You should read the following discussion of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, or our Annual Report. The terms "Chembio", "Company", "we", "us",following discussion contains forward-looking statements that reflect our plans, estimates, and "our" referbeliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to Chembio Diagnostics, Inc.these differences include those discussed below and its subsidiaries as a consolidated entity, unlesselsewhere in this report, particularly in the context suggests otherwise.
Overview
This discussion and analysis should be readsection titled “Item 1A. Risk Factors” in
conjunction with the accompanying Condensed Consolidated Financial Statements and related notes.Part I of our Annual Report. The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States
("(“U.S.
GAAP"GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period.
On an ongoing basis, we review our estimatesOur management’s discussion and assumptions. Our estimates are based on our historical experienceanalysis of financial condition and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations. Our critical accounting policies,operations is intended to help you understand the policies we believe are most important to the presentation of ourbusiness operations and financial statements and require the most difficult, subjective and complex judgments, are outlined below in ''Critical Accounting Policies,'' and have not changed significantly from December 31, 2016, with the exception of goodwill.
In addition, certain statements made in this report may constitute "forward-looking statements". These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance or achievementscondition of the Company toas of September 30, 2018, and for the three and nine months ended September 30, 2018. This discussion should be materially different from any futureread in conjunction with Item 1. Financial Statements. Our management’s discussion and analysis of financial condition and results performance or achievements expressed or implied by the forward-looking statements. Specifically, 1) our ability to obtain necessary regulatory approvals for our products; and 2) our ability to increase revenues and operating income are dependent upon our ability to develop and sell our products, general economic conditions, and other factors. You can identify forward-looking statements by terminology such as "may," "could", "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential", "continues" or the negative of these terms, or other comparable terminology. Although we believe that the expectations reflectedoperations is presented in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.six sections:
Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report, as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.
| ● | Consolidated Results of Operations
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| ● | Liquidity and Capital Resources
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| ● | Significant Accounting Policies and Critical Accounting Estimates
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| ● | Recently Issued Accounting Pronouncements |
All of the Company's future productsExecutive 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 diagnostic tests that are currently being developedused to detect or monitor diseases. Our product development efforts are basedfocused on itsour patented Dual Path Platform (DPP®), which isDPP technology, a uniquenovel point-of-care diagnostic point-of-care platform that hasoffers certain customer advantages overas compared to traditional lateral flow technology. The CompanyChembio Diagnostics, Inc. is a Nevada corporation formed in 1985.
Business Strategy
We are a leading provider of point-of-care diagnostic products for the detection and diagnosis of infectious diseases. We have been expanding our product portfolio based upon our proprietary DPP technology platform, which uses a small drop of blood from the fingertip to provide high-quality, cost-effective diagnostic results in approximately 15 minutes. We seek to build additional revenue streams by entering into strategic collaborations with leading global healthcare companies in order to leverage the DPP platform.
Compared with traditional lateral flow technology, the DPP technology platform provides enhanced sensitivity and specificity, advanced multiplexing capabilities, and, when used with the DPP Micro Reader, quantitative results. Our DPP HIV test provides sensitivity of 99.8% and specificity of 100%, and has completedbeen approved by the U.S. Food and Drug Administration, or FDA, and approved as a waived test under the Clinical Laboratory Improvement Amendments of 1988.
We are pursuing four corporate priorities, aimed at executing on our key building blocks to drive growth and operating efficiency:
| ● | expand our core point-of-care infectious disease business; |
| ● | leverage our patented DPP technology and scientific expertise through collaborations; |
| ● | broaden our sales channels worldwide; and
|
| ● | automate our U.S. manufacturing operations to increase capacity and margin.
|
Recent accomplishments and highlights:
| ● | Closed the acquisition of opTricon GmbH, a privately-held developer and manufacturer of hand-held analyzers for rapid diagnostic tests. |
| ● | Filed CE Mark for a point-of-care DPP® test to detect an undisclosed biomarker through the AstraZeneca funded collaboration and development program. |
| ● | Received a $10.5 million purchase commitment from Bio-Manginhos for the production of DPP HIV and DPP Leishmania assays in Brazil and their subsequent supply to Brazil's Ministry of Health. |
| ● | Completed an underwritten public offering that provided an estimated $16.6 million of net proceeds to the Company. |
Our product commercialization and product development efforts are focused in two areas: infectious disease, which includes both sexually transmitted and tropical & fever disease; and strategic collaborations with leading global healthcare companies, which leverage the DPP platform to provide us with additional revenue streams. In infectious disease, we are commercializing tests for HIV, Syphilis, Zika virus, dengue virus, and chikungunya virus, and developing tests for hepatitis C, malaria, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi. Certain of severalthese are also being developed as part of fever panel tests. Through strategic collaborations, we are developing tests for a specific form of cancer, concussions, bovine tuberculosis, and, in collaboration with global biopharmaceutical company AstraZeneca, an undisclosed biomarker.
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 employcan provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the DPP® technology whichpoint of care.
Our products are currently marketed under Chembio's label (DPP® HIV 1/2 Screening Assaysold globally, directly and DPP® HIV 1/2 –Syphilis Assay, which latter assay is not yet approvedthrough distributors, to be marketedhospitals and clinics, physician offices, clinical laboratories, public health organizations, government agencies, and consumers.
Consolidated Results of Operations
Three Months Ended September 30, 2018 versus Three Months Ended September 30, 2017
The results of operations for the three months ended September 30, 2018 and 2017 were as follows (dollars in thousands):
| | September 30, 2018 | | | September 30, 2017 | |
TOTAL REVENUES | | $ | 9,377 | | | | 100 | % | | $ | 7,587 | | | | 100 | % |
| | | | | | | | | | | | | | | | |
OPERATING COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
Cost of product sales | | | 6,775 | | | | 72 | % | | | 4,065 | | | | 54 | % |
Research and development expenses | | | 1,898 | | | | 20 | % | | | 1,806 | | | | 24 | % |
Selling, general and administrative expenses | | | 3,034 | | | | 32 | % | | | 2,305 | | | | 30 | % |
| | | 11,707
| | | | | | | | 8,176
| | | | | |
LOSS FROM OPERATIONS | | | (2,330 | )
| | | | | | | (589 | )
| | | | |
| | | | | | | | | | | | | | | | |
INTEREST INCOME, NET | | | 16 | | | | | | | | 4 | | | | | |
| | | | | | | | | | | | | | | | |
LOSS BEFORE INCOME TAXES | | | (2,314 | )
| | | (24 | )% | | | (585 | )
| | | (8 | )% |
| | | | | | | | | | | | | | | | |
Income tax provision | | | - | | | | | | | | - | | | | | |
NET LOSS | | $ | (2,314 | )
| | | | | | $ | (585 | )
| | | | |
Percentages in the U.S.),table reflect the percent of total revenues.
Total Revenues
Total revenues during the three months ended September 30, 2018 were $9.4 million, an increase of $1.8 million, or which may be marketed pursuant23.6% compared to private labelthe three months ended September 30, 2017. The increase in total revenues was comprised of the following:
| ● | $1.7 million, or a 28.1% increase in net product sales compared to the three months ended September 30, 2017, reflecting gains in Africa ($2.1 million, or 217.3%), including both ongoing growth and continued shipments to Ethiopia, and Europe & Middle East ($0.3 million, or 78.2%), and |
| ● | $0.1 million, or a 4.5% increase in R&D, milestone and grant, and license and royalty revenues compared to the three months ended September 30, 2017, reflecting ongoing technology and scientific collaborations. |
Gross Product Margin
Cost of product sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross margin percentage is gross product margin as a percentage of net product sales.
Gross product margin during the three months ended September 30, 2018 decreased by $1.0 million, or distribution agreements such as those47.7% compared to the three months ended September 30, 2017. The following schedule calculates gross product margin and gross product margin percentage (dollars in thousands):
| | For the three months ended | | | Favorable/(unfavorable)
| |
| | September 30, 2018 | | | September 30, 2017 | | | $ Change
| | | % Change | |
Net product sales | | $ | 7,856 | | | $ | 6,133 | | | $ | 1,723 | | | | 28.1 | % |
Less: Cost of product sales | | | 6,775 | | | | 4,065 | | | | (2,710 | )
| | | (66.7 | )% |
Gross product margin | | $ | 1,081 | | | $ | 2,068 | | | $ | (987 | )
| | | (47.7 | )% |
Gross margin percentage
| | | 13.76 | % | | | 33.72 | % | | | | | | | | |
The $1.0 million decrease in gross product margin was comprised of the following:
| ● | $0.6 million from favorable net product sales volume as described above, and |
| ● | offset by $1.6 million decrease from lower product margins, related to the sales growth in markets with lower average selling prices, coupled with costs incurred through the scaling of labor and production reflecting the current manual assembly process to deliver the 28.1% increase in net product sales volume. |
The decrease in gross product margin percentage is related to the same factors described above with the Oswaldo Cruz Foundation ("FIOCRUZ"), Labtest, and Bio-Rad.respect to lower gross product margin.
Research and Development
This category includes costs incurred for clinical & regulatory affairs and other research & development, ("as follows (dollars in thousands):
| | For the three months ended | | | Favorable/(unfavorable)
| |
| | September 30, 2018 | | | September 30, 2017 | | | $ Change
| | | % Change | |
Clinical & regulatory affairs | | $ | 244 | | | $ | 485 | | | $ | 241 | | | | 50.0 | % |
Other research & development | | | 1,654 | | | | 1,321 | | | | (333 | )
| | | (25.2 | )% |
Total Research and Development | | $ | 1,898 | | | $ | 1,806 | | | $ | (92 | )
| | | (5.1 | )% |
The decrease in clinical & regulatory affairs costs for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 is primarily associated with decreased spending on the Company’s U.S. clinical trial evaluating its DPP® HIV-Syphilis System. The increase in other research & development costs is primarily associated with a higher R&D"),&D headcount and an increase in spending on materials & supplies, each corresponding with the growth in R&D milestone and grant revenuesrevenue-related projects.
Selling, General and Administrative Expense
Selling, general and administrative expense, or SG&A, includes administrative expenses, sales and marketing costs (including commissions), and other corporate items.
The $0.7 million, or 31.6% increase in SG&A for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, was primarily associated with merger and acquisition expenses and increased head count and related costs.
Interest Expense, net
Interest expense, net is interest income earned on the Company's deposits, net of interest expense on the note payable. This increased on a net basis by approximately $12,000 for the three months ended September 30, 2018 compared to the three months ended September 30, 2017.
Nine Months Ended September 30, 2018 versus Nine Months Ended September 30, 2017
The results of operations for the nine months ended September 30, 2018 and 2017 increased to $3.10 million from $3.03 millionwere as follows (dollars in thousands):
| | September 30, 2018 | | | September 30, 2017 | |
TOTAL REVENUES | | $ | 25,814 | | | | 100 | % | | $ | 18,027 | | | | 100 | % |
| | | | | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
Cost of product sales | | | 16,828 | | | | 65 | % | | | 9,488 | | | | 53 | % |
Research and development expenses | | | 5,736 | | | | 22 | % | | | 6,035 | | | | 33 | % |
Selling, general and administrative expenses | | | 7,988 | | | | 31 | % | | | 6,903 | | | | 38 | % |
| | | 30,552 | | | | | | | | 22,426 | | | | | |
LOSS FROM OPERATIONS | | | (4,738 | )
| | | | | | | (4,399 | )
| | | | |
| | | | | | | | | | | | | | | | |
INTEREST INCOME, NET | | | 43 | | | | | | | | 25 | | | | | |
| | | | | | | | | | | | | | | | |
LOSS BEFORE INCOME TAXES | | | (4,695 | )
| | | (18 | )% | | | (4,374 | )
| | | (24 | )% |
| | | | | | | | | | | | | | | | |
Income tax provision | | | - | | | | | | | | - | | | | | |
NET LOSS | | $ | (4,695 | )
| | | | | | $ | (4,374 | )
| | | | |
Percentages in the prior-year period, which was primarilytable reflect the resultpercent of increased R&D project revenues in 2017.total revenues.
R&D expensesTotal Revenues
Total revenues during the nine months ended September 30, 2018 were $25.8 million, an increase of $7.8 million, or 43.2% compared to the nine months ended September 30, 2017. The increase in total revenues was comprised of the following:
| ● | $6.7 million, or a 46.1% increase in net product sales compared to the nine months ended September 30, 2017, reflecting strong gains in Africa ($5.1 million, or 279.0%), including both ongoing growth and the Company’s continued shipments to Ethiopia, Latin America ($2.4 million, or 35.3%) and Europe & Middle East ($0.3 million, or 20.7%), and |
| ● | $1.1 million, or a 31.6% increase in R&D, milestone and grant revenues and license and royalty revenues compared to the nine months ended September 30, 2017, reflecting growing governmental, non-governmental, and commercial collaborations. |
Gross Product Margin
Cost of product sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross margin percentage is gross product margin as a percentage of net product sales.
Gross product margin during the nine months ended September 30, 2018 decreased by $0.7 million, or 13.7% compared to the nine months ended September 30, 2017 were $6.03. The following schedule calculates gross product margin and gross product margin percentage (dollars in thousands):
| | For the nine months ended | | | Favorable/(unfavorable)
| |
| | September 30, 2018 | | | September 30, 2017 | | | $ Change
| | | % Change | |
Net product sales | | $ | 21,112 | | | $ | 14,453 | | | $ | 6,659 | | | | 46.1 | % |
Less: Cost of product sales | | | 16,828 | | | | 9,488 | | | | (7,340 | )
| | | (77.4 | )% |
Gross product margin | | $ | 4,284 | | | $ | 4,965 | | | $ | (681 | )
| | | (13.7 | )% |
Gross product margin percentage
| | | 20.29 | % | | | 34.35 | % | | | | | | | | |
The $0.7 million compared with $6.27 milliondecrease in gross product margin was comprised of the prior-year period. Development work continues on several assays utilizing Chembio's DPP® platform, including the DPP® HIV multiplex tests that are designed to detect various infectious diseases such as Zika, Malaria, Dengue and other fever diseases partially funded by projects and grants.following:
| ● | $2.3 million from favorable product sales volume as described above, and |
Research & Development Activities
Sexually Transmitted Disease
| ● | offset by $3.0 million decrease from lower product margins, related to the sales growth in markets with lower average selling prices, coupled with costs incurred through the scaling of labor and production reflecting the current manual assembly process to deliver the 46.1% increase in net product sales volume. |
·DPP® HIV-Syphilis Assay: The DPP® HIV-Syphilis Assaydecrease in gross product margin percentage is a rapid, point-of-care (POC), multiplex test for the simultaneous detection of antibodies to HIV and to Treponema Pallidum (TP) bacteria (the causative agent of syphilis). This novel combination assay was developed to address the growing concern among public health officials regarding the rising co-infection rates of HIV and syphilis as well as mother-to-child transmission (MTCT) of HIV and syphilis. The product received approval by the Mexican regulatory agency (COFEPRIS) in 2014, received approval by the Brazilian regulatory agency, Agência Nacional de Vigilância Sanitária (ANVISA) in 2015, and received CE mark approval in 2017. We have developed a U.S. version of the DPP® HIV-Syphilis Assay, designed to meet the performance requirements for the "reverse" algorithm that is currently in clinical use for syphilis testing in the United States. The clinical trial to support the FDA application for the DPP® HIV-Syphilis Assay, which was initiated during first quarter of 2016, has been completed. In March 2017, the FDA requested further studies in addition to the clinical studies recently completed. These studies are in progress and expected to be complete during the fourth quarter of 2017, in preparation for filing the Premarket Approval Application.
Fever & Tropical Disease
·DPP® Malaria Assay: The DPP® Malaria Assay is a rapid, POC, multiplex test for the simultaneous detection of plasmodium falciparum and other plasmodium infections. In January 2015, we received a grant from the Bill & Melinda Gates Foundation to expedite the development and feasibility testing of a POC DPP® Malaria Assay. The Company completed this project, which compared the new DPP® malaria assay to the world's leading currently-available POC Malaria Assay with favorable results: a ten-fold improvement in sensitivity. In April 2016, we received a second malaria grant from the Bill & Melinda Gates Foundation to expedite the feasibility testing and development of the world's first oral fluid/saliva POC diagnostic test to simply and accurately identify individuals infected with all species of malaria. We completed the feasibility and delivered DPP® Malaria Assay prototypes to a partner of the Bill & Melinda Gates Foundation for a lab evaluation, which was completed successfully during the third quarter of 2017.
·DPP® Dengue Fever Assay: The DPP® Dengue Fever Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM and NS1 antigens. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system related to the DPP® Dengue Fever Assay. We completed verification and validation studies, and production of pilot lots,same factors described above with respect to support preclinical studies. During 2016, we initiated registration in Southeast Asia and initiated commercialization of the DPP® Dengue Assay in Southeast Asia during the first quarter of 2017.
·DPP® Zika Assay: The DPP® Zika Assay is a rapid POC stand-alone test for the simultaneous detection of IgM/IgG antibodies. In February 2016, we received a grant from The Paul G. Allen Family Foundation to initiate development of the DPP® Zika Assay. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Zika Assay. In August 2016, the Company received an award from the U.S. Government (HHS/ASPR/BARDA), granting the Company up to $13.2 million ($5.9 million to develop DPP® Zika Assay and obtain U.S. regulatory approval). The Company obtained CE mark in July 2016, and then began selling in the Caribbean region via its distribution partner, Isla Lab, LLC. In September 2016, the Company received a contract award from CDC, to initiate a Zika surveillance program in India, Peru, Guatemala, and Haiti, and we began selling the DPP® Zika IgM/IgG Assay to CDC for field testing purposes during the first quarter of 2017. The Company received approval by the Brazilian health regulatory authority, Agência Nacional de Vigilância Sanitária (ANVISA), for the DPP® Zika IgM/IgG Assay in November 2016 and for the DPP® Micro Reader in July 2017, in collaboration with Bio-Manguinhos/Fiocruz. In September 2017, the Company became the first to receive FDA Emergency Use Authorization for a rapid Zika test.
·DPP® Chikungunya Assay: The DPP® Chikungunya Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM antibodies. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Chikungunya Assay. During 2017, we initiated registration to begin initial commercialization in Southeast Asia.
·DPP® Zika/Dengue/Chikungunya Assay: The DPP® Zika/Dengue/Chikungunya Assay is a rapid, POC, multiplex test for the simultaneous detection of IgM/IgG antibodies. In February 2016, we received a grant from The Paul G. Allen Family Foundation to initiate development of the DPP® Zika/Dengue/Chikungunya Assay. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Zika/Dengue/Chikungunya Assay. In August 2016, the Company received an award from the U.S. Government (HHS/ASPR/BARDA), granting the Company up to $13.2 million (including an option of $7.3 million to develop DPP® Zika/Dengue/Chikungunya Assay and obtain U.S. regulatory approval). In September 2016, the Company received a contract award from CDC to initiate a Zika, Dengue, and Chikungunya surveillance program in India, Peru, Guatemala, and Haiti, and we began selling the DPP® Zika/Dengue/Chikungunya IgM/IgG Assay to CDC during the first quarter of 2017.
·DPP® Fever Panel Assay (1): The DPP® Fever Panel Assay (1) is a rapid, POC, multiplex test for the simultaneous detection of Malaria, Dengue, Chikungunya, Zika, Ebola, Lassa, and Marburg. In October 2015, we received a $2.1 million grant from the Paul G. Allen Ebola Program to develop the DPP® Fever Panel Assay (1) and a $0.55 million follow-on grant to add a test for the detection of Zika virus. We completed the development of the DPP® Fever Panel Assay in 2016, including the addition of Zika, and we supplied 10,000 DPP® Fever Panel Assays (1) to FIND, which initiated field evaluation in Peru and Nigeria. The field evaluation is completed, FIND is analyzing the data, and expected to deliver the final report in the first quarter of 2018.
·DPP® Fever Panel Assay (2): The DPP® Fever Panel Assay (2) is a rapid, POC, multiplex test for the simultaneous detection of Malaria, Dengue, Chikungunya, Zika, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi. In April 2017, the Company announced collaboration with FIND, to develop a DPP® Fever Panel Assay (2) for the Asian market. Development is ongoing and on schedule.
·DPP® Ebola Assay and DPP® Malaria-Ebola Assay: The DPP® Ebola Assay is a rapid POC test for the detection of Ebola, and the DPP® Malaria-Ebola Assay is a rapid, POC, multiplex test for the simultaneous detection of Malaria and Ebola. In October 2014, we announced plans to develop, validate, and commercialize POC DPP® Assays for Ebola and Febrile Illness. We completed the development of the DPP® Ebola Assay and submitted it for Emergency Use Authorization (EUA) with the Food & Drug Administration (FDA) and World Health Organization (WHO), and we are actively engaged with these regulatory agencies. During the third and fourth quarters of 2015, we sold DPP® Ebola and DPP® Malaria-Ebola Assays to the Centers for Disease Control & Prevention (CDC) for field studies in West Africa, which is ongoing.
Technology Collaboration
·DPP® Cancer Assay: The DPP® Cancer Assay is a rapid, POC, multiplex test for the early detection and monitoring of a specific type of cancer. In October 2014, we entered into collaboration with an international diagnostics company to develop a POC diagnostic test for a specific type of cancer. This program is fully funded by this partner. However, under the terms of the agreement, neither Chembio's partner nor the specific type of cancer is being disclosed. The cancer project represents an application of the DPP® technology outside of the infectious disease field, and the scope of the agreement involveslower gross product development of a quantitative, reader-based cancer assay for two cancer markers, utilizing Chembio's DPP® technology and DPP® Micro Reader. During the third quarter of 2015, we completed successful feasibility, and our partner agreed to fund continued development and verification of the DPP® Cancer Assay, which are ongoing.
·DPP® Traumatic Brain Injury Assay: The DPP® Traumatic Brain Injury Assay is a rapid POC test for the detection of traumatic brain injury (TBI) and sports-related concussion. In January 2015, we entered into an agreement with the Concussion Science Group (CSG) Division of Perseus Science Group LLC, to combine CSG's patented biomarker with our proprietary DPP® platform and DPP® Micro Reader, to develop a semi-quantitative or quantitative POC test, to diagnose TBI. The DPP® Traumatic Brain Injury Assay is in the feasibility and pre-clinical stage. Under institutional review board (IRB) agreements with multiple hospitals, we are conducting pre-clinical studies of the prototype DPP® Traumatic Brain Injury Assay using patient samples.
·DPP® Bovine Tuberculosis: The DPP® BovidTB Assay is a rapid POC test for the detection of bovine tuberculosis (TB). In September 2016, the Company was awarded a $600,000 grant from the United States Department of Agriculture (USDA) to develop the DPP® BovidTB Assay. The grant is managed by the Small Business Innovation Research Program (SBIR) of the National Institute of Food and Agriculture (NIFA), a federal agency within the USDA, and the assay is being developed in collaboration with National Animal Disease Center (NADC) and Infectious Disease Research Institute (IDRI). Under the two-year grant, Chembio is using its patented DPP® technology to undertake to develop a simple, rapid, accurate and cost-effective test for bovine TB in cattle. The DPP® BovidTB Assay is being designed to provide results within 20 minutes, thereby significantly improving on the time-consuming, tedious and inadequate diagnostic methods currently in use.
Regulatory Activities
·DPP® HIV-Syphilis Assay: We have developed a U.S. version of the DPP® HIV-Syphilis Assay, designed to meet the performance requirements for the "reverse" algorithm that is currently in clinical use for syphilis testing in the United States. The clinical trial to support the FDA application for the DPP® HIV-Syphilis Assay, initiated during first quarter of 2016, has been completed. In March 2017, the FDA requested further studies in addition to the clinical studies recently completed, which are in progress and expected to be complete during the fourth quarter of 2017, in preparation for filing the Premarket Approval Application.
·DPP® Zika IgM/IgG System: The DPP® Zika IgM/IgG System, which includes the DPP® Zika Assay and DPP® Micro Reader, obtained CE mark, allowing the product to be commercialized in Europe as well as the majority of the Caribbean nations. In November of 2016, the Company received approval from ANVISA, Brazil's regulatory Agency, for the DPP® Zika IgM/IgG Assay, and in July 2017, the Company received ANVISA approval for the DPP® Micro Reader, in collaboration with Bio-Manguinhos. In September 2017, the Company received FDA Emergency Use Authorization, allowing the Company to commercialize the DPP® Zika System in the United States, Puerto Rico, and the U.S. Virgin Islands. The Company has also filed regulatory submissions with the World Health Organization (Emergency Use Assessment and Listing) and with COFEPRIS (Mexico), and we are actively engaged with these organizations.
There can be no assurance that any of the aforementioned Research & Development and/or regulatory products or activities will result in any product approvals or commercialization, nor that any of the existing research and development activities, or any new potential development programs or collaborations will materialize or that they will meet regulatory or any other technical requirements and specifications, and/or that if continued, will result in completed products, or that such products, if they are successfully completed, can or will be successfully commercialized.
Critical Accounting Policies and Estimates
We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management's judgments and estimates. These significant accounting policies relate to revenue recognition, research and development costs, valuation of inventory, valuation of long-lived assets, goodwill, and income taxes. For a summary of our significant accounting policies, which have not changed from December 31, 2016, with the exception of goodwill, see our Annual Report on Form 10-K for the twelve months ended December 31, 2016, which was filed with the SEC on March 7, 2017.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 AS COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2016
Income:
For the three months ended September 30, 2017, Loss before income taxes was $585,000 compared to $2,138,000 for the three months ended September 30, 2016. Net Loss for the 2017 period was $585,000 as compared to $2,138,000 for 2016. The decrease in Net Loss is primarily attributable to increased product revenues in the 2017 period over the 2016 period, together with smaller increases in R&D and royalty revenues, increased product gross margin, and a decrease in operating expenses. Product gross margin increased in the three months ended September 30, 2017, as compared with the three months ended September 30, 2016, by $1,360,000 or 192.19%.
Revenues:
Selected Product Categories: | | For the three months ended | | | | | | | |
| | September 30, 2017 | | | September 30, 2016 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Lateral Flow HIV Tests and Components | | $ | 2,289,972 | | | $ | 1,471,458 | | | $ | 818,514 | | | | 55.63 | % |
DPP® Tests and Components | | | 3,582,145 | | | | 997,768 | | | | 2,584,377 | | | | 259.02 | % |
Other | | | 260,608 | | | | 32,871 | | | | 227,737 | | | | 692.82 | % |
Net Product Sales | | | 6,132,725 | | | | 2,502,097 | | | | 3,630,628 | | | | 145.10 | % |
License and royalty revenue | | | 150,000 | | | | 77,754 | | | | 72,246 | | | | 92.92 | % |
R&D, milestone and grant revenue | | | 1,304,649 | | | | 1,166,610 | | | | 138,039 | | | | 11.83 | % |
Total Revenues | | $ | 7,587,374 | | | $ | 3,746,461 | | | $ | 3,840,913 | | | | 102.52 | % |
Revenues for our lateral flow HIV (LF-HIV) tests and related components during the three months ended September 30, 2017 increased by approximately $819,000 from the same period in 2016. This was primarily attributable to increased sales to Africa of approximately $475,000, USA of approximately $272,000, and Europe of approximately $57,000. Revenues for our DPP® products during the three months ended September 30, 2017 increased by approximately $2,584,000 over the same period in 2016, primarily due to increased sales in Brazil. The increase in R&D, milestone and grant revenue, was primarily due to increased R&D project revenues in 2017.
Management is also focused on sales by region as well as sales by product types. As a result, we are providing the following table which shows sales by region and by product type.
| | For the three Months ended | | | | | | For the three Months ended | | | | |
Region | | September 30, 2017 | | September 30, 2016 | | $ Change | | Part-Type | | September 30, 2017 | | | September 30, 2016 | | | $ Change | |
Africa | | $ | 965,606 | | $ | 483,088 | | $ | 482,518 | | DPP® | | $ | 7,700 | | | $ | 5 | | | $ | 7,695 | |
LF-HIV | | | 957,905 | | | | 482,993 | | | | 474,912 | |
OTHER | | | 1 | | | | 90 | | | | (89 | ) |
Asia | | | 90,781 | | | 125,616 | | | (34,835 | ) | DPP® | | | 984 | | | | 100,250 | | | | (99,266 | ) |
LF-HIV | | | 23,805 | | | | 20,026 | | | | 3,779 | |
OTHER | | | 65,992 | | | | 5,340 | | | | 60,652 | |
Europe | | | 401,730 | | | 315,669 | | | 86,061 | | DPP® | | | 1,120 | | | | 2,860 | | | | (1,740 | ) |
LF-HIV | | | 357,375 | | | | 300,537 | | | | 56,838 | |
OTHER | | | 43,235 | | | | 12,272 | | | | 30,963 | |
Latin America | | | 3,556,815 | | | 731,291 | | | 2,825,524 | | DPP® | | | 3,523,924 | | | | 718,841 | | | | 2,805,083 | |
LF-HIV | | | 17,651 | | | | 9,100 | | | | 8,551 | |
OTHER | | | 15,240 | | | | 3,350 | | | | 11,890 | |
Other | | | 2,320 | | | 5 | | | 2,315 | | DPP® | | | – | | | | – | | | | – | |
LF-HIV | | | 2,320 | | | | 10 | | | | 2,310 | |
OTHER | | | – | | | | (5 | ) | | | 5 | |
USA | | | 1,115,473 | | | 846,428 | | | 269,045 | | DPP® | | | 48,417 | | | | 175,812 | | | | (127,395 | ) |
LF-HIV | | | 930,916 | | | | 658,792 | | | | 272,124 | |
OTHER | | | 136,140 | | | | 11,824 | | | | 124,316 | |
TOTALS | | $ | 6,132,725 | | $ | 2,502,097 | | $ | 3,630,628 | | | | $ | 6,132,725 | | | $ | 2,502,097 | | | $ | 3,630,628 | |
Gross Margin:
| | For the three months ended | | | | | | | |
| | September 30, 2017 | | | September 30, 2016 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Gross Margin per Statements of Operations | | $ | 3,522,583 | | | $ | 1,952,097 | | | $ | 1,570,486 | | | | 80.45 | % |
Less: R&D, milestone, grant, license and royalty revenues | | | 1,454,649 | | | | 1,244,364 | | | | 210,285 | | | | 16.90 | % |
Gross Margin from Net Product Sales | | $ | 2,067,934 | | | $ | 707,733 | | | $ | 1,360,201 | | | | 192.19 | % |
Product Gross Margin % | | | 33.72 | % | | | 28.29 | % | | | | | | | | |
The overall gross margin dollar increase of $1,570,000 included a $1,360,000 increase in gross margin from product sales and an increase in non-product revenues of $210,000. The increase in net product sales gross margin of $1,360,000 is primarily attributable to the increase in sales compared to 2016. The net product sales gross margin increase is primarily affected by two components, one is the increase in product sales of $3,631,000, which, at the 28.3% margin percentage for September 30, 2016, contributed $1,027,000 to the increase, and the other is the increased change in margin percentage of 5.43%, which contributed $333,000 to the balance of the increase in our net product sales gross margin.
Research and Development:
Research and development expenses includeDevelopment
This category includes costs incurred for productclinical & regulatory affairs and other research & development, regulatory approvals, clinical trials, and product evaluations.as follows (dollars in thousands):
Selected expense lines: | | For the three months ended | | | | | | | |
| | September 30, 2017 | | | September 30, 2016 | | | $ Change | | | % Change | |
Clinical and Regulatory Affairs: | | | | | | | | | | | | |
Wages and related costs | | $ | 130,331 | | | $ | 153,500 | | | $ | (23,169 | ) | | | -15.09 | % |
Consulting | | | 20,352 | | | | 11,849 | | | | 8,503 | | | | 71.76 | % |
Clinical trials | | | 293,400 | | | | 322,518 | | | | (29,118 | ) | | | -9.03 | % |
Other | | | 41,047 | | | | 15,018 | | | | 26,029 | | | | 173.32 | % |
Total Clinical and Regulatory Affairs | | | 485,130 | | | | 502,885 | | | | (17,755 | ) | | | -3.53 | % |
| | | | | | | | | | | | | | | | |
R&D other than Clinical Regulatory Affairs: | | | | | | | | | | | | | | | | |
Wages and related costs | | | 731,251 | | | | 732,775 | | | | (1,524 | ) | | | -0.21 | % |
Consulting | | | 44,208 | | | | 58,711 | | | | (14,503 | ) | | | -24.70 | % |
Stock-based compensation | | | 12,101 | | | | 27,263 | | | | (15,162 | ) | | | -55.61 | % |
Materials and supplies | | | 399,051 | | | | 802,144 | | | | (403,093 | ) | | | -50.25 | % |
Other | | | 133,997 | | | | 139,941 | | | | (5,944 | ) | | | -4.25 | % |
Total R&D other than Clinical Regulatory Affairs | | | 1,320,608 | | | | 1,760,834 | | | | (440,226 | ) | | | -25.00 | % |
| | | | | | | | | | | | | | | | |
Total Research and Development | | $ | 1,805,738 | | | $ | 2,263,719 | | | $ | (457,981 | ) | | | -20.23 | % |
| | For the nine months ended | | | Favorable/(unfavorable)
| |
| | September 30, 2018 | | | September 30, 2017 | | | $ Change
| | | % Change | |
Clinical & regulatory affairs | | $ | 927 | | | $ | 1,589 | | | $ | 662 |
| | | 41.6 | % |
Other research & development | | | 4,809 | | | | 4,446 | | | | (363 | )
| | | (8.2 | )% |
Total Research and Development | | $ | 5,736 | | | $ | 6,035 | | | $ | 299 |
| | | 5.0 | % |
Expenses for Clinical & Regulatory Affairs for the three months ended September 30, 2017regulatory affairs decreased by $18,000 as compared to the same period in 2016. This was primarily due to the decrease in clinical trial expenses of $29,000.
R&D expenses other than Clinical & Regulatory Affairs decreased by $440,000 in the three months ended September 30, 2017, as compared with the same period in 2016. The decreases were primarily related to a decrease in material and supplies, that resulted from the decrease in our sponsored research.
Selling, General and Administrative Expenses:
Selected expense lines: | | For the three months ended | | | | | | | |
| | September 30, 2017 | | | September 30, 2016 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Wages and related costs | | $ | 943,436 | | | $ | 844,123 | | | $ | 99,313 | | | | 11.77 | % |
Consulting | | | 102,008 | | | | 5,969 | | | | 96,039 | | | | 1,608.96 | % |
Commissions | | | 333,800 | | | | 147,652 | | | | 186,148 | | | | 126.07 | % |
Stock-based compensation | | | 62,154 | | | | 46,750 | | | | 15,404 | | | | 32.95 | % |
Marketing materials | | | 22,631 | | | | 153,465 | | | | (130,834 | ) | | | -85.25 | % |
Investor relations/investment bankers | | | 62,574 | | | | 67,607 | | | | (5,033 | ) | | | -7.44 | % |
Legal, accounting and compliance | | | 312,311 | | | | 250,129 | | | | 62,182 | | | | 24.86 | % |
Travel, entertainment and trade shows | | | 136,347 | | | | 115,701 | | | | 20,646 | | | | 17.84 | % |
Other | | | 330,097 | | | | 201,055 | | | | 129,042 | | | | 64.18 | % |
Total S, G &A | | $ | 2,305,358 | | | $ | 1,832,451 | | | $ | 472,907 | | | | 25.81 | % |
Selling, general and administrative expenses for the three months ended September 30, 2017, increased by $473,000 as compared with the same period in 2016, a 25.8% increase. This increase resulted primarily from increases in commissions, primarily due to increased sales to Brazil, wages and related costs due to an increase in sales staff, consulting, professional fees, travel, entertainment and trade shows, and other expenses which were partially offset by decreases in marketing material, and decreases in investor relations expense.
Other Income:
| For the three months ended | | | | | |
| September 30, 2017 | | September 30, 2016 | | $ Change | | % Change | |
Interest income | | $ | 3,852 | | | $ | 5,855 | | | $ | (2,003 | ) | | | -34.21 | % |
Total Other Income | | $ | 3,852 | | | $ | 5,855 | | | $ | (2,003 | ) | | | -34.21 | % |
Other income for the three months ended September 30, 2017 decreased to $3,852, from income of $5,855 in the same period in 2016, primarily as a result of less interest income received as a result of less cash to invest.
Income tax provision:
The Company recorded a full valuation allowance for the three months ended September 30, 2017, on its deferred tax assets.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AS COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2016
Income:
For the$0.7 million for the nine months ended September 30, 2017, Loss before income taxes was $4,373,0002018, as compared to $4,988,000the nine months ended September 30, 2017, primarily related to a decrease in clinical trial expenses for the DPP HIV-Syphilis System.
The $0.4 million increase in other research & development costs was primarily associated with a higher R&D headcount and an increase in spending on materials & supplies, each corresponding with the $1.0 million growth in R&D milestone and grant revenue-related projects.
Selling, General and Administrative Expense
SG&A includes administrative expenses, sales and marketing costs including commissions, and other corporate items.
The $1.1 million increase in SG&A for the nine months ended September 30, 2016, primarily as a result of higher net product sales, non-product revenues and reduction in R&D expenses partially offset by increased selling, general and administrative expenses. Net Loss for the 2017 period was $4,373,0002018, as compared to $10,789,000 for 2016. The decrease in Net Loss is primarily attributable to recording of a full valuation of approximately $5,801,000 on our Deferred Tax Asset (DTA) in the 2016 period, an increase in product revenues, an increase in R&D and royalty revenues, and increased product gross margin. Product gross margin increased in the nine months ended September 30, 2017, as comparedwas associated with the nine months ended September 30, 2016, by $1,428,000 or 40.37%.merger & acquisition expenses, and increased sales commissions, head count and related costs.
Revenues:Interest Expense, net
Selected Product Categories: | | For the nine months ended | | | | | | | |
| | September 30, 2017 | | | September 30, 2016 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Lateral Flow HIV Tests and Components | | $ | 5,520,073 | | | $ | 5,696,745 | | | $ | (176,672 | ) | | | (3.10 | )% |
DPP® Tests and Components | | | 6,969,815 | | | | 4,490,214 | | | | 2,479,601 | | | | 55.22 | % |
Other | | | 1,963,209 | | | | 266,229 | | | | 1,696,980 | | | | 637.41 | % |
Net Product Sales | | | 14,453,097 | | | | 10,453,188 | | | | 3,999,909 | | | | 38.26 | % |
License and royalty revenue | | | 477,631 | | | | 133,850 | | | | 343,781 | | | | 256.84 | % |
R&D, milestone and grant revenue | | | 3,096,626 | | | | 3,026,927 | | | | 69,699 | | | | 2.30 | % |
Total Revenues | | $ | 18,027,354 | | | $ | 13,613,965 | | | $ | 4,413,389 | | | | 32.42 | % |
Revenues for our lateral flow HIV (LF-HIV) tests and related componentsInterest expense, net is interest income earned on the Company's deposits, net of interest expense on the note payable, which increased by approximately $18,000 for the nine months ended September 30, 2017 decreased by approximately $177,000 from the same period in 2016. This was primarily attributable2018, as compared to decreased sales in the U.S. of approximately $985,000, decreased sales to Latin America of approximately $61,000, and decreased sales to Asia of approximately $27,000, and partially offset by increased sales to Europe of approximately $768,000 and increased sales to Africa of approximately $140,000. Revenues for our DPP® products during the nine months ended September 30, 2017, increasedreflecting interest on funds raised in the February 2018 public offering.
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 continue to explore ways to enhance our capital structure.
As of September 30, 2018, we had cash and cash equivalents of $6.8 million.
Public Offerings
As described in Note 5 – Stockholders’ Equity to the unaudited condensed consolidated financial statements included herein, on February 13, 2018, we consummated an underwritten registered public offering of 1,783,760 shares of 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, were approximately $10.9 million.
As described in Note 8 – Subsequent Events to the unaudited condensed consolidated financial statements included herein, on November 5, 2018, we consummated an underwritten registered public offering of 2,726,000 shares of common stock at a public offering price of $6.75 per share for gross proceeds of approximately $18.4 million. The net proceeds, after underwriting discounts and commissions and estimated expenses, were approximately $16.6 million.
Acquisitions
On January 9, 2017, we 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 shares of common stock with a value at closing of approximately $1.7 million. As further described in Note 2 – Acquisition to the unaudited condensed consolidated financial statements contained herein, the acquisition was accounted for as a business combination, with the operating results of RVR Diagnostics included within our operating results from the date of acquisition. We financed the cash portion of the acquisition with funds raised in our 2016 public equity offering. After the acquisition, we changed the name RVR Diagnostics Sdn Bhd to Chembio Diagnostics Malaysia Sdn Bhd.
As described in Note 8 – Subsequent Events to the unaudited condensed consolidated financial statements included herein, on November 6, 2018, we acquired 100% of the equity interests in opTricon GmbH, a Berlin, Germany-based privately-held developer and manufacturer of hand-held analyzers for rapid diagnostic tests, for approximately $5.5 million, subject to certain post-closing working capital and other adjustments.
Government, Non-Governmental Organization, and Non-Profit Programs
We seek research and development programs awarded by approximately $2,480,000 overgovernment, non-governmental organization, and non-profit entities, including private foundations. We have, or have recently undertaken, development programs that are competitively awarded from agencies of the same periodU.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.
As of September 30, 2018, we had cash and equivalents of $6.8 million and our only outstanding indebtedness was a $0.4 million seller-financed note payable associated with automated manufacturing equipment. Following is a summary of the changes in 2016, primarily due to increased salescash and cash equivalents (dollars in Brazil, partially offset by decreased sales in Asia. Revenues for our other productsthousands):
| | For the nine months ended | | | Favorable/(unfavorable)
| |
| | September 30, 2018 | | | September 30, 2017 | | | $ Change
| | | % Change | |
| | | | | | | | | | | | |
Net cash used in operating activities | | $ | (7,530 | )
| | $ | (7,177 | ) | | $ | (353 | )
| | | (5.0 | )% |
Net cash used in investing activities | | | (402 | )
| | | (1,640 | ) | | | 1,238 | | | | 75.5 | % |
Net cash provided by financing activities | | | 10,990 | | | | 134 | | | | 10,856 | | | | 8201.5 | % |
Effect of exchange rate changes on cash | | | - | | | | - | | | | - | | | | NA | % |
Increase (Decrease) in Cash and Cash Equivalents | | $ | 3,058 | | | $ | (8,683 | ) | | $ | 11,741 | | | | 135.2 | % |
Our cash flows for the nine months ended September 30, 20172018 increased by approximately $1,697,000, primarily as a result of sales from our Malaysia subsidiary. The increase in R&D, milestone and grant revenue, was primarily due to increased royalty revenues in 2017.
Management is also focused on sales by region as well as sales by product types. As a result, we are providing the following table which shows sales by region and by product type.
| | For the nine months ended | | | | | | For the nine months ended | | | |
Region | | September 30, 2017 | | September 30, 2016 | | $ Change | | Part-Type | | September 30, 2017 | | September 30, 2016 | | $ Change | |
Africa | | $ | 1,797,285 | | $ | 1,576,233 | | $ | 221,052 | | DPP® | | $ | 96,080 | | $ | 18,515 | | $ | 77,565 | |
LF-HIV | | | 1,698,033 | | | 1,557,608 | | | 140,425 | |
OTHER | | | 3,172 | | | 110 | | | 3,062 | |
Asia | | | 1,633,490 | | | 272,638 | | | 1,360,852 | | DPP® | | | 8,384 | | | 104,650 | | | (96,266 | ) |
LF-HIV | | | 129,132 | | | 156,468 | | | (27,336 | ) |
OTHER | | | 1,495,974 | | | 11,520 | | | 1,484,454 | |
Europe | | | 1,441,890 | | | 647,582 | | | 794,308 | | DPP® | | | 4,970 | | | 3,110 | | | 1,860 | |
LF-HIV | | | 1,368,185 | | | 600,393 | | | 767,792 | |
OTHER | | | 68,735 | | | 44,079 | | | 24,656 | |
Latin America | | | 6,701,923 | | | 4,147,284 | | | 2,554,639 | | DPP® | | | 6,420,768 | | | 3,975,011 | | | 2,445,757 | |
LF-HIV | | | 75,861 | | | 136,843 | | | (60,982 | ) |
OTHER | | | 205,294 | | | 35,430 | | | 169,864 | |
Other | | | 3,575 | | | 4,323 | | | (748 | ) | DPP® | | | 1,000 | | | 750 | | | 250 | |
LF-HIV | | | 2,575 | | | 3,566 | | | (991 | ) |
OTHER | | | 0 | | | 7 | | | (7 | ) |
USA | | | 2,874,934 | | | 3,805,128 | | | (930,194 | ) | DPP® | | | 438,613 | | | 388,177 | | | 50,436 | |
LF-HIV | | | 2,246,287 | | | 3,231,403 | | | (985,116 | ) |
OTHER | | | 190,034 | | | 185,548 | | | 4,486 | |
TOTALS | | $ | 14,453,097 | | $ | 10,453,188 | | $ | 3,999,909 | | | | $ | 14,453,097 | | $ | 10,453,188 | | $ | 3,999,909 | |
Gross Margin:
| | For the nine months ended | | | | | | | |
| | September 30, 2017 | | | September 30, 2016 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Gross Margin per Statements of Operations | | $ | 8,539,506 | | | $ | 6,697,950 | | | $ | 1,841,556 | | | | 27.49 | % |
Less: R&D, milestone, grant, license and royalty revenues | | | 3,574,257 | | | | 3,160,777 | | | | 413,480 | | | | 13.08 | % |
Gross Margin from Net Product Sales | | $ | 4,965,249 | | | $ | 3,537,173 | | | $ | 1,428,076 | | | | 40.37 | % |
Product Gross Margin % | | | 34.35 | % | | | 33.84 | % | | | | | | | | |
The overall gross margin dollar increase of $1,842,000 included a $1,428,000 increase in gross margin from product sales and a $413,000 increase in non-product revenues. The increase in net product sales gross margin of $1,428,000 is primarily attributable to the increase in sales compared to 2016. The net product sales gross margin increase is primarily affected by two components, one is the increase in product sales of $4,000,000, which, at the 33.84% margin percentage for September 30, 2016, contributed $1,354,000 to the increase, and the other is the increased change in margin percentage of 0.51%, which contributed $74,000 to the balance of the increase in our net product sales gross margin.
Research and Development:
Research and development expenses include costs incurred for product development, regulatory approvals, clinical trials, and product evaluations.
Selected expense lines: | | For the nine months ended | | | | | | | |
| | September 30, 2017 | | | September 30, 2016 | | | $ Change | | | % Change | |
Clinical and Regulatory Affairs: | | | | | | | | | | | | |
Wages and related costs | | $ | 410,136 | | | $ | 417,542 | | | $ | (7,406 | ) | | | (1.77 | )% |
Consulting | | | 23,815 | | | | 28,300 | | | | (4,485 | ) | | | (15.85 | )% |
Stock-based compensation | | | 9,652 | | | | - | | | | 9,652 | | | | 100.00 | % |
Clinical trials | | | 1,079,372 | | | | 481,359 | | | | 598,013 | | | | 124.23 | % |
Other | | | 65,661 | | | | 38,441 | | | | 27,220 | | | | 70.81 | % |
Total Clinical and Regulatory Affairs | | | 1,588,636 | | | | 965,642 | | | | 622,994 | | | | 64.52 | % |
| | | | | | | | | | | | | | | | |
R&D other than Clinical Regulatory Affairs: | | | | | | | | | | | | | | | | |
Wages and related costs | | | 2,190,656 | | | | 2,171,191 | | | | 19,465 | | | | 0.90 | % |
Consulting | | | 151,023 | | | | 101,486 | | | | 49,537 | | | | 48.81 | % |
Stock-based compensation | | | 67,660 | | | | 61,983 | | | | 5,677 | | | | 9.16 | % |
Materials and supplies | | | 1,565,111 | | | | 2,607,179 | | | | (1,042,068 | ) | | | (39.97 | )% |
Other | | | 471,649 | | | | 358,002 | | | | 113,647 | | | | 31.74 | % |
Total R&D other than Clinical Regulatory Affairs | | | 4,446,099 | | | | 5,299,841 | | | | (853,742 | ) | | | (16.11 | )% |
| | | | | | | | | | | | | | | | |
Total Research and Development | | $ | 6,034,735 | | | $ | 6,265,483 | | | $ | (230,748 | ) | | | (3.68 | )% |
Expenses for Clinical & Regulatory Affairs for the nine months ended September 30, 2017 increased by $623,000$11.7 million as compared to the same period in 2016. This was primarily due to the increase in clinical trial expenses of $598,000.
R&D expenses other than Clinical & Regulatory Affairs decreased by $854,000 for the nine months ended September 30, 2017, as compared with the same period in 2016. The decreases were primarily related to a decrease in material and supplies, that resulted from the decrease in our sponsored research.
Selling, General and Administrative Expenses:
Selected expense lines: | | For the nine months ended | | | | | | | |
| | September 30, 2017 | | | September 30, 2016 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Wages and related costs | | $ | 2,807,297 | | | $ | 2,408,996 | | | $ | 398,301 | | | | 16.53 | % |
Consulting | | | 123,433 | | | | 124,192 | | | | (759 | ) | | | (0.61 | )% |
Commissions | | | 651,316 | | | | 553,931 | | | | 97,385 | | | | 17.58 | % |
Stock-based compensation | | | 185,204 | | | | 158,296 | | | | 26,908 | | | | 17.00 | % |
Marketing materials | | | 202,305 | | | | 301,302 | | | | (98,997 | ) | | | (32.86 | )% |
Investor relations/investment bankers | | | 203,819 | | | | 231,769 | | | | (27,950 | ) | | | (12.06 | )% |
Legal, accounting and compliance | | | 1,010,591 | | | | 731,492 | | | | 279,099 | | | | 38.15 | % |
Travel, entertainment and trade shows | | | 477,870 | | | | 322,909 | | | | 154,961 | | | | 47.99 | % |
Other | | | 1,241,220 | | | | 597,781 | | | | 643,439 | | | | 107.64 | % |
Total S, G &A | | $ | 6,903,055 | | | $ | 5,430,668 | | | $ | 1,472,387 | | | | 27.11 | % |
Selling, general and administrative expenses for the nine months ended September 30, 2017, increased by $1,472,000 as compared with the same period in 2016, a 27.11% increase. This increase resulted primarily from increases in wages and related costs due to an increase in sales staff, professional fees, travel, entertainment and trade shows, increases in commissions, primarily due to increased sales to Brazil, stock-based compensation, and other expenses, primarily due to expenses from our Malaysian subsidiary, which were partially offset by decreases in marketing materials and deceases in investor relations expense.
Other Income:
| For the nine months ended | | | | | |
| September 30, 2017 | | September 30, 2016 | | $ Change | | % Change | |
Interest income | | $ | 24,956 | | | $ | 9,729 | | | $ | 15,227 | | | | 156.51 | % |
Total Other Income | | $ | 24,956 | | | $ | 9,729 | | | $ | 15,227 | | | | 156.51 | % |
Other income for the nine months ended September 30, 2017 increased to $ 24,956, from income of $ 9,729 in the same period in 2016, primarily as a result of interest income received as a result of more cash to invest.
Income tax provision:
The Company recorded a full valuation allowance for the nine months ended September 30, 2017, on its deferred tax assets.
MATERIAL CHANGES IN FINANCIAL CONDITION
Selected Changes in Financial Condition | | As of | | | | | | | |
| | September 30, 2017 | | | December 31, 2016 | | | $ Change | | | % Change | |
Cash and cash equivalents | | $ | 1,871,982 | | | $ | 10,554,464 | | | $ | (8,682,482 | ) | | | -82.26 | % |
Accounts receivable, net of allowance for doubtful accounts of $52,000 at September 30, 2017 and December 31, 2016, respectively | | | 5,768,920 | | | | 3,383,729 | | | | 2,385,191 | | | | 70.49 | % |
Inventories, net | | | 5,235,164 | | | | 3,335,188 | | | | 1,899,976 | | | | 56.97 | % |
Fixed assets, net of accumulated depreciation | | | 1,964,427 | | | | 1,709,321 | | | | 255,106 | | | | 14.92 | % |
Deposits on manufacturing equipment | | | 243,755 | | | | 31,900 | | | | 211,855 | | | | 664.12 | % |
Deposits and other assets | | | 146,789 | | | | 720,489 | | | | (573,700 | ) | | | -79.63 | % |
Prepaid expenses and other current assets | | | 842,532 | | | | 840,145 | | | | 2,387 | | | | 0.28 | % |
Goodwill | | | 1,597,617 | | | | - | | | | 1,597,617 | | | | 100.00 | % |
Intangible assets, net | | | 1,573,518 | | | | - | | | | 1,573,518 | | | | 100.00 | % |
Accounts payable and accrued liabilities | | | 3,870,161 | | | | 3,013,133 | | | | 857,028 | | | | 28.44 | % |
Deferred revenue | | | - | | | | 392,517 | | | | (392,517 | ) | | | -100.00 | % |
Cash decreased by $8,682,000 from December 31, 2016, primarily due to cash used in operating activities and cash used in investing activities, primarily for the acquisition of CDM, for the nine months of 2017. In addition, there were increases in accounts receivable of $2,385,000 (primarily due to a large customer as described under "Liquidity And Capital Resources"), inventories of $1,900,000, net fixed assets of $255,000, deposits on manufacturing equipment of $212,000, an increase in accounts payable and accrued liabilities of $857,000, and increases in goodwill and intangible assets of $1,598,000 and $1,574,000, respectively due to the CDM acquisition. We experienced a decrease in deposits and other assets of $574,000, primarily from reducing the deposit paid for the CDM acquisition, and a decrease in deferred revenue of $393,000.
LIQUIDITY AND CAPITAL RESOURCES
| | For the nine months ended | | | | | | | |
| | September 30, 2017 | | | September 30, 2016 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Net cash used in operating activities | | $ | (7,176,935 | ) | | $ | (5,676,073 | ) | | $ | (1,500,862 | ) | | | 26.44 | % |
Net cash used in investing activities | | | (1,639,827 | ) | | | (79,877 | ) | | | (1,559,950 | ) | | | 1,952.94 | % |
Net cash provided by financing activities | | | 134,280 | | | | 12,550,973 | | | | (12,416,693 | ) | | | -98.93 | % |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | $ | (8,682,482 | ) | | $ | 6,795,023 | | | $ | (15,477,505 | ) | | | -227.78 | % |
The Company's cash decreased as of September 30, 2017 by $8,682,000 from December 31, 2016, primarily due to cash used in operating activities, and net cash used in investing activities, primarily for the CDM acquisition, for the first nine months of 2017.
The cash used in operations in the first nine months of 2017 was $7,177,000, which consisted primarily of an increase in accounts receivable of $2,385,000, an increase in prepaid expenses of $115,000 (net of amortization), increase in inventories of $1,900,000, a decrease in deferred revenue of $393,000, and a net loss net of non-cash items of $3,065,000, partially offset by cash provided by an increase in accounts payable and accrued liabilities of $658,000. Net loss net of non-cash items includes loss before income taxes of $4,373,000 reduced by non-cash expenses of $1,011,000 in depreciation and amortization, and of $297,000 in share-based non-cash compensation. The use of cash from investing activities is primarily due to the acquisition of CDM for $1,400,000 in cash, of which $850,000 was paid in the nine months ended September 30, 2017, and partially offset by reduction in deposit for the CDM investment of $550,000 for a deposit paid in December of 2016.
The Company currently has positive working capital. It has used approximately $8.7 million in cash for the nine months ended September 30, 2017, primarily due to capital raised, offset in part by the use of cash to fund increases in accounts receivable and inventory, net of the benefit of supplier payment terms and cash collections for deferred revenue.
Cash used in operating activities. Approximately $3.3activities during the nine months ended September 30, 2018 was $7.5 million, ofprimarily due to the total $5.8$5.7 million ofincrease in accounts receivable isassociated with the increase in total revenues, and the $4.7 million net loss (excluding non-cash items) during the nine months ended September 30, 2018. In addition, inventories increased by $1.6 million to support higher sales volumes during the nine months ended September 30, 2018 and build product for the Ethiopia HIV tender that began shipping during the second quarter of 2018. The $1.6 million increase in inventory was more than offset by a $3.8 million increase in accounts payable and accrued liabilities.
Cash used in investing activities of $0.4 million during the nine months ended September 30, 2018 related to one customer,the purchase of manufacturing equipment and other fixed assets.
Cash provided by financing activities during the Company hasnine months ended September 30, 2018, primarily relates to proceeds from an underwritten registered public offering. Please see the “Public Offering” section, above, for further information.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
Recent Developments
In October 2018, we announced it had received a high$10.5 million purchase commitment from Bio-Manginhos for the production of DPP HIV and DPP Leishmania assays in Brazil and their subsequent supply to Brazil's Ministry of Health.
In November 2018, we announced that we had received FDA EUA for DPP Ebola Antigen System for use with fingerstick and venous whole blood.
Significant Accounting Policies and Critical Accounting Estimates
Our significant accounting policies are described in Note 3 – Summary of Significant Accounting Policies to the Unaudited Condensed 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 confidence that this account receivable is collectibleuncertainty. 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 this customer.other outside sources, as appropriate. We consider an accounting estimate to be critical if:
A fundamental principle
| ● | 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 preparationaccounting treatment of financial statements in accordance witha particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, ("GAAP")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. There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2018, except for those changes pertaining to our adoption of Accounting Standards Codification Topic 606, Revenue From Contracts With Customers.
Revenue Recognition
We recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenues following the five-step model prescribed under Accounting Standards Update No. 2014-09: (i) identify contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation. Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers.
All contracts related to R&D, milestone and grants revenues are evaluated under the five-step model described above. For certain contracts, we recognize revenue from R&D, milestone and grant revenues when earned. Grants are invoiced after expenses are incurred, as that is the assumption that an entity will continuedepiction of the timing of the transfer of services. Performance obligations generally follow the major phases of product development processes: design feasibility & planning, product development & design optimization, design verification, design validation & process validation, and pivotal studies. Further details regarding revenue recognition are described in existenceNote 3(b) – Summary of Significant Accounting Policies: Revenue Recognition to the Unaudited Condensed Consolidated Financial Statements.
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 going concern, which contemplates continuity of operationsBlack-Scholes option valuation model. This valuation model’s computations incorporate highly subjective assumptions, such as the expected stock price volatility and the realizationestimated 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 and net realizable value, using the first-in, first-out method 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 $60,000.
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 1% of accounts receivable. For example, each additional 1% of accounts receivable that becomes uncollectible would reduce such balance of accounts receivable by approximately $78,000.
Acquisitions
In accordance with accounting guidance for the provisions in FASB ASC 805, Business Combinations, we allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. In addition, an acquisition may include a contingent consideration component. The fair value of the contingent consideration is estimated as of the date of the acquisition and is recorded as part of the purchase price. This estimate is updated in future periods and any changes in the estimate, which are not considered an adjustment to the purchase price, are recorded in our consolidated statements of operations.
We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed.
Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and settlementliabilities based upon quoted market prices, the carrying value of liabilities occurring in the ordinary courseacquired 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 business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, the Company has prepared its consolidated financial statements on a going concern basis.our fair value estimates, including assumptions regarding industry economic factors and business strategies.
The Company has incurred significant operating lossesOther estimates used in the previous three years as well as negativedetermining fair value include, but are not limited to, future cash flow from operations. The Company currently has a working capital surplusflows or income related to intangibles, market rate assumptions, actuarial assumptions for benefit plans and appropriate discount rates. Our estimates of $9.8 million. The Company's abilityfair value are based upon assumptions believed to continue as a going concern depends on its ability to execute its business plan, increase revenuebe reasonable, but that are inherently uncertain, and billings and reduce expenditures. During 2017, the Company began to focus on aligning its expense structure with revenue expectations which included tighter expense controls and overall operational efficiencies which better align the Company's current business plan on a run-rate basis. In addition, the Company recently increased its inventory in anticipation of orders which to date havetherefore, may not materialized and the plan includes reducing inventory levels to provide additional cash to fund operations. Another focus is on the Company's receivable balance which also increased over the nine months, partially due to increased product sales, and we are focusing on reducing days outstanding.
The Company entered into a Controlled Equity OfferingSM Sales Agreement with Cantor Fitzgerald & Co., as sales agent, pursuant to which the Company may offer and sell, from time to time, through Cantor Fitzgerald, shares of the Company's common stock, par value $0.01 per share, having an aggregate offering price of up to $21.2 million, and anticipates the ability to raise additional funding if needed through this vehicle. In addition, the Company may be able to raise additional funds through a private offering. With these options available and the steps outlined above, the Company expects it will be able continue as a going concern into and beyond 2018. However,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 on the first day of 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 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.
We review indefinite-lived intangible assets for impairment annually or more frequently if events or changes in circumstances indicate the assets might be impaired. Similar to the goodwill assessment described above, the Company first performs a qualitative assessment of whether it is more likely than not that an indefinite-lived intangible asset is impaired. If necessary, the Company then performs a quantitative impairment test by comparing the estimated fair of the asset, based upon its forecasted cash flows, to its carrying value. Other intangible assets with definite lives are amortized over their useful lives and are subject to impairment testing only if events or circumstances indicate that the asset might be impaired, as described above.
Income Taxes
Income taxes are accounted for under ASC 740 authoritative guidance, or the 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. We believe that it is more likely than not that we will not be able to obtain financing or that such financing will beutilize our net operating loss carryforwards and maintains a full valuation allowance. We maintain a full valuation allowance on favorable terms. Any such financing would be dilutive to shareholders. Failure to generate sufficient revenue, control or further reduce expenditures and/or the inability to obtain financing will result in an inability of the Company to continue as a going concern.research and development tax credits.
Fixed Asset Commitments
As of September 30, 2017, the Company had $243,755 in deposits on equipment,The Guidance also prescribes a comprehensive model for recognizing, measuring, presenting and
$462,989 in commitments for additional equipment purchase obligations.RECENT DEVELOPMENTS AND CHEMBIO'S PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
During the third quarter of 2017, Chembio continued to execute its strategy and focus on three key areas: 1) strengthening the Company's core sexually transmitted disease business, 2) building a broad tropical and fever disease portfolio, and 3) establishing a global commercial organization.
Chembio believes there are significant opportunities in our core sexually transmitted disease business, including the commercialization of a U.S. version of the DPP® HIV-Syphilis Assay, as well as the DPP® HIV Self-Testing kits outside the U.S, specifically in Africa and Europe. The Company also believes large market opportunities can be addressed with its fever and tropical disease assays, including DPP® Malaria, DPP® Dengue, DPP® Zika, and the DPP® Fever Assays. Chembio's growing commercial organization includes experienced sales executives based in target regions, including the U.S., Latin America, Africa, Europe and Asia Pacific, and through this global sales infrastructure the Company's has had successes in each of these markets.
Sexually Transmitted Diseases Business
Within the sexually transmitted disease business, Chembio increased sales of its HIV Assays in multiple markets. The Company expects its DPP® HIV-Syphilis Assay to play an important role in combatting global concerns related to co-infection and mother-to-child transmission of both HIV and syphilis. The World Health Organization recommends screening all pregnant women for HIV and syphilis at the first antenatal care visit in nearly every country. Early diagnosis and treatment of both HIV and syphilis in pregnant women has proved effectivedisclosing in the prevention of both adverse outcomes of pregnancy and mother-to-child transmission. Additionally, there are other at-risk populations that may also benefit from improved HIV and syphilis screening coverage. Chembio's DPP® HIV-Syphilis Assay is currently available in Latin America, Europe and the Caribbean (except for Puerto Rico).
In March 2017, the FDA requested that the Company undertake further studies of its DPP® HIV-Syphilis Assay, in addition to the clinical studies recently completed, which are in progress andconsolidated financial statements tax positions taken or expected to be complete during the fourth quartertaken on a tax return, including a decision whether to file or not to file in a particular jurisdiction.
Recently Issued Accounting Pronouncements
The information concerning recently issued accounting pronouncements contained in Note 3 – Summary of 2017, in preparation for the Company's filing the Premarket Approval Application for its DPP® HIV-Syphilis Assay.
Another important factor in the U.S. market is the fact that Chembio won multiple HIV rapid test procurement awards in recent quarters. The Company has been supplying HIV products pursuant to these awards in 2017, and expects to continue doing so during 2018.
Outside the U.S., Chembio's DPP® Syphilis Screen & Confirm Assay, which is CE Marked, is now available. The DPP® Syphilis Screen & Confirm Assay has been successfully used in several pilot programs in Africa, andSignificant Accounting Policies, to the Company's knowledgeunaudited condensed consolidated financial statements included in Part 1, Item 1 of this report is the only rapid test that can detect both active and past-treated syphilis infections with the same test. We believe this product represents a paradigm shift in syphilis confirmatory testing outside of the U.S.incorporated herein by reference.
Chembio's HIV Self-Testing products continue to record sales growth in the EU. We believe the market for HIV Self-Testing, especially in Africa and Europe, offers significant growth potential and we believe our HIV products are well-suited to penetrate these markets.
During the third quarter, Chembio continued to fulfill the $5.8 million order received in May 2017 for the production of DPP® HIV 1/2 Assays, both blood and oral fluid, in Brazil. The Company shipped $0.9 million during the second quarter of 2017, $3.2 million in the third quarter of 2017, and anticipates shipping the remaining $1.6 million during the fourth quarter of 2017.
Tropical and Fever Disease Business
One of Chembio's key goals is the commercialization of multiple tropical and fever disease products during 2017. We are pleased to confirm that during the third quarter of 2017 the Company initiated sales of its DPP® Dengue Assay and DPP® Zika Assay, and initiated a pilot program with the Centers for Disease Control and Prevention (CDC) for the Company's DPP® Dengue/Zika/Chikungunya Assay in India, Peru, Haiti and Guatemala.
Also during the third quarter of 2017, Chembio received approval for its DPP® Micro Reader from Agência Nacional de Vigilância Sanitária (ANVISA), the Brazilian health regulatory agency, in collaboration with Bio-Manguinhos/Fiocruz. The DPP® Zika IgM/IgG Assay detects antibodies using a tiny (10uL) drop of blood from the fingertip and provides quantitative results in 15 minutes, when used with the handheld, battery-operated DPP® Micro Reader. With this approval, Chembio's DPP® Zika System, which includes the DPP® Zika IgM/IgG Assay and DPP® Micro Reader, is now approved for commercial use in Brazil.
Another significant milestone during the third quarter of 2017 was Chembio's receipt of U.S. Food and Drug Administration (FDA) Emergency Use Authorization (EUA) for its DPP® Zika System. The DPP® Zika System is the first and only rapid Zika test to receive an FDA EUA. The test is authorized for the presumptive detection of Zika virus IgM antibodies in fingerstick whole blood, EDTA venous whole blood, EDTA plasma (each collected alongside a patient-matched serum specimen) or serum (plain or separation gel) specimens collected from individuals meeting CDC Zika virus clinical and/or epidemiological criteria, from 8 days of on-set and up to 12 weeks. The Company believes its DPP® Zika System will be an important contributor to future sales.
The Company continues to pursue additional regulatory approvals for its DPP® Zika System, including the World Health Organization Emergency Use Assessment and Listing. We remain optimistic regarding these authorizations, given the performance of our DPP® Zika System.
Beyond the products that we are currently marketing, Chembio continues to work with collaborators toward the development of the Company's next generation of tropical and fever disease products, including: DPP® Fever Panel – Africa, DPP® Fever Panel – Asia, DPP® Malaria Assay and, DPP® Zika/Dengue/Chikungunya Assay, among others. It is important to note that nearly all of the Company's tropical and fever disease products are being developed through collaborations and/or funding from world-leading health organizations, including the Bill & Melinda Gates Foundation, the Paul G. Allen Family Foundation, the CDC, FIND, and BARDA.
Global Commercialization
In mid-2014, Chembio made a strategic decision to transform from a product supply organization to an integrated commercial organization. The Company then terminated its distribution agreements with a former U.S. exclusive distributor in 2014 and 2016, respectively. Subsequently, Chembio began building a sales and marketing team in the U.S market.
During the fourth quarter of 2016, we strengthened our commercial leadership, appointing seasoned executives to lead the Americas region, as well as the European, Middle East and Africa regions and Asia Pacific region. And, during the first quarter of 2017, we added experienced diagnostics sales executives in Latin America, Africa and Asia Pacific. We believe that this infrastructure positions the Company for commercial success, globally.
Additionally, Chembio has integrated our newly-acquired facility in Malaysia to execute upon our global commercialization strategy, which includes the manufacture of tests locally, in high growth regions where product performance and competitive pricing is key. In Medford, NY the Company has also made investments in automation of its DPP® manufacturing line to produce high quality, reliable, products that can be scaled up quickly. Also, importantly, the Company hired David Gyorke, Chembio's Vice President of Operations, in January 2017 to drive manufacturing strategy to support growth.
Key Personnel:
During the third quarter, Chembio announced the addition of Gail Page to the Company's Board of Directors. Ms. Page has spent her entire career in health care with a focus on diagnostics and emerging technologies. In January 2013, Ms. Page founded Vineyard Investment Advisors (VIA), through which she works with entrepreneurs, businesses, and universities to transform their ideas into products and services. Prior to VIA, Ms. Page served as the President, CEO and a Director of Vermillion, Inc., a healthcare company focused on developing and commercializing novel diagnostic blood tests. As President and CEO, Ms. Page directed Vermillion's repositioning to highlight the progressive nature of its pipeline, successfully raised over $100M in funding, developed and commercially launched the OVA1® Test, which was the first FDA-cleared blood test to help diagnose ovarian cancer, and engaged Quest Diagnostics as an equity and commercial partner. In the years preceding Vermillion, Ms. Page served as Executive Vice President and Chief Operating Officer at Luminex, and as Sr. Vice President at Roche Biomedical / Laboratory Corporation of America (LabCorp), during which time her team launched approximately 300 innovative tests, including a suite of HIV and infectious disease assays. Ms. Page's current board appointments include Sword Diagnostics, Inc., Consortia Health Holdings (Chair and Co-founder), and NxPrenatal, Inc., for which she serves as Executive Chair.
In other personnel news, Richard J. Larkin, Chembio's Executive Vice President and Chief Financial Officer (CFO), has recently announced his intent to retire by December 31, 2017. An external search for a new Company CFO has commenced. To ensure an orderly transition, Mr. Larkin is expected to continue to serve as the Company's CFO and remain an officer of the Company until the earlier of December 31, 2017 or until a successor is found. Mr. Larkin has been a dedicated and valuable member of the Chembio team for fourteen years. We wish him well as he transitions into retirement.
Also recently, John Sperzel, Chembio's President and Chief Executive Officer (CEO), returned from medical leave to resume his full responsibilities. During Mr. Sperzel's recovery from heart transplant surgery, he remained engaged in corporate activities and decisions. In his absence, Sharon Klugewicz, President of the Americas, assumed the role of acting CEO, and provided expert leadership in advancing the Company's strategy.
Overview of Chembio's Global Sales:
During the third quarter of 2017, Chembio achieved total revenue of $7.6 million, which represents a 102% increase over the prior-year period. Product sales during the third quarter of 2017 were $6.1 million, which represents a 144% increase over the prior-year period. This increase was driven primarily by product sales growth within certain target regions compared to the prior-year period, including: 386% increase in Latin America, 100% increase in Africa, 32% increase in the U.S., and 27% increase in Europe.
The increase in product revenue during the third quarter can be attributed to the efforts of our expanding sales and marketing organization. In Latin America, we achieved sales in excess of $3.5 million in large part led by strong DPP® sales. In the U.S., the Company achieved over $1.1 million in sales, as we evolve from a product supply organization to direct sales of our three FDA- PMA-approved, CLIA-waived HIV rapid tests, serving both public health and the professional market. And, we expect the recent EUA for our DPP® Zika System to strengthen U.S. sales in the coming quarters. In Africa, we achieved sales of nearly $1.0 million, and in Europe, we recognized revenue of approximately $0.4 million, driven primarily by HIV sales for self-testing.
Conclusion:
The third quarter of 2017 was a strong one for Chembio. During the period, sales increased over 100% as compared to the prior-year period. In our sexually transmitted disease business, the Company advanced a pivotal clinical trial for our DPP® HIV-Syphilis Assay, and we plan to file a PMA for this assay during the fourth quarter of 2017, moving the product closer to U.S. commercialization.
Two key regulatory approvals during the third quarter have the potential to impact future sales in our tropical and fever disease business. With ANVISA approval of the DPP® Zika System in Brazil and with the FDA EUA for the DPP® Zika System in the U.S. market, Chembio has the opportunity to establish itself as the leader in rapid testing for this growing health concern.
In both the tropical and fever disease business, as well as other areas of interest, Chembio remains actively engaged with multiple funding collaborators, working toward the development of new assays that we expect to fill our product pipeline in the future.
Supporting our near-term and future growth is the global commercial team that we've built over the last year. With strong sales experience and leadership in target regions around the world, combined with high-quality and much needed products, we are confident in Chembio's future.
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk. |
We do not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, have no material derivative risk to report under this Item. As of September 30, 2018, we did not have any foreign currency exchange contracts or 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 4% of our total revenues for the nine months ended September 30, 2018.
(a) | Disclosure Controls and Procedures. Under the supervision and with the participation of our senior management, consisting of our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"),or the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that as of September 30, 20172018 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our Exchange Act reports is accumulated and communicated to our management, including our chiefprincipal executive officer and chiefprincipal financial officer, as appropriate to allow timely decisions regarding required disclosure. On January 9, 2017, the Company acquired all the outstanding stock of Chembio Diagnostics Malaysia Sdn Bhd ("CDM") (formally known as RVR Diagnostics Sdn Bhd), which became a wholly-owned subsidiary of the Company as a result of the acquisition. This report on controls does not includeManagement recognizes that any controls and procedures, concerning CDM.no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. |
(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 ninethree months ended September 30, 2017, except for CDM,2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
PART II. OTHER INFORMATION
EXHIBITS INDEXFrom time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest that is adverse to our interest.
Except as set forth below, there have been no material changes to the risk factors discussed in in Part I, Item 1A, entitled “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2017.:
We may not generate the expected benefits of our acquisition of opTricon GmbH, and the acquisition could disrupt our ongoing business, distract our management and increase our expenses.
We entered into a share purchase agreement with opTricon GmbH, or opTricon, with the expectation that the acquisition of all of the outstanding shares of opTricon, or the Acquisition, will result in various benefits, including securing global commercial rights and reducing cost of goods. Achieving the anticipated benefits of the Acquisition is subject to a number of uncertainties, including whether our business and the business of opTricon can be integrated in an efficient and effective manner. We cannot assure you that we will be able to accurately forecast the performance or ultimate impact of the Acquisition.
It is possible that the integration process could take longer than anticipated and could result in the loss of valuable employees, additional and unforeseen expenses, the disruption of our ongoing business, processes and systems, or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the Acquisition. There may be increased risk due to integrating financial reporting and internal control systems. The integration process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits, expense savings and synergies will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could adversely affect our future business, financial condition, operating results and prospects.
We have incurred and will continue to incur non-recurring expenses in connection with the Acquisition, including legal, accounting and other expenses. Additional unanticipated costs may be incurred following consummation of the Acquisition in the course of the integration of the business of opTricon into our business. We cannot be certain that the realization of efficiencies related to the integration of the two businesses will offset the transaction and integration costs in the near term or any losses from undiscovered liabilities not covered by an indemnification from the sellers of opTricon.
Number | | Description |
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| | Chembio Diagnostics Inc.
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3.2 | | Bylaws and Bylaw Amendments. (2) |
3.3 | | |
4.1 | | |
4.2 | | |
4.3 | | |
4.4 | | |
4.5 | | |
4.6 | | Form of Warrant (to be filed by amendment) |
10.1* | | |
10.2* | | |
10.3* | | |
10.4 | | |
10.5* | | |
10.6* | | |
10.7 | | |
10.8 | | |
10.9 | | |
10.10 | | |
10.11 | | |
10.12 | | |
14.1 | | |
31.1 | | 2002. |
31.2 | | |
| | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002. |
32 | | |
| | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002. |
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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 |
* Previously filed
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1 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on July 29, 2010. |
2 | | |
3 | | Incorporated by reference to the Registrant's definitive proxy statement on Schedule 14A filed with the Commission on August 3, 2012. |
4 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 8, 2014. |
5 | | Incorporated by reference to the Registrant's definitive proxy statement on Schedule 14A filed with the Commission on April 29, 2014. |
6 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 7, 2014. |
7 | | Incorporated by reference to the Registrant's registration statement on Form 8-A filed with the Commission on April 7, 2016. |
8 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on March 14, 2016. |
9 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on June 27, 2017. |
10 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on October 5, 2006. |
11 | | Incorporated by reference to the Registrant's Annual Report on Form 10-K filed with the Commission on March 5, 2015. |
12 | | Incorporated by reference to the Registrant's Annual Report on Form 10-KSB filed with the Commission on March 30, 2006. |
13 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on April 7, 2016. |
14 | | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on January 10, 2017. |
15 | | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 9, 2017. |
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(*) | | 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. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Chembio Diagnostics, Inc. |
| | Chembio Diagnostics, Inc. |
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Date: | November 8, 20172018 | By: /s//s/ John J. Sperzel III |
| | John J. Sperzel III |
| | Chief Executive Officer and President
(Principal Executive Officer) |
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Date: | November 8, 20172018 | By: /s / Richard J. LarkinNeil A. Goldman |
| | Richard J. LarkinNeil A. Goldman |
| | Chief Financial Officer and
Executive Vice President
(Principal Financial and Accounting Officer) |