless such annual stockholder meeting occurs either (a) earlier than the third trading day following the date on which we file our Quarterly Report on Form 10 Q for the quarter ended March 31 of such year, in which case the grant date generally will be the first Monday that follows the date of such filing, or (b) on or after June 1 of such year, in which case the grant date generally will be the first Monday that follows the date on which we next file an Annual Report on Form 10-K.10 K or Quarterly Report on Form 10 Q.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required in responsefollowing table sets forth the number of outstanding shares of common stock beneficially owned, and the percentage of the class beneficially owned, as of April 24, 2020, by:
each person known to this Item 12 is incorporated herein by reference to our Definitive Proxy Statementus to be filed with the SEC pursuant to Regulation 14Abeneficial owner of more than five percent of the Exchange Act not later than 120 days after the endthen-outstanding shares of the fiscal year covered by this Annual Report on Form 10-K.common stock;
each named executive officer included in “Executive Compensation—Summary Compensation Table,” each current director and each nominee for election as a director; and
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.all of our executive officers, directors and director nominees as a group.
The information required in response to this Item 13number of shares of common stock beneficially owned by each person is incorporated herein by reference to our Definitive Proxy Statement to be filed withdetermined under the SEC pursuant to Regulation 14Arules of the Exchange Act not later than 120SEC. Under these rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares that the individual has the right to acquire by June 23, 2020 (sixty days after April 24, 2020) through the endexercise or conversion of a security or other right. Unless otherwise indicated, each person has sole investment and voting power, or shares such power with a family member, with respect to the shares set forth in the following table. The inclusion in this table of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares for any other purpose. As of April 24, 2020, there were 17,548,910 shares of common stock outstanding. Shares not outstanding, but deemed beneficially owned by virtue of the fiscal year coveredright of a person to acquire those shares, are treated as outstanding only for purposes of determining the number and percent of shares co common stock owned by this Annual Report on Form 10-K.such person or group.
Unless otherwise noted below, the address of each person listed in the table is in care of Chembio Diagnostics, Inc., 555 Wireless Boulevard, Hauppauge, New York 11788.
| | | Common Stock Beneficially Owned | |
| Beneficial Owner | | Shares | | | % | |
5% Stockholders | | | | | | |
Norman H. Pessin(1) 500 Fifth Avenue, Suite 2240 New York, NY 10010 | | | 1,367,587 | | | | 7.8 | % |
Nantahala Capital Management, LLC(2) 130 Main Street, 2nd Floor New Canaan, CT 06840 | | | 1,239,983 | | | | 7.1 | % |
Laurence W. Lytton(3) 467 Central Park West New York, New NY 10025 | | | 1,010,718 | | | | 5.8 | % |
Royce & Associates, LP(4) 745 Fifth Avenue New York, NY 10151 | | | 991,492 | | | | 5.6 | % |
Named Executive Officers and Directors | | | | | | | | |
Neil A. Goldman(5) | | | 129,236 | | | | * | |
Javan Esfandiari(6) | | | 128,773 | | | | * | |
Gail S. Page(7) | | | 88,815 | | | | * | |
Katherine L. Davis(8) | | | 90,143 | | | | * | |
John G. Potthoff(9) | | | 65,897 | | | | * | |
Mary Lake Polan(10) | | | 26,522 | | | | * | |
John J. Sperzel III(11) 91 Hartwell Avenue Lexington, MA 02421 | | | 31,815 | | | | * | |
Richard L. Eberly | | | 0 | | | | * | |
All executive officers and directors as a group (8 persons)(12) | | | 586,484 | | | | 3.3 | % |
| (1) | Based on an amended Schedule 13D filed on July 18, 2019. |
| (2) | Based on a Schedule 13G filed on February 14, 2020. As of December 31, 2019, Nantahala may be deemed to be the beneficial owner of 1,239,983 shares held by funds and separately managed accounts under its control, and as the managing members of Nantahala, each of Messrs. Wilmot B. Harkey and Daniel Mack may be deemed to be a beneficial owner of those shares. |
| (3) | Based on a Schedule 13G filed on March 20, 2020. Of the shares, 273,264 are held for the benefit of the Lytton-Kambara Foundation, 120,048 shares for the benefit of the AWL Family LLC, 21,000 for the benefit of the IKL Trust, 13,200 for the benefit of the WWL Trust, 9,100 for the benefit of the KLL Trust, and 45,290 shares for the benefit of other accounts of which the reporting person is deemed to have beneficial ownership. |
| (4) | Based on a Schedule 13G filed on January 21, 2020. |
| (5) | Include (a) 20,725 restricted shares, one-half of which will vest on each of October 8, 2020 and 2021, and (b) options to acquire 41,666 shares. |
| (6) | Include (a) 25,907 restricted shares, one-half of which will vest on each of October 8, 2020 and 2021, and (b) options to acquire 20,000 shares. |
| (7) | Include (a) 5,181 restricted shares, one-half of which will vest on each of October 8, 2020 and 2021, (b) options to acquire 28,125 shares. |
| (8) | Include (a) 5,181 restricted shares, one-half of which will vest on each of October 8, 2020 and 2021, and (b) options to acquire 9,375 shares. |
| (9) | Include (a) 5,181 restricted shares, one-half of which will vest on each of October 8, 2020 and 2021, and (b) options to acquire 28,125 shares. |
| (10) | Include (a) 5,181 restricted shares, one-half of which will vest on each of October 8, 2020 and 2021 and (b) options to acquire 18,750 shares. |
| (11) | Does not include shares of common stock underlying certain options that were received by Mr. Sperzel during his time as our Chief Executive Officer and President and that had vested as of the time of his resignation. The compensation committee of the board has determined that Mr. Sperzel failed to exercise such options in a timely manner prior to their expiration. Mr. Sperzel has asserted that he continues to have the right to exercise those options to acquire 266,666 shares for an aggregate exercise price of $943,126. |
| (12) | Include, in addition to the restricted shares and options described in notes (5) through (10), (a) 6,098 restricted stock units and (b) options to acquire 36,000 shares. Does not include any shares held by Mr. Sperzel.
|
Equity Compensation Plan Information
The following table provides information required in responseas of December 31, 2019 with respect to this Item 14 is incorporated herein by reference to our Definitive Proxy Statement toshares of common stock that may 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.issued under equity plans and standalone option grants:
| Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | | Weighted Average Exercise Price of Outstanding Options, Warrants | | | Number of Securities to be Issued Upon Exercise of Outstanding Restricted Stock Units | | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |
| Equity compensation plans approved by stockholders(1) | | | 642,625 | | | $ | 5.79 | | | | 13,817 | | | $ | 9.65
| | | | 2,173,667 | |
| Equity compensation plans not approved by stockholders | | | — | | | | — | | | | — | | | | — | | | | — | |
| Totals | | | 642,625 | | | | | | | | 13,817
| | | | | | | | 2,173,667 | |
| (1) | “Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights” consists of 99,132 shares under the 2008 Stock Incentive Plan, 336,625 shares under the 2014 Stock Incentive Plan, and 206,868 shares issued outside of those plans. "Number of Securities to be Issued Upon Exercise of Outstanding Restricted Stock” consists of 13,817 shares under the 2014 Stock Incentive Plan. “Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans” consists of 2,173,667 shares available under the 2019 Omnibus Incentive Plan. |
3520
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
Procedures for Approval of Related Person Transactions
PART IV
The board of directors reviews all transactions involving us in which any of our directors, director nominees, significant stockholders and executive officers and their immediate family members are participants, in order to determine whether any such party has a direct or indirect material interest in the transaction. All directors, director nominees and executive officers must notify us of any proposed transaction involving us in which such person has a direct or indirect material interest. The proposed transaction is then reviewed by either the board as a whole or the Audit Committee, which determines whether to approve the transaction. After such review, the reviewing body approves the transaction only if it determines that the transaction is in, or not inconsistent with, the best interests of our company and stockholders.
Independence of Directors
See “Item 10. Directors, Executive Officers and Corporate Governance—Corporate Governance and Board Structure” and “—Board Committees.”
21
EXHIBITS INDEX
NumberITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Principal Independent Auditor Fees
The following table sets forth the aggregate fees billed to us by BDO USA, LLP for professional services rendered for the fiscal years ended December 31, 2019 and 2018:
| | | 2019 | | | 2018 | |
| Audit fees(1) | | $ | 292,500 | | | $ | 548,863 | |
| Audit-related fees(2) | | | 83,500 | | | | 87,780 | |
| Tax fees(3) | | | 15,375 | | | | 21,000 | |
| Total Fees | | $ | 391,375 | | | $ | 657,643 | |
| (1) | Includes services relating to the audit of annual consolidated financial statements, review of quarterly consolidated financial statements, statutory audits, comfort letters, and consents and review of documentation filed with SEC-registered and other securities offerings. |
| (2) | Includes services related to assistance with general accounting matters, work performed on acquisitions and divestitures, employee benefit plan audits and assistance with statutory audit matters. |
| (3) | Includes services for tax compliance, tax advice and tax planning. |
Audit Committee Pre-Approval Policies and Procedures
The audit committee approves in advance all audit and non-audit services performed by the independent registered public accounting firm. There are no other specific policies or procedures relating to the pre-approval of services performed by the independent registered public accounting firm.
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| (a) | The following is filed as part of the 2019 Form 10-K: |
| (1) | Index to Consolidated Financial Statements in Item 8 of 2019 Form 10-K. |
All schedules were omitted because they are not applicable, not required under the instructions, or the requested information is shown in the consolidated financial statements or related notes thereto.
| (b) | The following exhibits are included herein or incorporated herein by reference. |
| Exhibit 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* | | |
| 10.7(a)* | | |
10.3*10.7(b)* | | |
| 10.8* | | |
10.4*10.9(a)* | | |
10.5*10.9(b)* | | |
10.6* | | |
10.7 | | |
10.810.10* | | |
10.9 | | |
10.10 | | |
| 10.11 | | |
10.1210.12(a) | | |
| 10.12(b) | | Agreement of Sublease dated February 5, 2019 between Chembio Diagnostic Systems Inc., RVR Diagnostics Sdn Bhd, Avijit Royas sublessor, and Magentiren Vajuram (14)Reliance Communications of New Jersey, LLC, as sublessee, with respect to 3661 Horseblock Road, Medford, New York, as amended |
| 10.13 | | UnderwritingLease Agreement, dated February 9, 2018, by4, 2013, between Sherwood Corporate Center LLC and Chembio Diagnostics, Inc. with respect to 91-1A Colin Drive, Holbrook, New York, as amended on September 19, 2017 |
| 10.14 | | |
| 10.15† | | |
| 14.1 | | |
| 21.1 | | |
| 23.1 | | |
| 31.1 | | |
| 31.2 | | |
3232.1ç | | |
| 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 | * | IncorporatedIndicates management contract or compensatory plan.
|
| † | Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish copies of omitted exhibits and schedules upon request by referencethe Securities and Exchange Commission, provided that it may request confidential treatment pursuant to Rule 24b-2 of the Registrant's registration statement on Form SB-2 (File No. 333-85787) filed with the Commission on August 23, 1999Securities Exchange Act of 1934 for exhibits and the Registrant's Forms 8-K filed onMay 14, 2004,December 20, 2007 and April 18, 2008.schedules so furnished. |
3‡ | Certain sensitive personally identifiable information in this exhibit was omitted by means of redacting a portion of the text and replacing it with [***]. |
| ç | Incorporated by reference toThe certifications attached as Exhibit 32.1 accompany 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 withpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Commission on March 5, 2015. |
12 | | IncorporatedSarbanes-Oxley Act of 2002, and shall not be deemed “filed” by reference to the Registrant's Annual Report on Form 10-KSB filed withregistrant for purposes of Section 18 of the Commission on March 30, 2006. |
13 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on April 7, 2016. |
14 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on January 10, 2017. |
15 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 9, 2017. |
16 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on November 8, 2017. |
17 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on February 13, 2018. |
| | |
(*) | | An asterisk (*) beside an exhibit number indicates the exhibit contains a management contract, compensatory plan or arrangement which is required to be identified in this report.Securities Exchange Act of 1934, as amended. |
ITEM 16. Form 10-K SummaryNone.
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this reportAmendment to be signed on its behalf by the undersigned, thereunto duly authorized.
| | CHEMBIO DIAGNOSTICS, INC. |
| | | | |
March 8, 2017Dated: April 29, 2020 | ByBy: | /s/ John J. Sperzel | /s/ Neil A. Goldman
|
| | | John J. Sperzel III | Name: Neil A. Goldman
|
| | | President, Chief Executive Officer and | |
| | Member of the Board | |
In accordance with the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures | | Title | | Date |
| | | | |
| | | | |
| | | | |
/s/ John J. Sperzel | | Chief Executive Officer, President and | | March 8, 2017 |
John J. Sperzel III | | Member Of The Board | | |
| | (Principal Executive Officer) | | |
| | | | |
| | | | |
| | | | |
/s/ Neil A. Goldman | | Title: Executive Vice President &and Chief Financial Officer | | March 8, 2017 |
Neil A. Goldman | | (Principal Financial & Accounting Officer) | | |
| | | | |
| | | | |
| | | | |
/s/ Katherine L. Davis | | Director & Chair of the Board | | March 8, 2017 |
Katherine L. Davis | | | | |
| | | | |
| | | | |
| | | | |
/s/ Peter T. Kissinger | | Director | | March 8, 2017 |
Peter T. Kissinger | | | | |
| | | | |
| | | | |
| | | | |
/s/ Gail S. Page | | Director | | March 8, 2017 |
Gail S. Page | | | | |
| | | | |
| | | | |
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, 2017 and 2016 | F-2 |
| |
Statements of Operations for each of the years ended December 31, 2017, 2016 and 2015 | F-3 |
| |
Statements of Comprehensive Loss for each of the years ended December 31, 2017, 2016 and 2015 | F-4 |
| |
Statements of Changes in Stockholders’ Equity for each of the years ended December 31, 2017, 2016 and 2015 | F-5 |
| |
Statements of Cash Flows for each of the years ended December 31, 2017, 2016 and 2015 | F-6 |
| |
Notes to Consolidated Financial Statements | F-7 - F-17 |
| |
Schedule II - Valuation and Qualifying Accounts | F-18 |
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Chembio Diagnostics, Inc.
Medford, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Chembio Diagnostics, Inc. (the “Company”) and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedule (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, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 8, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, 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's auditor since 2011.
New York, NY
March 8, 2018
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF
- ASSETS -
| | | December 31, 2017 | | | December 31, 2016 | |
| CURRENT ASSETS: | | | | | | |
| Cash and cash equivalents | | $ | 3,790,302 | | | $ | 10,554,464 | |
| Accounts receivable, net of allowance for doubtful accounts of $42,000 and $52,000 at December 31, 2017 and 2016, respectively | | | 2,085,340 | | | | 3,383,729 | |
| Inventories, net | | | 4,423,618 | | | | 3,335,188 | |
| Prepaid expenses and other current assets | | | 554,383 | | | | 840,145 | |
| TOTAL CURRENT ASSETS | | | 10,853,643 | | | | 18,113,526 | |
| | | | | | | | | |
FIXED ASSETS, net of accumulated depreciation | | | 1,909,232 | | | | 1,709,321 | |
| | | | | | | | | |
| OTHER ASSETS: | | | | | | | | |
| Intangible assets, net | | | 1,597,377 | | | | - | |
| Goodwill | | | 1,666,610 | | | | - | |
| Deposits and other assets | | | 589,159 | | | | 752,389 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 16,616,021 | | | $ | 20,575,236 | |
| | | | | | | | | |
| - LIABILITIES AND STOCKHOLDERS’ EQUITY - | |
| CURRENT LIABILITIES: | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 3,046,303 | | | $ | 3,013,133 | |
| Deferred revenue | | | 50,000 | | | | 392,517 | |
| TOTAL CURRENT LIABILITIES | | | 3,096,303 | | | | 3,405,650 | |
| | | | | | | | | |
| OTHER LIABILITIES: | | | | | | | | |
| Note payable | | | 99,480 | | | | - | |
| Deferred tax liability | | | 341,042 | | | | - | |
| | | | | | | | | |
| TOTAL LIABILITIES | | | 3,536,825 | | | | 3,405,650 | |
| | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES (Note 13) | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS’ EQUITY: | | | | | | | | |
| Preferred stock – 10,000,000 shares authorized, none outstanding | | | - | | | | - | |
| Common stock - $.01 par value; 100,000,000 shares authorized, 12,318,570 and 12,026,847 shares issued and outstanding at December 31, 2017 and 2016, respectively | | | 123,185 | | | | 120,268 | |
| Additional paid-in capital | | | 62,821,288 | | | | 60,721,783 | |
| Accumulated deficit | | | (50,044,225 | ) | | | (43,672,465 | ) |
| Accumulated other comprehensive income | | | 178,948 | | | | - | |
| TOTAL STOCKHOLDERS’ EQUITY | | | 13,079,196 | | | | 17,169,586 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 16,616,021 | | | $ | 20,575,236 | |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | For the years ended | |
| | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
| REVENUES: | | | | | | | | | |
| Net product sales | | $ | 19,322,302 | | | $ | 13,680,107 | | | $ | 21,886,688 | |
| License and royalty revenue | | | 741,534 | | | | 449,685 | | | | 52,753 | |
| R&D, milestone and grant revenue | | | 3,951,591 | | | | 3,739,049 | | | | 2,316,044 | |
| TOTAL REVENUES | | | 24,015,427 | | | | 17,868,841 | | | | 24,255,485 | |
| | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | |
| Cost of product sales | | | 12,921,157 | | | | 9,417,505 | | | | 13,768,658 | |
| Research and development expenses | | | 8,555,381 | | | | 8,427,554 | | | | 6,377,839 | |
| Selling, general and administrative expenses | | | 9,021,439 | | | | 7,595,559 | | | | 7,663,035 | |
| | | | 30,497,977 | | | | 25,440,618 | | | | 27,809,532 | |
| LOSS FROM OPERATIONS | | | (6,482,550 | ) | | | (7,571,777 | ) | | | (3,554,047 | ) |
| | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | | | | | |
| Other expense | | | - | | | | - | | | | (4,814 | ) |
| Interest income | | | 25,430 | | | | 25,548 | | | | 2,412 | |
| Interest expense | | | (2,945 | ) | | | - | | | | (836 | ) |
| | | | 22,485 | | | | 25,548 | | | | (3,238 | ) |
| | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES (BENEFIT) | | | (6,460,065 | ) | | | (7,546,229 | ) | | | (3,557,285 | ) |
| | | | | | | | | | | | | |
| Income tax provision (benefit) | | | (88,305 | ) | | | 5,800,818 | | | | (1,160,243 | ) |
| | | | | | | | | | | | | |
| NET LOSS | | $ | (6,371,760 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
| | | | | | | | | | | | | |
| Basic loss per share | | $ | $ (0.52 | ) | | $ | (1.26 | ) | | $ | (0.25 | ) |
| | | | | | | | | | | | | |
| Diluted loss per share | | $ | $ (0.52 | ) | | $ | (1.26 | ) | | $ | (0.25 | ) |
| | | | | | | | | | | | | |
| Weighted average number of shares outstanding, basic | | | 12,300,031 | | | | 10,622,331 | | | | 9,626,028 | |
| | | | | | | | | | | | | |
| Weighted average number of shares outstanding, diluted | | | 12,300,031 | | | | 10,622,331 | | | | 9,626,028 | |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| | | For the years ended | |
| | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
| | | | | | | | | | |
| Net loss | | $ | (6,371,760 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
| Other comprehensive income: | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | 178,948 | | | | - | | | | - | |
| COMPREHENSIVE LOSS | | $ | (6,192,812 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
| | | Common Stock | | | Additional
Paid-in-Capital | | | Accumulated Deficit | | | AOCI | | | Total | |
| | | Shares | | | Amount | | | Amount | | | Amount | | | Amount | | | Amount | |
| Balance at December 31, 2014 | | | 9,611,139 | | | $ | 96,112 | | | $ | 47,556,426 | | | $ | (27,928,376 | ) | | $ | - | | | $ | 19,724,162 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Options: | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercised | | | 17,109 | | | | 170 | | | | (170 | ) | | | - | | | | - | | | | - | |
| Stock option compensation | | | - | | | | - | | | | 334,386 | | | | - | | | | - | | | | 334,386 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | (2,397,042 | ) | | | - | | | | (2,397,042 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2015 | | | 9,628,248 | | | $ | 96,282 | | | $ | 47,890,642 | | | $ | (30,325,418 | ) | | $ | - | | | $ | 17,661,506 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock: | | | | | | | | | | | | | | | | | | | | | | | | |
| New stock from offering | | | 2,300,000 | | | | 23,000 | | | | 12,470,398 | | | | - | | | | - | | | | 12,493,398 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Options: | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercised | | | 98,599 | | | | 986 | | | | 56,589 | | | | - | | | | - | | | | 57,575 | |
| Stock option compensation | | | - | | | | - | | | | 304,154 | | | | - | | | | - | | | | 304,154 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (13,347,047 | ) | | | - | | | | (13,347,047 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2016 | | | 12,026,847 | | | $ | 120,268 | | | $ | 60,721,783 | | | $ | (43,672,465 | ) | | $ | - | | | $ | 17,169,586 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock: | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase of RVR Diagnostics Sdn Bhd | | | 269,236 | | | | 2,692 | | | | 1,680,033 | | | | - | | | | - | | | | 1,682,725 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Options: | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercised | | | 22,487 | | | | 225 | | | | 34,575 | | | | - | | | | - | | | | 34,800 | |
| Stock option compensation | | | - | | | | - | | | | 384,897 | | | | - | | | | - | | | | 384,897 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 178,948 | | | | 178,948 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (6,371,760 | ) | | | - | | | | (6,371,760 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2017 | | | 12,318,570 | | | $ | 123,185 | | | $ | 62,821,288 | | | $ | (50,044,225 | ) | | $ | 178,948 | | | $ | 13,079,196 | |
See accompanying notes to consolidated financial statements
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
| | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
| | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
| Cash received from customers and grants | | $ | 24,971,299 | | | $ | 16,947,194 | | | $ | 30,174,083 | |
| Cash paid to suppliers and employees | | | (30,028,299 | ) | | | (23,677,476 | ) | | | (28,382,681 | ) |
| Interest received | | | 22,485 | | | | 25,548 | | | | 2,412 | |
| Interest paid | | | - | | | | - | | | | (836 | ) |
| Net cash (used in) provided by operating activities | | | (5,034,515 | ) | | | (6,704,734 | ) | | | 1,792,978 | |
| | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
| Acquisition of license | | | - | | | | - | | | | (550,000 | ) |
| Purchase of RVR Diagnostics Sdn Bhd | | | (850,000 | ) | | | (550,000 | ) | | | - | |
| Acquisition of and deposits on fixed assets | | | (1,026,954 | ) | | | (118,706 | ) | | | (480,585 | ) |
| Net cash used in investing activities | | | (1,876,954 | ) | | | (668,706 | ) | | | (1,030,585 | ) |
| | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
| Proceeds from option and warrant exercises | | | 34,800 | | | | 57,575 | | | | - | |
| Proceeds from note payable | | | 99,480 | | | | - | | | | - | |
| Proceeds from credit line | | | - | | | | - | | | | 700,000 | |
| Repayment of credit line | | | - | | | | - | | | | (700,000 | ) |
| Proceeds from sale of common stock, net | | | - | | | | 12,493,398 | | | | - | |
| Net cash provided by financing activities | | | 134,280 | | | | 12,550,973 | | | | - | |
| | | | | | | | | | | | | |
| Effect of exchange rate changes on cash | | | 13,027 | | | | - | | | | - | |
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (6,764,162 | ) | | | 5,177,533 | | | | 762,393 | |
| Cash and cash equivalents - beginning of the period | | | 10,554,464 | | | | 5,376,931 | | | | 4,614,538 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents - end of the period | | $ | 3,790,302 | | | $ | 10,554,464 | | | $ | 5,376,931 | |
| | | | | | | | | | | | | |
| RECONCILIATION OF NET LOSS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net Loss | | $ | (6,371,760 | ) | | $ | (13,347,047 | ) | | $ | (2,397,042 | ) |
| Adjustments: | | | | | | | | | | | | |
| Depreciation and amortization | | | 1,276,963 | | | | 1,139,228 | | | | 1,372,563 | |
| Provision for (benefit from) deferred taxes | | | - | | | | 5,800,818 | | | | (1,170,969 | ) |
| Fair value adjustment to contingent consideration | | | (148,000 | ) | | | - | | | | - | |
| Share based compensation | | | 384,897 | | | | 304,154 | | | | 334,386 | |
| Changes in assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | | 1,298,389 | | | | (960,758 | ) | | | 5,915,918 | |
| Inventories | | | (1,088,430 | ) | | | 242,837 | | | | 60,274 | |
| Prepaid expenses and other current assets | | | 285,762 | | | | (136,258 | ) | | | (190,960 | ) |
| Deposits and other assets | | | (512,272 | ) | | | 1,480 | | | | - | |
| Accounts payable and accrued liabilities | | | 182,453 | | | | 211,701 | | | | (2,144,598 | ) |
| Deferred revenue | | | (342,517 | ) | | | 39,111 | | | | 13,406 | |
| Net cash (used in) provided by operating activities | | $ | (5,034,515 | ) | | $ | (6,704,734 | ) | | $ | 1,792,978 | |
| | | | | | | | | | | | | |
| Supplemental disclosures for non-cash investing and financing activities: | | | | | | | | | | | | |
| Deposits on manufacturing equipment transferred to fixed assets | | $ | 174,399 | | | $ | - | | | $ | 20,017 | |
| Accrual of contingent earn-out | | | 148,000 | | | | - | | | | - | |
| Issuance of common stock for net assets of business acquired | | | 1,682,725 | | | | - | | | | - | |
See accompanying notes to consolidated financial statements
NOTE 1 — DESCRIPTION OF BUSINESS:
Chembio Diagnostics, Inc. and its subsidiaries (collectively, the “Company” or “Chembio”), develop, manufacture, and commercialize point-of-care (POC) diagnostic tests that are used to detect or monitor diseases. All products that are currently being developed are based on the Company’s patented DPP® technology, a novel 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.
Our product commercialization and product development efforts are focused in three areas: sexually transmitted disease, tropical & fever disease, and technology collaborations. In sexually transmitted disease, we are commercializing tests for HIV and Syphilis. In tropical and fever disease, we are commercializing a test for Zika virus, and developing tests for malaria, dengue virus, chikungunya virus, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi, individually or as part of fever panel tests. Through technology collaborations, we are developing tests for a specific form of cancer, concussion, bovine tuberculosis, and for an undisclosed biomarker, the latter in collaboration with global biopharmaceutical company AstraZeneca.
Large and growing markets have been established for these kinds of tests, initially in high prevalence regions where they are indispensable for large scale prevention and treatment programs. Our product development is focused on areas where the availability of rapid, POC screening, diagnostic, or confirmatory results can improve health outcomes. More generally, we believe there is and will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the point of care.
Our products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally, under our STAT PAK® SURE CHECK®, STAT-VIEW® or DPP® registered trademarks, or under the private labels of our 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:
On January 9, 2017, pursuant to a stock purchase agreement (the "Stock Purchase Agreement), the Company acquired all of the outstanding common stock of RVR Diagnostics Sdn Bhd ("RVR"), a privately-held Malaysia based manufacturing company focused on assembly and sales of rapid medical assays, for $3,231,000. The Company acquired RVR, which subsequently changed its name to Chembio Diagnostics Malaysia Sdn Bhd ("CDM"), to have a better presence in Asia, access to lower cost, shorter approval time of in-country regulatory approvals, and a lower cost assembly operation.
Total consideration was: (i) a cash payment of $1,400,000, of which $550,000 was paid as a deposit in December 2016; (ii) 269,236 shares of Chembio's common stock, with a value at closing of $1,683,000, of which 7,277 shares were held back to satisfy certain potential claims under the Stock Purchase Agreement and became issuable to the sellers on the one-year anniversary of the closing; and, a contingent $148,000 milestone payment based on the achievement of performance goals related to sales by CDM during the 12 months ended December 31, 2017. The performance goals were not achieved and the related $148,000 accrual was reversed during the fourth quarter of 2017 and recognized in Selling, general, and administrative expenses associated with the change in fair value.
As a result of the consideration paid exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $1,503,361 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. In addition, the Company recorded $1,800,000 in intangible assets associated with the addition of CDM’s intellectual property, customer base and distribution channels, trade names, order backlog, industry reputation, and management talent and workforce. The Condensed Consolidated Statements of Operations for the year ended December 31, 2017 include $25,000 of transaction costs related to the CDM acquisition, which are reflected as Selling, general and administrative expenses.
The acquisition was accounted for using the purchase method of accounting. The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of January 9, 2017:
| | | | |
| | | Amount | |
| Property, plant and equipment | | $ | 235,141 | |
| Goodwill | | | 1,651,361 | |
| Deferred tax liability | | | (307,636 | ) |
| Contingent consideration | | | (148,000 | ) |
| Other intangible assets (estimated useful life): | | | | |
| Intellectual property (approximate 10 year weighted average) | | | 800,000 | |
| Customer contracts / relationships (approximate 10 year weighted average) | | | 700,000 | |
| Order backlog (3 months) | | | 200,134 | |
| Trade names (approximate 11 year weighted average) | | | 100,000 | |
| Total consideration | | $ | 3,231,000 | |
The Company calculated the fair value of the fixed assets based on the net book value of CDM as that approximates fair value. The intellectual property, customer contracts and trade names were based on discounted cash flows using management estimates. The order backlog was based on an order that CDM had at the closing that was shipped in the first quarter of 2017, and valued at an estimated net income.
The following represents unaudited pro forma operating results for the year ended December 31, 2016 as if the operations of CDM had been included in the Company’s Condensed Consolidated Statements of Operations as of January 1, 2016:
| | | Pro Forma | |
| Total revenues | | $ | 19,151,653 | |
| | | | | |
| Net loss | | $ | (13,473,084 | ) |
| | | | | |
| Net loss per common share | | $ | (1.26 | ) |
| | | | | |
| Diluted net loss per common share | | $ | (1.26 | ) |
The pro forma financial information includes business combination accounting effects from the acquisition including amortization charges from acquired intangible assets of approximately $398,000. The unaudited pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2016. CDM's net revenues and pre-tax loss for the year ended December 31, 2017 were approximately $1,465,000 and ($406,000), respectively.
NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES:
| (a) | Principles of Consolidation: |
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries (Chembio Diagnostic Systems, Inc. and Chembio Diagnostics Malaysia Sdn Bhd). 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 persuant 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. The fair value of the Company's notes payable approximates the recorded value as the rate is based upon the current rates offered to the Company for similar financial instruments.
| (d) | 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 or net realizable value. Cost is determined on the first-in, first-out method.
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, which range from three to seven years. Leasehold improvements are amortized over the useful life of the asset or the lease term, whichever is shorter. Deposits paid for fixed assets are capitalized and not depreciated until the related asset is placed in service.
The Company records up-front payments related to sublicense agreements as prepaids and amortizes them over their respective economic life. As of December 31, 2017 and 2016, total prepaids were $100,000 and $237,500, respectively.
Amortization expenses for the licenses above for the years ended December 31, 2017, 2016 and 2015 were $137,500 $319,319, and $442,557, respectively.
| (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, 2017 and 2016.
The Company recognizes revenue for product sales in accordance with ASC 605, whereby revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, or services have been rendered, the sales price is fixed and determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.
For certain contracts, the Company recognizes revenue from non-milestone contracts and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned.
The Company follows the recognition of revenue under the milestone method for certain collaborative research projects defining milestones at the inception of the agreement.
In April 2017, the Company entered into a $1.0 million agreement with FIND to develop a simple, point-of-care fever panel assay that can identify multiple life-threatening acute febrile illnesses common in the Asia Pacific region. The Company earned $0.8 million for the year ended December 31, 2017, as R&D, milestone and grant revenue in our Consolidated Statements of Operations.
In August 2016, the Company was awarded a grant of $5.9 million from BARDA, which is part of the U.S. Department of Health And Human Resources to develop a rapid Zika virus assay. The Company earned $2.2 million and $2.7 million for the year ended December 31, 2017 and from inception through December 31, 2017, respectively, as R&D, milestone and grant revenue in our Consolidated Statements of Operations.
In September 2016, the Company was awarded a $0.7 million contract from the USDA to develop a Bovid TB assay. The Company earned $0.4 million and $0.7 million for the year ended December 31, 2017 and from inception through December 31, 2017, respectively, as R&D, milestone and grant revenue in our Consolidated Statements of Operations.
| (k) | Research and Development: |
Research and development (R&D) costs are expensed as incurred.
| (l) | Stock-Based Compensation: |
Stock-based compensation expense is calculated using the Black-Scholes valuation model based on awards ultimately expected to vest, reduced for forfeitures, and expensed on a straight-line basis over the requisite service period of the grant. During 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting".
The Company accounts for income taxes under an asset and liability approach 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. Diluted loss per share for the year ended December 31, 2017, 2016 and 2015 reflects the potential dilution from the exercise or conversion of other securities into common stock, if dilutive.
There were 810,670, 600,549 and 658,631 options outstanding as of December 31, 2017, 2016 and 2015, respectively, which were not included in the calculation of diluted income per share for the years ended because their effect would have been anti-dilutive.
| (o) | Goodwill and Intangible Assets: |
Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired in our acquisition of CDM in January 2017. Goodwill is not amortized but rather is tested annually as of the first day of the fiscal fourth quarter, or sooner if we believe that indicators of impairment exist. We make a qualitative evaluation about the likelihood of goodwill impairment, which is based on a number of applicable factors. If we conclude that it is more likely than not that the carrying value of the applicable reporting unit is greater than its fair value, then we would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.
For the year ended December 31, 2017, the results of our goodwill impairment analysis did not result in any impairment.
Following is a table that reflects changes in Goodwill:
| | |
| Beginning balance 1/1/17 | | $ | - | |
| | | | | |
| Acquisition of CDM | | | 1,651,361 | |
| | | | | |
| Changes in foreign currency exchange rate | | | 15,249 | |
| | | | | |
| Balance at December 31, 2017 | | $ | 1,666,610 | |
In addition, the Company recorded certain intangible assets as part of the CDM acquisition which are as follows as of December 31, 2017:
| | | Cost | | | Accumulated Amortization | | | Net Book Value | |
| Intellectual property | | $ | 886,872 | | | $ | 88,687 | | | $ | 798,185 | |
| Customer contracts/relationships | | | 776,013 | | | | 77,601 | | | | 698,412 | |
| Order backlog | | | 221,867 | | | | 221,867 | | | | - | |
| Trade names | | | 110,859 | | | | 10,079 | | | | 100,780 | |
| | | $ | 1,995,611 | | | $ | 398,234 | | | $ | 1,597,377 | |
Amortization expense for the year ended December 31, 2017 was $398,234.
| (p) | Foreign Currency Translation: |
Assets and liabilities of non-U.S. subsidiaries that use a currency other than U.S. dollars as their functional currency are translated to U.S. dollars at end of period currency exchange rates. The consolidated statements of operations of non-U.S. subsidiaries are translated to U.S. dollars at average period currency exchange rates. The effect of translation for non-U.S subsidiaries is generally reported in Other comprehensive income.
| (q) | Recent Accounting Pronouncements Affecting the Company: |
In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with customers, 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 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 effective date (modified retrospective). The Company adopted the new standard effective January 1, 2018 using the modified retrospective transition method. Under that method, we applied the rules to all contracts existing as of January 1, 2018. We estimated the cumulative effect recorded to the opening balance of retained earnings to be immaterial.
The disclosures in our notes to the consolidated financial statements related to revenue recognition will be expanded under the new standard, specifically around the quantitative and qualitative information about performance obligations, changes in contract assets and liabilities, and disaggregation of revenue. The Company expects to make these enhanced disclosures in its interim financial statements for 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.
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 our consolidated financial statements and related disclosures. See Note 8 – Income Taxes, for additional information. Should the full valuation allowance be reversed in future periods, the adoption of this new guidance could introduce more volatility in the calculation of our effective tax rate, depending on the Company’s share price at exercise or vesting of share-based awards as compared to grant date. The other provisions of ASU 2016-09 did not have a material impact on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017. The guidance in ASU 2016-15 is generally consistent with our current cash flow classifications, and we do not expect the adoption of this standard will have a material impact on our 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 our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, to provide clarity to which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This update will be effective for annual periods and interim periods in fiscal years beginning after December 15, 2017 with early adoption permitted. We do not expect the adoption will have a material effect on our consolidated financial statements.
NOTE 4 — INVENTORIES:
Inventories consist of the following at:
| | | 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 | |
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. Depreciation expense for the 2017, 2016 and 2015 years aggregated $727,563, $782,711 and $893,305, respectively.
As of December 31, 2017 and 2016, the Company had paid deposits on various pieces of equipment classified within Deposits and Other Assets aggregating $257,455 and $31,900, respectively.
NOTE 6 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following at:
| | | 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 | |
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, 2017 and 2016, there were $50,000 and $392,517 unearned advanced revenues, respectively.
NOTE 8 — INCOME TAXES:
The (benefit from) provision for income taxes for the years ended December 31, 2017, 2016, and 2015 is comprised of the following:
| | | 2017 | | | 2016 | | | 2015 | |
| Current | | | | | | | | | |
| Federal | | $ | (97,339 | ) | | $ | - | | | $ | - | |
| State | | | 9,034 | | | | - | | | | 10,726 | |
| Total current (benefit) provision | | | (88,305 | ) | | | - | | | | 10,726 | |
| | | | | | | | | | | | | |
| Deferred | | | | | | | | | | | | |
| Federal | | | - | | | | 5,778,185 | | | | (1,171,865 | ) |
| State | | | - | | | | 22,633 | | | | 896 | |
| Total deferred (benefit) provision | | | - | | | | 5,800,818 | | | | (1,170,969 | ) |
| | | | | | | | | | | | | |
| Total (benefit) provision | | $ | (88,305 | ) | | $ | 5,800,818 | | | $ | (1,160,243 | ) |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 34% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
The Tax Act also puts in place new tax laws that will apply prospectively, which include, but are not limited to, (1) implementing a base erosion and anti-abuse tax, (2) generally eliminating U.S.federal income taxes on dividends from foreign subsidiaries, (3) a new provision designed to tax currently in the U.S. global intangible low-taxed income (“GILTI”) of foreign subsidiaries, which allows for the possibility of utilizing foreign tax credits to offset the income tax liability (subject to some limitations), and (4) a lower effective U.S. tax rate on certain revenues from sources outside the U.S.
The Company calculated its best estimate of the impact of the Act in accordance with its understanding of the Act and guidance available as of the date of this filing and recorded a $97,339 tax benefit in the period in which the legislation was enacted, related to a credit for alternative minimum taxes (AMT) paid in prior periods. A provisional amount related the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future resulted in a charge of $3,906,774, which was fully offset by an equivalent adjustment to the deferred tax valuation allowance. No provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was deemed necessary.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that the $97,339 benefit recorded which relates to the AMT credit is a provisional amount and a reasonable estimate of December 31, 2017.
The Company had an ownership change as described in Internal Revenue Code Sec. 382 during 2004 (“2004 change”). 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 2020 through 2026.
After applying the above limitations, at December 31, 2017, the Company has post-change net operating loss carry-forwards of approximately $26,660,530 which expire between 2018 and 2037. In addition the Company has research and development tax credit carryforwards of approximately $1,461,351 for the year ended December 31, 2017, which 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 | |
| | | | | | | |
| Inventory reserves | | $ | 244,158 | | | $ | 253,380 | |
| Accrued expenses | | | 102,332 | | | | 53,140 | |
| Net operating loss carry-forwards | | | 5,800,144 | | | | 7,487,937 | |
| Research and development credit | | | 1,918,137 | | | | 1,461,351 | |
| Other credits | | | - | | | | 97,339 | |
| Other | | | 167,522 | | | | 292,556 | |
| Depreciation | | | 91,258 | | | | 31,285 | |
| Deferred tax assets | | | 8,323,551 | | | | 9,676,988 | |
| | | | | | | | | |
| Intangibles | | | (341,042 | ) | | | - | |
| Deferred tax liabilities | | | (341,042 | ) | | | - | |
| | | | | | | | | |
| Net deferred tax assets before valuation allowance | | | 7,982,509 | | | | 9,676,988 | |
| Less valuation allowances | | | (8,323,551 | ) | | | (9,676,988 | ) |
| Net noncurrent deferred tax liabilities | | $ | (341,042 | ) | | $ | - | |
The components of (loss) before income taxes consisted of the following:
| | | Year Ending December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| United States operations | | $ | (6,054,002 | ) | | $ | (7,546,229 | ) | | $ | (3,557,285 | ) |
| International operations | | | (406,063 | ) | | | - | | | | - | |
| (Loss) before taxes | | $ | (6,460,065 | ) | | $ | (7,546,229 | ) | | $ | (3,557,285 | ) |
A reconciliation of the Federal statutory rate to the effective rate applicable to loss before income taxes is as follows:
| | | 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, the Company does not have a liability for uncertain tax positions.
The Company files Federal and state income tax returns. Tax years for fiscal 2014 through 2016 are open and potentially subject to examination by the federal and state taxing authorities.
NOTE 9 — STOCKHOLDERS’ EQUITY:
In August of 2016, the Company closed on an underwritten public offering of 2,300,000 shares of its common stock at $6.00 per share. The net proceeds of the offering, after deducting the underwriters' discounts and other offering expenses payable by the Company, was approximately $12,493,000.
During 2017, options to purchase 56,969 shares of the Company’s common stock were exercised for 22,487 shares of common stock at exercise prices ranging from $3.48 to $4.45 by surrendering options and shares of common stock already owned.
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.
The Compensation Committee of the Board of Directors may issues options persuant to employee stock option plans that have been approved by the Company's stockholders.
As of December 31, 2017 and 2016, the Company had no warrants outstanding to purchase shares of common stock.
NOTE 10 — RIGHTS AGREEMENT:
In March 2010, the Company entered into a Rights Agreement (the "Rights Agreement") between the Company and Action Stock Transfer Corp., as Rights Agent. The Rights Agreement expired at the end of November 2015. Pursuant to the Rights Agreement, the Company declared a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of Common Stock, $0.01 par value (the "Common Stock"), of the Company. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2010, and the Rights were distributed to the Company’s shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable. The Rights were not exercisable until a Distribution Date. Until a Right was exercised, the holder thereof, as such, would have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights. The Rights were to be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date") or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 20% or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date").
NOTE 11 — EMPLOYEE STOCK OPTION PLAN:
Effective June 3, 2008, the Company’s stockholders voted to approve the 2008 Stock Incentive Plan (“SIP”), with 750,000 shares of Common Stock available to be issued. At the Annual Stockholder meeting on September 22, 2011 the Company’s stockholders voted to approve an increase to the shares of Common Stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, the Compensation Committee of the Company’s Board has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee. As of December 31, 2017, there were 480,172 options exercised, 228,177 options outstanding and 41,651 options still available to be issued under the SIP.
Effective June 19, 2014, the Company’s stockholders voted to approve the 2014 Stock Incentive Plan (“SIP14”), with 800,000 shares of Common Stock available to be issued. Under the terms of the SIP14, the Compensation Committee of the Company’s Board has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee. As of December 31, 2017, there were 22,000 options exercised, 375,625 options outstanding and 402,375 options still available to be issued under the SIP14.
The Company's results for the years ended December 31, 2017, 2016 and 2015 include stock-based compensation expense totaling $384,897, $304,100, and $334,400 respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold ($47,000, $-, and $- respectively), research and development ($89,400, $89,200, and $62,700 respectively) and selling, general and administrative expenses ($248,497, $214,900, and $271,700 respectively).
Stock option compensation expense in the years ended December 31, 2017, 2016 and 2015 represents the estimated fair value of options outstanding which is being amortized on a straight-line basis over the requisite vesting period of the entire award.
The weighted average estimated fair value of stock options granted in the 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. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based on the Company’s historical experience with similar type options.
The weighted-average assumptions made in calculating the fair values of options are as follows for the respective years ended:
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | |
| Expected term (in years) | | | 5.48 | | | | 4.71 | | | | n/a | |
| Expected volatility | | | 43.31 | % | | | 45.78 | % | | | n/a | |
| Expected dividend yield | | | n/a | | | | n/a | | | | n/a | |
| Risk-free interest rate | | | 1.78 | % | | | 0.92 | % | | | n/a | |
The Company granted 267,875 new options during the year ended December 31, 2017 to employees.
The following table provides stock options activity for the years ended December 31, 2017, 2016, and 2015:
| | | Number of Shares | | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | |
| Outstanding at December 31, 2014 | | | 691,869 | | | | 3.66 | | 3.97 years | | $ | 334,636 | |
| | | | | | | | | | | | | | |
| Granted | | | - | | | | - | | | | | | |
| Exercised | | | 41,141 | | | | 2.25 | | | | | 65,449 | |
| Forfeited/expired/cancelled | | | 1,250 | | | | 4.30 | | | | | | |
| Outstanding at December 31, 2015 | | | 649,478 | | | | 3.75 | | 3.21 years | | $ | 1,032,362 | |
| | | | | | | | | | | | | | |
| Exercisable at December 31, 2015 | | | 359,228 | | | | 3.89 | | 2.03 years | | $ | 522,039 | |
| | | | | | | | | | | | | | |
| Outstanding at December 31, 2015 | | | 649,478 | | | | 3.75 | | 3.21 years | | $ | 1,032,362 | |
| | | | | | | | | | | | | | |
| Granted | | | 142,875 | | | | 7.08 | | | | | | |
| Exercised | | | 191,804 | | | | 3.73 | | | | | 629,143 | |
| Forfeited/expired/cancelled | | | - | | | | - | | | | | | |
| Outstanding at December 31, 2016 | | | 600,549 | | | | 4.55 | | 3.43 years | | $ | 1,463,052 | |
| | | | | | | | | | | | | | |
| Exercisable at December 31, 2016 | | | 267,549 | | | | 4.14 | | 2.66 years | | $ | 731,997 | |
| | | | | | | | | | | | | | |
| 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 | |
The following table summarizes information about stock options outstanding at December 31, 2017:
| | | Stock Options Outstanding | | | Stock Options Exercisable | |
Range of Exercise Prices | | Shares | | | Average Remaining Contract Life (Year) | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | | | Shares | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | |
| 1 to 2.79999 | | | - | | | | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | |
| 2.8 to 4.59999 | | | 362,750 | | | | 2.68 | | | | 3.51 | | | | 1,702,125 | | | | 244,000 | | | | 3.55 | | | | 1,135,255 | |
| 4.6 to 6.39999 | | | 240,045 | | | | 3.56 | | | | 5.73 | | | | 592,678 | | | | 96,545 | | | | 5.49 | | | | 261,585 | |
| 6.4 to 8.19999 | | | 161,000 | | | | 6.26 | | | | 7.06 | | | | 183,050 | | | | 12,000 | | | | 7.15 | | | | 12,600 | |
| 8.2 to 10 | | | 46,875 | | | | 3.44 | | | | 8.86 | | | | - | | | | 18,750 | | | | 8.86 | | | | - | |
| Total | | | 810,670 | | | | 3.69 | | | $ | 5.18 | | | $ | 2,477,853 | | | | 371,295 | | | $ | 4.44 | | | $ | 1,409,440 | |
As of December 31, 2017, there was $735,946 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 2.57 years. The total fair value of shares vested during the year ended December 31, 2017, was $380,465.
NOTE 12 — 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 | |
NOTE 13 — COMMITMENTS AND CONTINGENCIES:
Employment Contracts:
The Company has multi-year contracts with two key employees. The contracts call for salaries presently aggregating $770,000 per year, and they expire in March 2019 and March 2020. The following table is a schedule of future minimum salary commitments:
| 2018 | | $ | 770,000 | |
| 2019 | | | 485,500 | |
| 2020 | | | 85,000 | |
Pension Plan:
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 and $90,915 for the years ended December 31, 2017, 2016, and 2015, respectively.
Obligations Under Operating Leases:
The Company leases industrial space used for office, R&D and manufacturing facilities, currently with a monthly rent 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, the Company entered into a lease for office and warehouse space, effective March 1, 2014, a short distance from its current facility currently with a monthly rent 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 Company also leases office, warehouse, and manufacturing space in a single building in Kuala Lumpur, Malaysia persuant to two separate leases that each expire on April 30, 2020 and have an additional three year renewal option with combined monthly rent of approximately $3,600.
The following is a schedule of future minimum rental commitments for the years ending December 31,
| 2018 | | $ | 603,335 | |
| 2019 | | | 371,036 | |
| 2020 | | | 84,152 | |
| | | $ | 1,058,523 | |
Rent expense was $586,730, $516,708 and $511,900 for the years ended December 31, 2017, 2016, and 2015, respectively.
Economic Dependency:
Customers are considered major customers when net sales exceed 10% of the Company's total net sales for period or outstanding trade receivables exceed 10% of current assets. The Company had the following major customers for the respective periods:
| | | For the years ended | | | Accounts Receivable | |
| | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2017 | | | December 31, 2016 | |
| | | Sales | | | % of Sales | | | Sales | | | % of Sales | | | Sales | | | % of Sales | | | | | | | |
| Customer 1 | | $ | 8,065,217 | | | | 42 | % | | $ | 4,801,577 | | | | 35 | % | | $ | 10,132,512 | | | | 46 | % | | $ | - | | | $ | 828,848 | |
| Customer 2 | | | - | | | | - | | | | 1,796,477 | | | | 13 | % | | | 4,526,908 | | | | 21 | % | | | - | | | | - | |
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 | % | | | * | | | | * | |
In the table 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 adversly affect operating results.
NOTE 14 — QUARTERLY FINANCIAL DATA (UNAUDITED):
The sum of the earnings per common share may not equal the corresponding annual amounts due to interim quarter rounding.
| For the Quarters Ended in Fiscal 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 15 — NOTE PAYABLE:
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 prepayments of 30% down, 60% at time of factory acceptance testing and 10% after delivery. The vendor agreed to lend the Company 15%, 40%, and 10% of each originally scheduled payment, respectively. The Company will pay interest at an annual rate of 12% until delivery. Thirty days after delivery, the Company will begin 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:
On February 13, 2018, the Company closed on 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. 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 II
Valuation and Qualifying Accounts
| | | | | | Additions | | | | | | | |
| Description | | Balance at beginning of period | | | Charged to statement of income | | | Charged to other accounts | | | Deductions | | | Balance at end of period | |
| Year ended December 31, 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-18