UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 20202021

OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: ______ to ________

000-30379
(Commission File Number)

graphic

Chembio Diagnostics, Inc.
(Exact name of registrant as specified in its charter)

Nevada 88-0425691
(State or other jurisdiction of incorporation) (IRS Employer Identification Number)

555 Wireless Blvd.
Hauppauge, NY 11788
(Address of principal executive offices including zip code)

(631) 924-1135
(Registrant’s telephone number, including area code)
N/A

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, $0.01 par value CEMI The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer ☐
Accelerated filer ☒
 
Non-accelerated filer ☐
Smaller reporting company ☒
 
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes ☐ No ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒

As of July 31, 2020,2021, the registrant had 20,161,54228,622,803 shares outstanding of its common stock, $.01$0.01 par value.


Table of Contents

Quarterly Report on Form 10-Q
For The Quarterly Period Ended
June 30, 20202021

Table of Contents

Chembio Diagnostics, Inc.

 Page
FORWARD-LOOKING STATEMENTS AND STATISTICAL ESTIMATES
3
   
Part I. FINANCIAL INFORMATION: 
  
 
Item 1. Financial Statements:
 
   
 
Condensed Consolidated Balance Sheets as of June 30, 20202021 (unaudited) and December 31, 20192020
4
   
 
Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 20202021 and 20192020
5
   
 
Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and six months ended June 30, 20202021 and 20192020
6
   
 
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and six months ended June 30, 20202021 and 20192020
7
   
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 20202021 and 20192020
9
   
 
Notes to Condensed Consolidated Financial Statements (unaudited)
10
   
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2725
   
 
Item 4. Controls and Procedures
4334
   
Part II. OTHER INFORMATION: 
   
 
Item 1. Legal Proceedings
4434
   
 
Item 1A. Risk Factors
4534
   
 
Item 6. Exhibits
5239
   
SIGNATURES
5340


2
Table of Contents

Unless the context requires otherwise, the words ‘‘we,’’ “us,” ‘‘our,’’ ‘‘our company,’’ ‘‘us,’’ ‘‘Chembio,’’ and similar terms refer to Chembio Diagnostics, Inc. and its consolidated subsidiaries.

DPP, STAT-PAK, STAT-VIEW and SURE CHECK are our registered trademarks, and CHEMBIO, MICRO READER and our logo design are our trademarks. For convenience, these trademarks appear in this report without ® and ™ symbols, but that practice does not mean that we will not assert, to the fullest extent under applicable law, our rights to the trademarks.

FORWARD-LOOKING STATEMENTS AND STATISTICAL ESTIMATES

This report contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified through the inclusion of words such as “anticipate,” “believe,” “contemplate,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “objective,” “outlook,” “plan,” “potential,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” or variations of such words or similar expressions. All statements addressing our future operating performance, and statements addressing events and developments that we expect or anticipate will occur in the future, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon currently available information, operating plans, and projections about future events and trends.

This report contains estimates, projections and other data concerning our industry, our business, and the markets for our products. Where expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by the World Health Organization, or WHO. We also include data that we have compiled, obtained, identified or otherwise derived from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. Other than the WHO, we do not expressly refer to the sources from which this data is derived.

Forward-lookingForward-looking statements and statistical estimates inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted or expressed in this report. These risks and uncertainties include those described in Part I, Item 1A “Risk“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 13, 2020, inof Part II Item 1A. “Risk Factors” in our Quarterly Reoprt on Form 10-Q for the quarterly period ended March 31, 2020, as filed with the Securities and Exchange Commission on May 4, 2020, and in Part II, Item 1A, “Risk Factors,” of this report. You should interpret many of the risks identified in these reports as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Investors are cautioned not to place undue reliance on any forward-looking statements or statistical estimates, which speak only as of the date they are made.made. We undertake no obligation to update any forward-looking statement or statistical estimate, whether as a result of new information, future events or otherwise.


3
Table of Contents

PART I
Item 1.FINANCIAL STATEMENTS
Item 1.FINANCIAL STATEMENTS
 CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF

 
(Unaudited)
June 30, 2020
  December 31, 2019  
(Unaudited)
June 30, 2021
  December 31, 2020 
- ASSETS -            
CURRENT ASSETS:            
Cash and cash equivalents $36,427,468  $18,271,352  $5,564,349  $23,066,301 
Accounts receivable, net of allowance for doubtful accounts of $156,000 and $62,000 as of June 30, 2020 and December 31, 2019, respectively  2,610,587   3,661,325 
Accounts receivable, net of allowance for doubtful accounts of $193,535 and $296,793 at June 30, 2021 and December 31, 2020, respectively
  2,977,082   3,377,387 
Inventories, net  14,131,540   9,598,030   15,720,292   12,516,402 
Prepaid expenses and other current assets  742,908   693,013   1,064,508   778,683 
TOTAL CURRENT ASSETS  53,912,503   32,223,720   25,326,231   39,738,773 
                
FIXED ASSETS:                
Property, plant and equipment, net  7,705,890   5,933,569   9,149,460   8,688,403 
Finance lease right-of-use asset, net  258,884   210,350   225,947   233,134 
                
OTHER ASSETS:                
Operating lease right-of-use assets, net  6,515,282   7,030,744 
Operating lease right-of-use asset, net  6,274,945   6,112,632 
Intangible assets, net  3,605,194   3,914,352   2,329,859   3,645,986 
Goodwill  5,534,624   5,872,690   5,899,531   5,963,744 
Deposits and other assets  429,884   543,539   370,644   509,342 
                
TOTAL ASSETS $77,962,261  $55,728,964  $49,576,617  $64,892,014 
                
- LIABILITIES AND STOCKHOLDERS’ EQUITY -                
CURRENT LIABILITIES:                
Accounts payable and accrued liabilities $9,290,887  $5,526,243  $8,091,368  $10,042,790 
Deferred revenue  4,097,155   125,000   404,486   1,606,997 
Operating lease liabilities  867,154   642,460 
Finance lease liabilities  55,712   41,894   65,435   58,877 
Operating lease liabilities  776,691   568,294 
Note payable  75,708   180,249 
TOTAL CURRENT LIABILITIES  14,296,153   6,441,680   9,428,443   12,351,124 
                
OTHER LIABILITIES:                
Long-term operating lease liabilities  6,565,019   6,969,603   6,392,531   6,327,143 
Long-term finance lease liabilities  210,408   171,953   174,466   185,239 
Long-term debt, less current portion, net  17,903,401   17,644,149 
Long-term debt, net  18,477,924   18,182,158 
Deferred tax liability  250,326   466,326   0   69,941 
                
TOTAL LIABILITIES  39,225,307   31,693,711   34,473,364   37,115,605 
                
COMMITMENTS AND CONTINGENCIES      
COMMITMENTS AND CONTINGENCIES (Note 6)  0   0 
                
STOCKHOLDERS’ EQUITY:                
Preferred stock - 10,000,000 shares authorized; NaN outstanding  -   - 
Common stock - $0.01 par value; 100,000,000 shares authorized; 20,194,832 shares and 17,733,617 shares issued at June 30, 2020 and December 31, 2019, respectively  201,948   177,335 
Preferred stock - 10,000,000 shares authorized; NaN issued or outstanding
  0   0 
Common stock - $0.01 par value; 100,000,000 shares authorized; 20,337,372 shares and 20,223,498 shares issued at June 30, 2021 and December 31, 2020, respectively
  203,374   202,235 
Additional paid-in capital  124,143,171   95,433,077   126,006,387   124,961,514 
Accumulated deficit  (84,428,349)  (71,585,003)  (110,670,879)  (97,106,331)
Treasury stock - 33,290 and 0 shares at cost, at June 30, 2020 and December 31, 2019, respectively  (150,919)  - 
Accumulated other comprehensive (loss) income  (1,028,897)  9,844 
Treasury Stock, 41,141 shares at cost, at June 30, 2021 and December 31, 2020  (190,093)  (190,093)
Accumulated other comprehensive loss  (245,536)  (90,916)
TOTAL STOCKHOLDERS’ EQUITY  38,736,954   24,035,253   15,103,253   27,776,409 
        
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $77,962,261  $55,728,964  $49,576,617  $64,892,014 

See accompanying notes to condensed consolidated financial statements

4
Table of Contents

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 For the Three Months Ended  For the Six Months Ended  For the three months ended  For the six months ended 
 June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
REVENUES:                        
Net product sales $3,791,574  $8,785,041  $9,508,166  $15,409,326  $3,931,383  $3,791,574  $7,956,045  $9,508,166 
R&D and grant revenue  1,193,973   854,264   2,101,660   2,556,053 
R&D revenue  727   1,193,973   1,107,366   2,101,660 
Government grant income  2,280,000   0   5,630,000   0 
License and royalty revenue  125,625   248,831   360,929   465,022   250,000   125,625   493,058   360,929 
TOTAL REVENUES  5,111,172   9,888,136   11,970,755   18,430,401   6,462,110   5,111,172   15,186,469   11,970,755 
                                
COSTS AND EXPENSES:                                
Cost of product sales  5,670,737   6,989,975   10,045,179   12,001,611   4,039,696   5,670,737   7,588,137   10,045,179 
Research and development expenses  1,922,306   2,101,020   3,881,159   4,318,652   2,796,981   1,922,306   5,660,319   3,881,159 
Selling, general and administrative expenses  4,397,593   4,096,942   8,554,234   8,110,013   6,001,353   4,397,593   12,086,422   8,554,234 
Severance, restructuring and other related costs  387,540   -   1,110,658   - 
Asset impairment, restructuring, severance and related costs  1,961,156   387,540   2,044,243   1,110,658 
Acquisition costs  -   -   63,497   395,612   0   0   0   63,497 
  12,378,176   13,187,937   23,654,727   24,825,888   14,799,186   12,378,176   27,379,121   23,654,727 
LOSS FROM OPERATIONS  (7,267,004)  (3,299,801)  (11,683,972)  (6,395,487)  (8,337,076)  (7,267,004)  (12,192,652)  (11,683,972)
                                
OTHER INCOME:                
Interest (expense) income  (712,052)  5,918   (1,374,192)  12,602 
OTHER EXPENSE:                
Interest expense, net  (727,374)  (712,052)  (1,439,851)  (1,374,192)
                                
LOSS BEFORE INCOME TAXES  (7,979,056)  (3,293,883)  (13,058,164)  (6,382,885)  (9,064,450)  (7,979,056)  (13,632,503)  (13,058,164)
                                
Income tax benefit  (135,259)  (107,203)  (214,818)  (379,672)
Income tax benefit:  65   135,259   67,955   214,818 
                                
NET LOSS $(7,843,797) $(3,186,680) $(12,843,346) $(6,003,213) $(9,064,385) $(7,843,797) $(13,564,548) $(12,843,346)
                                
Basic loss per share $(0.42) $(0.19) $(0.71) $(0.36)
Basic and diluted loss per share $(0.45) $(0.42) $(0.67) $(0.71)
                                
Diluted loss per share $(0.42) $(0.19) $(0.71) $(0.36)
                
Weighted average number of shares outstanding, basic  18,868,144   16,914,171   18,032,723   16,906,936 
                
Weighted average number of shares outstanding, diluted  18,868,144   16,914,171   18,032,723   16,906,936 
Weighted average number of shares outstanding, basic and diluted  20,219,617   18,868,144   20,191,657   18,032,723 

See accompanying notes to condensed consolidated financial statements

5
Table of Contents

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 For the Three Months Ended  For the Six Months Ended  For the three months ended  For the six months ended 
 June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
Net loss $(7,843,797) $(3,186,680) $(12,843,346) $(6,003,213) $(9,064,385) $(7,843,797) $(13,564,548) $(12,843,346)
Other comprehensive loss:                                
Foreign currency translation adjustments  (175,447)  (313,225)  (1,038,741)  (111,039)  301,102   (175,447)  (154,620)  (1,038,741)
Comprehensive loss $(8,019,244) $(3,499,905) $(13,882,087) $(6,114,252) $(8,763,283) $(8,019,244) $(13,719,168) $(13,882,087)

See accompanying notes to condensed consolidated financial statements

6
Table of Contents


CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

 For The Six Months Ended June 30, 2020 
  Common Stock  
Additional
Paid-in-Capital
  
Treasury
Stock
  
Accumulated
Deficit
  
Accumulated Other
Comprehensive
Income
  Total 
  Shares  Amount  Shares  Amount 
Balance at December 31, 2019  17,733,617  $177,335  $95,433,077   -  $-  $(71,585,003) $9,844  $24,035,253 
                                 
Common Stock:                                
Restricted stock issued  34,249   343   117,956   -   -   -   -   118,299 
Restricted stock compensation, net   (440,631)  (4,406)  (292,495)  -   -   -   -   (296,901)
Shares tendered for withholding taxes  -   -   145,056   (31,486)  (145,056)  -   -   - 
                                 
Options:                                
Stock option compensation  -   -   139,449   -   -   -   -   139,449 
                                 
Comprehensive loss  -   -   -   -   -   -   (863,294)  (863,294)
                                 
Net loss  -   -   -   -   -   (4,999,549)  -   (4,999,549)
                                 
Balance at March 31, 2020  17,327,235  $173,272  $95,543,043   (31,486) $(145,056) $(76,584,552) $(853,450) $18,133,257 
                                 
Common Stock:                                
Issuance of stock, net  2,619,593   26,196   28,410,545   -   -   -   -   28,436,741 
Restricted stock issued  18,858   189   (189)  -   -   -   -   - 
Restricted stock compensation, net  (29,543)  (296)  262,405   -   -   -   -   262,109 
Shares tendered for withholding taxes  -   -   (192,161)  (1,804)  (5,863)  -   -   (198,024)
                                 
Options:                                
Exercised  5,528   55   (55)  -   -   -   -   - 
Stock option compensation  -   -   122,115   -   -   -   -   122,115 
                                 
Warrants exercised  253,161   2,532   (2,532)  -   -   -   -   - 
                                 
Comprehensive loss  -   -   -   -   -   -   (175,447)  (175,447)
                                 
Net loss  -   -   -   -   -   (7,843,797)  -   (7,843,797)
                                 
Balance at June 30, 2020  20,194,832  $201,948  $124,143,171   (33,290) $(150,919) $(84,428,349) $(1,028,897) $38,736,954 

See accompanying notes to condensed consolidated financial statements
 For the six months ended June 30, 2021 
  Common Stock  
Additional
Paid-in-Capital
  
Treasury
Stock
  
Accumulated
Deficit
  AOCI  Total 
  Shares  Amount  Shares  Amount 
Balance at December 31, 2020
  20,223,498  $202,235  $124,961,514   (41,141) $(190,093) $(97,106,331) $(90,916) $27,776,409 
                                 
Common Stock:                                
Restricted stock issued  62,197   622   58,909   0   0   0   0   59,531 
Restricted stock compensation, net   0   0   309,010   0   0   0   0   309,010 
Shares tendered for withholding taxes  0   0   (115,059)  0   0   0   0   (115,059)
                                 
Options:                                
Stock option compensation  -   0   211,140   -   0   0   0   211,140 
                                 
Comprehensive loss  -   0   0   -   0   0   (455,722)  (455,722)
                                 
Net loss  -   0   0   -   0   (4,500,163)  0   (4,500,163)
                                 
Balance at March 31, 2021
  20,285,695  $202,857  $125,425,514   (41,141) $(190,093) $(101,606,494) $(546,638) $23,285,146 
                                 
Common Stock:                                
Restricted stock issued  51,677   517   (517)  0   0   0   0   0 
Restricted stock compensation, net  0   0   288,053   0   0   0   0   288,053 
Shares tendered for withholding taxes  0   0   (4,454)  0   0   0   0   (4,454)
                                 
Options:                                
Stock option compensation  -   0   297,791   -   0   0   0   297,791 
                                 
Comprehensive loss  -   0   0   -   0   0   301,102   301,102 
                                 
Net loss  -   0   0   -   0   (9,064,385)  0   (9,064,385)
                                 
Balance at June 30, 2021
  20,337,372  $203,374  $126,006,387   (41,141) $(190,093) $(110,670,879) $(245,536) $15,103,253 

7
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CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

 For The Six Months Ended June 30, 2019  For the six months ended June 30, 2020 
 Common Stock  
Additional
Paid-in-Capital
  
Accumulated
Deficit
  
Accumulated Other
Comprehensive Income
  Total  Common Stock  
Additional
Paid-in-Capital
  Treasury Stock  
Accumulated
Deficit
  AOCI  Total 
 Shares  Amount  Amount  Amount  Amount  Amount  Shares  Amount  Shares  Amount 
Balance at December 31, 2018  17,166,459  $171,664  $90,953,788  $(57,909,874) $112,196  $33,327,774 
Balance at December 31, 2019  17,733,617  $177,335  $95,433,077   0  $0  $(71,585,003) $9,844  $24,035,253 
                                                        
Common Stock:                                                        
Restricted stock compensation  -   -   281,248   -   -   281,248 
Restricted stock issued  34,249   343   117,956   0   0   0   0   118,299 
Restricted stock compensation, net  (440,631)  (4,406)  (292,495)  0   0   0   0   (296,901)
Shares tendered for withholding taxes  0   0   145,056   (31,486)  (145,056)  0   0   0 
                                                        
Options:                                                        
Stock option compensation  -   -   66,259   -   -   66,259   -   0   139,449   -   0   0   0   139,449 
                                                        
Comprehensive loss  -   -   -   -   202,186   202,186   -   0   0   -   0   0   (863,294)  (863,294)
                                                        
Net loss  -   -   -   (2,816,533)  -   (2,816,533)  -   0   0   -   0   (4,999,549)  0   (4,999,549)
                                                        
Balance at March 31, 2019  17,166,459  $171,664  $91,301,295  $(60,726,407) $314,382  $31,060,934 
Balance at March 31, 2020
  17,327,235  $173,272  $95,543,043   (31,486) $(145,056) $(76,584,552) $(853,450) $18,133,257 
                                                        
Common Stock:                                                        
Issuance of stock, net  2,619,593   26,196   28,410,545                   28,436,741 
Restricted stock issued  375,000   3,750   (3,750)  -   -   -   18,858   189   (189)                  0 
Restricted stock compensation  -   -   307,774   -   -   307,774 
Restricted stock compensation, net  (29,543)  (296)  262,405                   262,109 
Shares tendered for withholding taxes  0   0   (192,161)  (1,804)  (5,863)          (198,024)
                                                        
Options:                                                        
Exercised  24,075   241   (241)  -   -   -   5,528   55   (55)                  0 
Stock option compensation  -   -   69,097   -   -   69,097   -   0   122,115                   122,115 
                                                        
Warrants Exercised:  253,161   2,532   (2,532)                  0 
                                
Comprehensive loss  -   -   -   -   (313,225)  (313,225)  -   0   0   -   0       (175,447)  (175,447)
                                                        
Net loss  -   -   -   (3,186,680)  -   (3,186,680)  -   0   0       0   (7,843,797)  0   (7,843,797)
                                                        
Balance at June 30, 2019  17,565,534  $175,655  $91,674,175  $(63,913,087) $1,157  $27,937,900 
Balance at June 30, 2020
  20,194,832  $201,948  $124,143,171   (33,290) $(150,919) $(84,428,349) $(1,028,897) $38,736,954 

See accompanying notes to condensed consolidated financial statements

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CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
(Unaudited)

 June 30,2020  June 30, 2019  June 30,2021  June 30, 2020 
            
CASH FLOWS FROM OPERATING ACTIVITIES:            
Cash received from customers and grants $16,993,648  $17,627,823  $14,493,073  $16,993,648 
Cash paid to suppliers and employees  (22,751,210)  (24,421,683)  (28,559,938)  (22,751,210)
Cash paid for operating leases  (457,277)  (305,157)  (696,188)  (457,277)
Cash paid for finance leases  (9,367)  -   (10,312)  (9,367)
Interest and taxes, net  (1,106,778)  12,602   (1,135,295)  (1,106,778)
Net cash used in operating activities  (7,330,984)  (7,086,415)  (15,908,660)  (7,330,984)
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Patent application costs  (98,186)  (72,295)  (28,023)  (98,186)
Acquisition of and deposits on fixed assets  (2,351,160)  (1,077,203)  (1,270,989)  (2,351,160)
Acquisitions  -   145,760 
Net cash used in investing activities  (2,449,346)  (1,003,738)  (1,299,012)  (2,449,346)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Issuance of stock, net  28,436,741   -   0   28,436,741 
Stimulus package loan  2,978,315   -   0   2,978,315 
Payment of stimulus package loan  (2,978,315)  - 
Stimulus package loan payment  0   (2,978,315)
Payments on note payable  0   (104,542)
Payments of tax withholding on stock award  (343,080)  -   (119,513)  (343,080)
Payments on note payable  (104,542)  (92,158)
Payments on finance leases  (23,578)  - 
Payments on finance lease  (29,820)  (23,578)
Net cash (used in) provided by financing activities  27,965,541   (92,158)  (149,333)  27,965,541 
                
Effect of exchange rate changes on cash  (29,095)  161,835   (144,947)  (29,095)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  18,156,116   (8,020,476)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS  (17,501,952)  18,156,116 
Cash and cash equivalents - beginning of the period  18,271,352   12,524,551   23,066,301   18,271,352 
                
Cash and cash equivalents - end of the period $36,427,468   4,504,075  $5,564,349  $36,427,468 
                
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:                
                
Net loss $(12,843,346) $(6,003,213) $(13,564,548) $(12,843,346)
Adjustments:                
Depreciation and amortization  1,441,823   750,322   1,390,897   1,441,823 
Share based compensation  1,165,632   347,141 
Non-cash inventory adjustments  863,612   0 
Benefit from deferred tax liability  (216,000)  (379,672)  (69,941)  (216,000)
Provision of doubtful accounts  94,262   - 
Share based compensation  347,141   724,378 
Impairment of long-lived assets  1,273,945   0 
Recovery of (provision of) doubtful accounts  (103,258)  94,262 
Changes in assets and liabilities:                
Accounts receivable  1,050,738   (360,037)  503,563   1,050,738 
Inventories  (4,533,511)  (1,219,454)  (4,067,502)  (4,533,511)
Prepaid expenses and other current assets  (49,894)  131,752   (285,825)  (49,894)
Deposits and other assets  113,655   (255,124)  138,698   113,655 
Accounts payable and accrued liabilities  3,291,993   (570,872)  (1,951,422)  3,291,993 
Deferred revenue  3,972,155   95,505   (1,202,511)  3,972,155 
Net cash used in operating activities $(7,330,984) $(7,086,415) $(15,908,660) $(7,330,984)
                
Supplemental disclosures for non-cash investing and financing activities:                
Deposits on manufacturing equipment transferred to fixed assets $472,651  $-  $0  $472,651 
        

See accompanying notes to condensed consolidated financial statements


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CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 20202021
(Unaudited)



NOTE 1 — DESCRIPTION OF BUSINESS:

Chembio Diagnostics, Inc. (“Chembio”) and its subsidiaries (collectively with Chembio, the “Company”) develop and commercialize point-of-care rapid tests used for the detection and diagnosis of infectious diseases.

The Company has been expandingdiseases, including COVID-19, sexually transmitted disease, and fever and tropical disease. Coupled with the Company’s extensive scientific expertise, its product portfolio based upon its proprietarynovel DPP technology a novel, rapid diagnostic platform that uses a drop of blood from the fingertip to provide high-quality, cost-effective diagnostic results in approximately 15 minutes.
The Company’s product development and commercialization efforts are focused onoffers broad market applications beyond infectious disease testing. During the six months ended June 30, 2020, the Company refocused its business strategy on the development and commercialization of the DPP COVID-19 System, which consists of a new serological test for COVID-19 and a Micro Reader analyzer. In the six months ended June 30, 2020, the Company developed, received regulatory approval in the US, Brazil and Europe for, and commercialized the DPP COVID-19 System, and began developing its strategy for a portfolio of products both related to and expanding beyond COVID-19. Near the end of that period, the U.S. FDA revoked the Company’s Emergency Use Authorization for the DPP COVID-19 System, and the Company immediately began developing a revised version.

In addition to the DPP COVID-19 System, the Company has a broad portfolio of infectious disease products, which it expects to generate a diminished amount of revenue for the foreseeable future while it focuses on the development, manufacture, and commercialization of the DPP COVID-19 System and related products. Through Research & Development (“R&D”) Services, the Company is developing tests for a rare disease in collaboration with Takeda Pharmaceutical Company Limited and a biomarker development project in collaboration with AstraZeneca plc.

Large and growing markets have been established for these types of tests, initially in high prevalence regions where they are indispensable for large-scale prevention and treatment programs. More generally, the Company believes there is and will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the point of care.

The Company’sdisease. Chembio’s products are sold globally, directly and through distributors, to medicalhospitals and clinics, physician offices, clinical laboratories, and hospitals, governmental and public health entities, non-governmental organizations, medical professionalsgovernment agencies, and retail establishmentsconsumers under the Company’s DPP, STAT PAK,STAT-PAK, SURE CHECK and STAT-VIEW registered trademarks or under the private labels of the Company’s marketing partners.

Through R&D Services,The Company’s future working capital needs will depend on many factors, including the rate of its business and revenue growth, the availability and cost of human, material and other resources required to build and deliver products in accordance with its existing or future product orders, the timing of its continuing automation of U.S. manufacturing, and the timing of its investment in research and development as well as sales and marketing. If the Company developsis unable to increase its revenues and manage its expenses in accordance with its operating plan, it may need to reduce the level or slow the timing of the growth plans contemplated by its operating plan, which would likely curtail or delay the growth in its business contemplated by its operating plan and could impair or defer its ability to achieve profitability and generate cash flow, or to seek to raise additional funds through debt or equity financings, strategic relationships, or other arrangements (see Note 2(a)— Basis of Presentation and Note 12—Subsequent Events). All DPP tests for third parties using its DPP platformare developed and manufactured in limited cases, other platforms in projects that the Company believes haveUnited States and are the potential to create value for the restsubject of its business. In addition, the Company routinely enters into arrangements with governmentala range of domestic and non-governmental organizations for the funding of certain R&D efforts.global patents and patents pending.

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES:

(a)Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements include the accounts of Chembio and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Chembio’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2020, as filed with the SECSEC..

Going Concern Considerations

Revenues during the three months ended June 30, 2021 did not meet the Company’s expectations, and the shortfall in revenues was a principal cause of the Company’s limited cash and cash-equivalents position as of June 30, 2021. The Company’s future working capital needs will depend on many factors, includingdecrease in cash and cash-equivalents over the ratefirst two quarters of its business2021 reflected market, clinical trial and revenue growth,regulatory complications the timingCompany faced in seeking to develop and commercialize a portfolio of itsCOVID-19 test systems during the continuing, but evolving, uncertainty of the COVID‑19 pandemic. The decrease in cash and cash-equivalents also resulted in part from significant continuing expenses incurred in connection with pending legal matters (see “Note 6(f) – Commitments, Contingencies, and Concentrations: Litigation”); delayed achievement of milestones associated with government grant income; investments in inventory; and, the continuing automation of U.S. manufacturing, andmanufacturing.

The Company performed an assessment to determine whether there were conditions or events that, considered in the timingaggregate, raised substantial doubt about the Company’s ability to continue as a going concern within one year after the date the accompanying unaudited condensed consolidated financial statements are issued. Initially, this assessment did not consider the potential mitigating effect of management’s plans that had not been fully implemented. Because, as described below, substantial doubt was determined to exist as the result of this initial assessment, management then assessed the mitigating effect of its investmentplans to determine if it is probable that the plans (1) would be effectively implemented within one year after the date the accompanying unaudited condensed consolidated financial statements are issued and (2) when implemented, would mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

Following June 30, 2021, as discussed in research and development as well as sales and marketing. IfNote 16 – Subsequent Events, the Company is unableundertook measures to increase its total revenues and manageimprove its expenses in accordance with its operating plan, it may need to reduce the level or slow the timingliquidity position:

•
The Company received significant purchase orders from 2 customers. The Company had pursued the  purchase orders for an extended period of time, but did not receive them until July 2021 as follows:

•
On July 20, 2021, the Company received a $28.3 million purchase order from Bio-Manguinhos for the purchase of DPP SARS-CoV-2 Antigen tests for delivery during 2021 to support the urgent needs of Brazil’s Ministry of Health in addressing the COVID-19 pandemic. Bio-Manguinhos, a subsidiary of the Oswaldo Cruz Foundation, is responsible for the development and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet demands of Brazil’s national public health system.

•
On July 22, 2021, the Company received a $4 million purchase order from the Partnership for Supply Chain Management, supported by The Global Fund, for the purchase of HIV 1/2 STAT-PAK Assays for shipment to Ethiopia into early 2022.

•
The Company raised net proceeds of approximately $34.7 million from the issuance and sale of 8,323,242 shares of common stock pursuant to an At the Market Offering Agreement (the “ATM Agreement”) with Craig‑Hallum Capital Group LLC (“Craig-Hallum”), pursuant to which Chembio may sell from time to time, at its option, up to an aggregate of $60,000,000 of shares of common stock through Craig‑Hallum, as sales agent.

These measures and other plans and initiatives of the growthCompany were designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date the accompanying unaudited condensed consolidated financial statements are issued. Such plans contemplatedand initiatives are dependent, however, on factors that are beyond the Company’s control or that may not be available on terms acceptable to the Company, or at all. The Company considered how the uncertainties around the delivery of the full number of tests covered by its operating plan, which would likely curtail or delay the growthtwo purchase orders received in its business contemplatedJuly 2021 and other customer orders may be affected by its operating planlimitations of the Company’s supply chain, staffing and liquidity, uncertainties regarding the achievement of milestones and related recognition of revenue under government grants, and other matters outside the Company’s control. The Company further considered how such uncertainties could impair or deferimpact its ability to achieve profitabilitymeet the obligations specified in the Credit Agreement (as defined in Note 7– Long-Term Debt) over the next twelve months, which include attaining Minimum Total Revenue (as defined) for the twelve-months preceding each quarter end. For the next year, the Minimum Total Revenue requirements range from approximately $37.4 million for the twelve months ending September 30, 2021 to approximately $43.8 million for the twelve months ending June 30, 2022 (see Note 7 – Long-Term Debt). Upon an event of default under the Credit Agreement, the Lender could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and generate cash flow,payable. In such an event, there can be no assurance that the Company would have sufficient liquidity to fund payment of the amounts that would be due under the Credit Agreement or that, if such liquidity were not available, Chembio would be successful in raising additional capital on acceptable terms, or at all, or in completing any other endeavor to seekcontinue to be financially viable and continue as a going concern. Chembio’s inability to raise additional funds throughcapital on acceptable terms in the near future, whether for purposes of funding payments required under the Credit Agreement or providing additional liquidity needed by the Company for its operations, could have a material adverse effect on the Company’s business, prospects, results of operations, liquidity and financial condition. Accordingly, management determined the Company could not be certain that its plans and initiatives would be effectively implemented within one year after the date the accompanying unaudited condensed consolidated financial statements are issued. 

Without giving effect to the prospect of raising additional capital pursuant to the ATM Agreement, increasing product revenue in the near future or executing other mitigating plans, many of which are beyond the Company’s control, it is unlikely that the Company will be able to generate sufficient cash flows to meet its required financial obligations, including its rent, debt service and other obligations due to third parties. The existence of these conditions raises substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the date the accompanying unaudited condensed consolidated financial statements are issued.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date the accompanying unaudited condensed consolidated financial statements are issued. As such, the accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or equity financings, strategic relationships, or other arrangements.the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.

(b)Significant Accounting Policies:

During the six months ended June 30, 2021, there has been no significant changes to the Company's summary of significant accounting policies contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC.

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CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

All adjustments contained in the accompanying unaudited condensed consolidated financial statements are of a normal recurring nature and are necessary to present fairly the financial position of the Company as of June 30, 2020. Interim results are not necessarily indicative of results that may be expected for any other interim period or for an entire year.

(b)Use of Estimates:

The preparation of the consolidated financial statements in conformity with GAAP requires management to make assumptions and estimates that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and these notes. Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in certain areas. Generally, matters subject to estimation and judgment include accounts receivable realization, inventory obsolescence, asset impairments, recognition of revenue including variable consideration and pursuant to milestones, useful lives of intangible and fixed assets, stock-based compensation, business combinations, and deferred tax asset valuation allowances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates.

(c)Fair Value of Financial Instruments:

The carrying values for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities approximate fair value due to the immediate or short-term maturity of these financial instruments. Included in cash and cash equivalents were $26.8$0.5 million and $16.0$14.8 million as of June 30, 20202021 and December 31, 2019,2020, respectively, of money market funds that are Level 1 fair value measurements under the hierarchy. The fair value of the Company’s total debt of $20.0 million (carrying value of $17.9$18.5 million) and $20.0 million (carrying value of $17.6$18.2 million) as of June 30, 20202021 and December 31, 2019,2020, respectively, is a Level 2 fair value measurement under the hierarchy and the carryingCompany’s debt face value approximates fair value.the recorded value, as the rate is based upon the current rates available to the Company for similar financial instruments.

Fair value measurements of all financial assets and liabilities that are measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories:

Level 1:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2:Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and,

Level 3:Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

(d)Cash and Cash Equivalents:

Cash and cash equivalents are defined as short-term, highly liquid investments with original maturities of three months or less at date of purchase, and include restricted cash of $3.3$0.4 million and $0$1.0 million as of June 30, 20202021 and December 31, 2019,2020, respectively.

The Company is contractually obligated to maintain the restricted cash balance on deposit with a bank as security for the bank’s issuance of a guarantee on behalf of the Company for its performance under purchase orders from and relatedwhich the Company received advance payments by a customer. The Company expects that the restriction will be released within the next twelvethree months.

(e)Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash instruments with well-known financial institutions and, at times, may maintain balances in excess of the Federal Deposit Insurance Corporation insurance limit. The Company monitors the credit ratings of the financial institutions to mitigate this risk. Concentration of credit risk with respect to trade receivables is principally mitigated by the Company’s ability to obtain letters of credit from certain foreign customers and its diverse customer base, both in number of customers and geographic locations.
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CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

(f)Fixed Assets:

Fixed assets are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, which range from three to seven years. Leasehold improvements are amortized over the useful life of the asset or the lease term, whichever is shorter. Deposits paid for fixed assets are capitalized and not depreciated until the related asset is placed in service.

(g)License Agreements:

The Company records up-front payments related to license agreements as prepaids and amortizes them over their respective economic life. As of both June 30, 2020 and 2019, total prepaids related to license agreements were $100,000.

(h)Valuation of Long-Lived Assets and Intangible Assets:

Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. No impairment of long-lived tangible and intangible assets was recorded for the six months ended June 30, 2020 or 2019.

(i)Revenue Recognition:

The Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under Accounting Standards Update (“ASU”) 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligation.

Product Revenue

Revenues from product sales are recognized and commissions are accrued when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon tendering the product to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred, because the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial. Freight and distribution activities on products are performed after the customer obtains control of the goods. The Company has made an accounting policy election to account for shipping and handling activities that occur either when or after goods are tendered to the customer as a fulfillment activity, and therefore recognizes freight and distribution expenses in cost of product sales. The Company excludes certain taxes from the transaction price (e.g., sales, value added and some excise taxes).

The Company’s contracts with customers often include promises to transfer products or services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require judgment. Typical products sold are diagnostic tests and typical services performed are R&D studies. Revenues from product sales are recognized at a point-in-time and revenues from R&D studies are recognized ratably over the period of the agreement, unless the related performance obligations indicate otherwise.

Judgment is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. SSP is directly observable and the Company can use a range of amounts to estimate SSP, as it sells products and services separately, and can determine whether there is a discount to be allocated based on the relative SSP of the various products and services, for the various geographies.

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CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
The Company’s payment terms vary by the type and location of the Company’s customer and products or services offered. Payment terms differ by jurisdiction and customer, but payment is generally required in a term ranging from 30 to 60 days from date of shipment or satisfaction of the performance obligation.

Reserves for Discounts and Allowances

Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers. The Company’s process for estimating reserves established for these variable consideration components does not differ materially from its historical practices.

Product revenue reserves, which are classified as a reduction in product revenues, are generally related to discounts. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based on all information (historical, current, and forecasted) that is reasonably available to the Company, taking into consideration the type of customer, the type of transaction, market events and trends, and the specific facts and circumstances of each arrangement. The transaction price, which includes variable consideration reflecting the impact of discounts, allowances and returns may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from the Company’s estimates. If actual results vary, the Company adjusts these estimates, which could have an effect on revenue and earnings in the period of adjustment.

License and Royalty Revenue

The Company receives royalty revenue on sales by its licensee of products covered under patents that the Company owns. The Company does not have future performance obligations under this license arrangement. The Company records revenue based on estimates of the sales that occurred during the relevant period as a component of license and royalty revenue. The relevant period estimates of sales are based on interim data provided by the licensee and analysis of historical royalties that have been paid to the Company, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenue are adjusted for in the period in which they become known, typically the following quarter. Historically, adjustments have not been material when compared to actual amounts paid by licensees.

R&D and Grant Revenue

All contracts with customers are evaluated under the five-step model described above. For certain contracts that represent grants where the funder does not meet the definition of a customer, the Company recognizes revenue when earned in accordance with Accounting Standards Codification (“ASC”) Topic 958. Such contracts are further described under Disaggregation of Revenue below. Grants are invoiced and revenue is recognized ratably as that is the depiction of the timing of the transfer of services. The R&D study, which encompasses various phases of product development processes: design feasibility & planning, product development and design optimization, design verification, design validation and process validation, and pivotal studies, is also recognized ratably.

In June 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU 2018‑08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This ASU clarifies the guidance presented in ASC Topic 958, “Not-for-Profit Entities,” for evaluating whether a transaction is reciprocal (i.e., an exchange transaction) or nonreciprocal (i.e., a contribution) and for distinguishing between conditional and unconditional contributions. The ASU also clarified the guidance used by entities other than not-for-profits to identify and account for contributions made.

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CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Disaggregation of Revenue

The following table disaggregates total revenues:

 For the Three Months Ended 
  June 30, 2020  June 30, 2019 
  
Exchange
Transactions
  
Non-Exchange
Transactions
  Total  
Exchange
Transactions
  
Non-Exchange
Transactions
  Total 
Net product sales $3,791,574  $-  $3,791,574  $8,785,041  $-  $8,785,041 
R&D and grant revenue  1,193,973   -   1,193,973   619,139   235,125   854,264 
License and royalty revenue  125,625   -   125,625   248,831   -   248,831 
  $5,111,172  $-  $5,111,172  $9,653,011  $235,125  $9,888,136 

 For the Six Months Ended 
  June 30, 2020  June 30, 2019 
  
Exchange
Transactions
  
Non-Exchange
Transactions
  Total  
Exchange
Transactions
  
Non-Exchange
Transactions
  Total 
Net product sales $9,508,167  $-  $9,508,166  $15,409,326  $-  $15,409,326 
R&D and grant revenue  2,101,660   -   2,101,660   1,392,204   1,163,849   2,556,053 
License and royalty revenue  360,928   -   360,929   465,022   -   465,022 
  $11,970,755  $-  $11,970,755  $17,266,552  $1,163,849  $18,430,401 

Exchange transactions are recognized in accordance with ASC Topic 606, while non-exchange transactions are recognized in accordance with ASU 2018-08.

The following table disaggregates revenues by geographic location of the customer:

  For the Three Months Ended  For the Six Months Ended 
  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
Africa $552,570  $2,342,740  $1,436,085  $4,759,040 
Asia  119,319   119,548   482,607   240,646 
Europe & Middle East  1,635,016   1,107,558   3,811,172   3,250,779 
Latin America  780,567   4,897,297   2,896,963   6,177,770 
United States  2,023,699   1,420,993   3,343,928   4,002,166 
  $5,111,172  $9,888,136  $11,970,755  $18,430,401 

Contract Liabilities

Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as (or when) the Company performs under the contract. At June 30, 2020, the Company reported $4,097,155in deferred revenue, of which $1.4 million is expected to be recognized during the three months ending September 30, 2020, and the remainder over the next 12 months.

(j)Inventories:

Inventories consisted of the following at:

  June 30, 2020  December 31, 2019 
Raw materials $5,136,583  $2,901,319 
Work in process  2,609,407   793,343 
Finished goods  6,385,550   5,903,368 
  $14,131,540  $9,598,030 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

(k)Loss Per Share:

Basic loss per share is computed by dividing net loss attributable to holders of Chembio’s common stock (“common stock”)stockholders by the weighted-average number of shares of common stockshares outstanding for the period excluding unvested restricted stock. Diluted loss per share for the three and six months ended June 30, 2021 and 2020 and 2019 reflectedreflects the potential dilution from the exercise or conversion of other securities into common stock, if dilutive.

There were 56,9951,867,045 and 641,839 restricted shares awards1,034,124 options outstanding as of June 30, 20202021 and 2019,2020, respectively, that were not included in the calculation of diluted income per common share equivalents for the three and six months ended June 30, 2021 and 2020, and 2019,respectively, because theirthe effect would have been anti-dilutive.

There were 1,034,124803,062 and 688,122 weighted-average options619,385 restricted stock outstanding, each corresponding to 1 share of common stock, as of June 30, 20202021 and 2019,2020, respectively, that were not included in the calculation of diluted income per common share equivalents for the three and six months ended June 30, 20202021 and 2019,2020, respectively, because theirthe effect would have been anti-dilutive.

(l)Research and Development:

R&D costs are expensed as incurred. Advance payments for goods and services that will be used in future R&D activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.

(m)Equity Plans:

Effective June 3, 2008, Chembio’s stockholders voted to approve the 2008 Stock Incentive Plan (the “SIP”), with 625,000 shares of common stock available to be issued. At the Annual Stockholder Meeting on September 22, 2011, Chembio’s stockholders voted to approve an increase to the shares of common stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, which expired during 2018, the Board of Directors of Chembio (the “Board”) or its Compensation Committee had the discretion to select the persons to whom awards were to be granted. Awards could be stock options, restricted stock and/or restricted stock units (collectively, “Equity Award Units”). The awards became vested at such times and under such conditions as determined by the Board or its Compensation Committee. Cumulatively through June 30, 2020, there were 694,000 options expired, forfeited or exercised, and at June 30, 2020, 56,000 options were outstanding. NaN Equity Award Units are available to be issued under the SIP.

Effective June 19, 2014, Chembio’s stockholders voted to approve the 2014 Stock Incentive Plan (the “SIP14”), with 800,000 shares of common stock available to be issued. Under the terms of the SIP14, the Board or its Compensation Committee has the discretion to select the persons to whom awards are to be granted. Awards can be in the form of Equity Award Units. The awards vest at such times and under such conditions as determined by the Board or its Compensation Committee. Cumulatively through June 30, 2020, there were 432,502 Equity Award Units expired, forfeited or exercised. At June 30, 2020, 346,437 Equity Award Units were outstanding, and 21,061 Equity Award Units remained available to be issued under the SIP14.

Effective June 18, 2019, Chembio’s stockholders voted to approve the 2019 Omnibus Incentive Plan (the “2019 Plan”), with 2,400,000 shares of common stock available to be issued. In addition, shares of common stock underlying any outstanding award granted under the 2019 Plan that, following the effective date of the 2019 Plan, expire, or are terminated, surrendered or forfeited for any reason without issuance of such shares, shall be available for the grant of new awards under the 2019 Plan. Under the terms of the 2019 Plan, the Board or its Compensation Committee has the discretion to select the persons to whom awards are to be granted. Awards can be in the form of options, stock appreciation rights, restricted stock, restricted stock units, or other stock-based awards under the 2019 Plan (collectively, “2019 Equity Units”). The 2019 Equity Units become vested at such times and under such conditions as determined by the Board or its Compensation Committee. Cumulatively through June 30, 2020, 436,728 2019 Equity Units has been exercised or forfeited. At June 30, 2020, 1,251,072 2019 Equity Units were outstanding, and 712,200 2019 Equity Units were available to be awarded under the 2019 Plan.

(n)Stock-Based Compensation:

The fair value of restricted stock and performance/restricted stock unit awards are determined on the date of grant. Stock-based compensation expense for stock options is calculated using the Black-Scholes valuation model. Stock based compensation is reduced for actual forfeitures in the period in which the forfeiture occurs and generally recognized on a straight-line basis over the service period of the grant. During the three and six months ended June 30, 2020, 29,543 and 470,174 shares of restricted stock were forfeited, respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)


Stock-based compensation expense (net of recovery) recognized in the condensed consolidated statements of operations was classified as follows:

  
For The Three Months Ended
June 30,
  
For The Six Months Ended
June 30,
 
  2020  2019  2020  2019 
Cost of product sales $-  $2,300  $6,300  $5,800 
Research and development expenses  90,924   56,300   154,737   116,100 
Selling, general and administrative expenses  293,301   318,300   610,089   602,478 
Severance and related costs  -   -   (423,984)  - 
  $384,225  $376,900  $347,142  $724,378 

The weighted-average assumptions made in calculating the fair values of options are as follows:

(f)
For the Three and
Six Months Ended June 30, 2020
Expected term (in years)6.3
Expected volatility45.37%
Expected dividend yield0.00%
Risk-free interest rate1.33%

The following table provides stock option activity for the six months ended June 30, 2020:

Stock Options 
Number of
Shares
 
Weighted
 Average
 Exercise Price
 per Share
 
Weighted
 Average
Remaining
Contract
Term
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2019 642,625 $5.79 3 years $285,925
           
Granted 702,499  2.50     
Exercised (36,000)  6.30    95,976
Forfeited/expired/cancelled (275,000)  3.59     
Outstanding at June 30, 2020 1,034,124 $4.12 6 years $598,628
Exercisable at June 30, 2020 224,333 $7.24 3 years $-

As described in Note 5(f) – Litigation, the information in the above table and elsewhere in these notes does not reflect certain options that were received by Chembio’s former chief executive officer and that had vested as of the time of his resignation on January 3, 2020 because the Board’s Compensation Committee has determined that the former chief executive officer failed to exercise such options in a timely manner prior to their expiration.

The following table summarizes information about stock options outstanding at June 30, 2020:

 Stock Options Outstanding Stock Options Exercisable
Range of Exercise Prices 
Number of
Shares
 
Average
Remaining
Contract Term
(Years)
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
$1 to $2.79999 672,616 6.71 $2.36 $598,628 - $- $-
$2.8 to $4.59999 - -  -  - -  -  -
$4.6 to $6.39999 106,758 2.94  5.78  - 58,125  5.77  -
$6.4 to $8.19999 207,875 3.56  7.31  - 147,458  7.28  -
$8.2 to $12 46,875 3.10  11.45  - 18,750  11.45  -
 Total 1,034,124 5.52 $4.12 $598,628 224,333 $7.24 $-

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

As of June 30, 2020, there was $932,799 of net unrecognized compensation cost related to stock options that had not vested, which is expected to be recognized over a weighted-average period of approximately 2.57 years. The total fair value of shares vested during the six months ended June 30, 2020 and 2019 was $112,311 and $235,578, respectively.

The following table summarizes information about restricted stock, restricted stock units and performance stock units outstanding as of June 30, 2020:

 
Number of
Shares & Units
  
Weighted-
Average
Grant Date
Fair Value
 
Outstanding at December 31, 2019  545,986  $7.47 
         
Granted  610,301   2.57 
Vested  (66,728)  3.62 
Forfeited/expired/cancelled  (470,174)  6.58 
Outstanding at June 30, 2020  619,385  $3.32 

As of June 30, 2020, there was $1,551,837 of net unrecognized compensation cost related to restricted stock and restricted stock units that had not vested, which is expected to be recognized over a weighted-average period of approximately 2.29 years.

(o)Geographic Information and Economic Dependency

The Company produces only one group of similar products known collectively as “rapid medical tests”, and it operates in a single operating segment. Net product revenue by geographic area were as follows:

  
For The Three Months Ended
June 30,
  
For The Six Months Ended
June 30,
 
  2020  2019  2020  2019 
Africa $552,570  $2,342,740  $1,436,085  $4,759,040 
Asia  119,319   119,548   482,607   240,646 
Europe & Middle East  734,073   741,641   1,909,162   1,919,666 
Latin America  780,567   4,897,297   2,896,963   6,177,770 
United States  1,605,045   683,815   2,783,349   2,312,204 
  $3,791,574  $8,785,041  $9,508,166  $15,409,326 

Property, plant and equipment by geographic area were as follows:

  June 30, 2020  December 31, 2019 
Asia $357,921  $393,299 
Europe & Middle East  171,767   165,029 
Latin America  43,701   60,527 
United States  7,132,501   5,314,714 
  $7,705,890  $5,933,569 

(p)Accounts Payable and Accrued Liabilities:

Accounts payable and accrued liabilities consisted of:

  June 30, 2020  December 31, 2019 
Accounts payable – suppliers $6,588,598  $3,144,098 
Accrued commissions and royalties  486,998   931,760 
Accrued payroll  188,858   231,753 
Accrued vacation  547,307   410,199 
Accrued bonuses  350,479   215,000 
Accrued severance  260,481   - 
Accrued expenses – other  868,166   593,433 
TOTAL $9,290,887  $5,526,243 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

(q)Goodwill, Long-Lived Assets and Intangible Assets:

The following table reflects changes in goodwill:

Beginning balance at December 31, 2019 $5,872,690 
Change in foreign currency exchange rate  (338,066)
Balance at June 30, 2020 $5,534,624 

Intangible assets consisted of the following:

 June 30, 2020 December 31, 2019
  
Weighted
Average
Remaining
Useful Life
 Cost 
Accumulated
Amortization
 
Net Book
Value
 Cost 
Accumulated
Amortization
 
Net Book
Value
Intellectual property 6 $1,470,556 $366,353 $1,104,203 $1,418,681 $299,232 $1,119,449
Developed technology 6  1,924,990  400,304  1,524,686  1,922,682  266,550  1,656,132
Customer contracts/relationships 7  1,232,474  327,525  904,949  1,325,521  270,902  1,054,619
Trade names 8  107,796  36,440  71,356  114,946  30,794  84,152
    $4,735,816 $1,130,622 $3,605,194 $4,781,830 $867,478 $3,914,352

Intellectual property, developed technology, customer contracts/relationships and trade names are amortized over 10, 7, 10, and 11 years, respectively. Amortization expense for the six months ended June 30, 2020 and 2019 was approximately $287,253 and $306,700, respectively. Amortization expense, subject to changes in currency exchange rates, is expected to be $572,383 per year from 2020 through 2024, and total $1,031,987 for all remaining years combined.

(r)Income Taxes:

At the end of each interim reporting period, the Company estimates its effective tax rate expected to be applied for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis, and may change in subsequent interim periods. Accordingly, the Company’s effective tax rate for the three and six months ended June 30, 20202021 was 1.7%(1.11)% and 1.7%0.51%, respectively, compared to the effective tax rate of 3.3% and 6.0%1.7% for both the three and six months ended June 30, 2019.2020. The Company’s effective tax rates for both periods were affected primarily by a full valuation allowance on domestic net deferred tax assets and a benefit from foreign net operating losses.

(s)Allowance for Doubtful Accounts:

The Company records allowances for doubtful accounts for the estimated probable losses on uncollectible accounts receivable. The allowance is based upon the credit worthiness of the Company’s customers, the Company’s historical experience, the age of the receivable and current market and economic conditions. Receivables are written off against these allowances in the period they are determined to be uncollectible.

(t)Foreign Currency Translation:

The functional currency of a foreign subsidiary is the local currency. Assets and liabilities of foreign subsidiaries that use a currency other than U.S. dollars as their functional currency are translated to U.S. dollars at end of period currency exchange rates. The consolidated statements of operations of foreign subsidiaries are translated to U.S. dollars at average period currency exchange rates. The effect of translation for foreign subsidiaries is generally reported in other comprehensive (loss) income. Foreign transaction gains and losses have been immaterial.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

(u)Acquisition Costs:

Acquisition costs include period expenses, primarily professional services, related to acquisition activities. For the six months ended June 30, 2020 and 2019, the Company recognized $63,497 and $395,612 in acquisition costs related to its acquisition of Orangelife and opTricon GmbH, respectively.

(v)(g)Recently Issued Accounting Standards:Standards Affecting the Company:

Recently Adopted

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”)2020-10, Codification Improvements

In June 2016,October 2020, the FASBFinancial Accounting Standards Board (the “FASB”) issued ASU 2016-13. ASU 2016-13 provides guidance on measurement of credit losses on financial instruments that changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and that requires entities to use a new, forward-looking “expected loss” model that is expected to generally resultAccounting Standards Update (“ASU”) 2020-10, which clarifies various topics in the earlier recognitionFASB’s Accounting Standards Codification (the “ASC”), including the addition of allowances for losses. Theexisting disclosure requirements to the relevant disclosure sections. This update improves consistency by amending the ASC to include all disclosure guidance became effective for annual periods beginning after December 15, 2019, including interim periods within those years.in the appropriate disclosure sections and clarifies application of various provisions in the ASC by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology. The Company has evaluatedadopted the effects of this standard effective December 31, 2020 and has determined that the adoption did not have a material impact on the Company’s consolidated financial statements.

ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820) (“ASU 2018-13”)

In August 2018, the FASB issued ASU 2018-13. ASU 2018-13 improves the disclosure requirements on fair value measurements. The updated guidance became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has evaluated the effects of this standard and determined that the adoption did not have a material impact on the Company’s consolidated financial statements.

ASU 2017-4, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-4”)

In January 2017, the FASB issued ASU 2017-4. ASU 2017-4 simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. ASU 2017-4 is effective for annual and interim goodwill tests beginning after December 15, 2019. The Company has evaluated the effects of this standard and determined that the adoption did not have a material impact on the Company’s consolidated financial statements.

Not Yet Adopted

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

In March 2020, the FASB issued ASC Topic 848. ASC Topic 848 provides relief for impacted areas as it relates to impending reference rate reform. ASC Topic 848 contains optional expedients and exceptions for applying GAAP to debt arrangements, contracts, hedging relationships, and other areas or transactions that are impacted by reference rate reform. This guidance is effective for upon issuance for all entities and elections of certain optional expedients are required to apply the provisions of the guidance. The Company continues to assess all potential impacts ofadopted the standard effective January 1, 2021 and will disclose the nature and reason for any electionshas determined that the Company makes.adoption did not have a material impact on the Company’s consolidated financial statements.

ASU 2019-12, Simplifications toIncome Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”)

In December 2019, the FASB issued ASU 2019-12. ASU 2019-12 removesThis standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for recognizing deferred taxesintraperiod tax allocation, the methodology for investments, performing intra-period allocation and calculating income taxes in an interim periods.period and the recognition of deferred tax liabilities for outside basis differences. The ASUnew guidance also adds guidance to reduce complexitysimplifies aspects of the accounting for franchise taxes and enacted changes in certain areas, including deferred taxestax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes for membersto separate financial statements of a consolidated group.entities not subject to income tax. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company adopted the standard effective January 1, 2021 and has determined that the adoption did not have a material impact on the Company’s consolidated financial statements.

ASU 2021-01—Reference Rate Reform (Topic 848)

In January 2021, the FASB issued ASU 2021-01, which refines the scope of ASC Topic 848 and clarifies some of its guidance as part of the monitoring of global reference rate reform activities by a board of directors. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest (PAI3) in connection with reference rate reform activities under way in global financial markets (the “discounting transition”). ASU 2021-01 expands the scope of ASC Topic 848 to include all affected derivatives and give market participants the ability to apply certain aspects of the contract modification and hedge accounting expedients to derivative contracts affected by the discounting transition. In addition, ASU 2021-01 adds implementation guidance (codified in ASC 848-10-55-1) to clarify which optional expedients in ASC Topic 848 may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified as a result of the discounting transition. The Company adopted the standard effective January 1, 2021 and has determined that the adoption did not have a material impact on the Company’s consolidated financial statements.

Not Yet Adopted

ASU 2020-06 - Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. ASU 2020-06 simplifies the guidance in U.S. GAAP on the issuer’s accounting for convertible debt instruments, requires entities to provide expanded disclosures about “the terms and features of convertible instruments” and how the instruments have been reported in the entity’s financial statements. It also removes from ASC 815-40-25-10 certain conditions for equity classification and amends certain guidance in ASC 260 on the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. The ASU’s amendments are effective for smaller public business entities fiscal years beginning after December 15, 2023. The Company continues to assess all potential impacts of the standard.

ASU 2021-04 - Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options

On May 3, 2021, the FASB issued ASU 2021-04, which is the final guidance that requires issuers to account for modifications or exchanges of freestanding equity-classified written call options (e.g., warrants) that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. Under the guidance, an issuer determines the accounting for the modification or exchange based on whether the transaction was done to issue equity, to issue or modify debt, or for other reasons. The guidance is applied prospectively and is effective for all entities for fiscal years beginning after 15 December 15, 2020,2021, and earlierinterim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluatingcontinues to assess the potential impact of adopting ASU 2019-12 on its consolidated financial statements.the standard.

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June 30, 2020
(Unaudited)

(w)Severance, restructuring and other related costs:

During the six months ended June 30, 2020, the Company recognized $0.7 million in net severance expenses related to the departure of Chembio’s former chief executive officer and the elimination of certain positions as part of its multi-faceted expense reduction program to reduce operating expenses. The Company undertook actions to adjust the size and composition of the organization, including by removing positions that were non-essential in light of its new business strategy, and to remove other expenses, all of which the Company expects expect will provide savings throughout, and after, 2020.

In light of market dynamics, the Company retrenched its Malaysian operations, including the termination of employment of its Malaysian workforce. The Company will maintain its Malaysian subsidiary and sustain the product registrations that were obtained throughout southeast Asia, with the benefit of having that entity and the WHO prequalification certified facility.

Based on these activities, the Company has taken restructuring actions totaling $0.4 million to realign and resize its production capacity and cost structure. All expenses have been paid as of June 30, 2020.


NOTE 3 – ACQUISITION:— REVENUE:

Orangelife

On November 25, 2019, pursuant to a quota purchase agreement, the Company acquired allDisaggregation of the outstanding equity securities of Orangelife Comercio e Industria Ltda. (“Orangelife”), a privately held Brazilian company, that is an original equipment manufacturer of point-of-care tests approved by the Brazilian Health Surveillance Agency (Agência Nacional de Vigilância Sanitária, or “ANVISA”) for infectious diseases that include human immunodeficiency virus (“HIV”), Hepatitis C, Zika, Chikungunya and Dengue Fever. Orangelife tests are manufactured in its Rio de Janeiro facility, which is ISO-certified and approved by ANVISA to produce Class II/III/IV medical devices. The purchase price includes the following consideration:

●$150,000 in cash and 153,707 shares of common stock.
●Issuance of 316,456 shares of common stock to the founder and former chief executive officer of Orangelife, based on the transfer and approval of registration of certain of the Company’s product in Brazil prior to November 25, 2022. All of the shares may be deliverable in the event of change in control of Chembio. The number of shares issued was subject to adjustments based upon Orangelife’s working capital at closing. The fair value of the shares on the date of the acquisition was recorded in equity and was valued at $1.2 million.

The acquisition of Orangelife allowed the Company to expand its commercial presence by offering its products to the state, private and pharmacy markets in Brazil, in addition to providing local support to its long-time customer Bio-Manguinhos, a subsidiary of the Oswaldo Cruz Foundation (Fiocruz), which oversees development and production of vaccines, diagnostics, and biopharmaceuticals to meet the demands of Brazil’s national public health system. The results of Orangelife’s operations have been reflected in the consolidated financial statements since November 25, 2019.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

The acquisition was accounted for using the purchase method of accounting. The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of November 25, 2019:

 Amount 
Net current assets $320,293 
Property, plant and equipment and other assets  226,035 
Inventory  289,205 
Goodwill  986,058 
Deferred tax liability  (50,000)
Other intangible assets (estimated useful life):    
Trade name (0.5 years)  5,000 
Customer contracts / relationships (5 years)  195,000 
Total consideration $1,971,591 

The Company calculated the estimated fair value of the fixed assets based on the net book value of Orangelife, which approximated fair value. The estimated fair value of the trade name, customer contracts/relationships and contingent earnouts were based on discounted cash flows using management estimates.

As a result of the consideration paid exceeding the fair value of the net assets acquired, goodwill in the amount of $986,058 was recorded in connection with this acquisition, none of which is deductible for tax purposes. In addition, the Company recorded $200,000 in intangible assets associated with the addition of Orangelife’s trade name and customer base.Revenue

The following represents pro forma operating resultstable disaggregates Total Revenues:

  For the three months ended 
 June 30, 2021  June 30, 2020 
  
Exchange
Transactions
  
Non-Exchange
Transactions
  Total  
Exchange
Transactions
  
Non-Exchange
Transactions
  Total 
Net product sales $3,931,383  $0  $3,931,383  $3,791,574  $0  $3,791,574 
R&D revenue  727   0   727   1,193,973   0   1,193,973 
Government grant income  0   2,280,000   2,280,000   0   0   0 
License and royalty revenue  250,000   0   250,000   125,625   0   125,625 
  $4,182,110  $2,280,000  $6,462,110  $5,111,172  $0  $5,111,172 

  For the six months ended 
 June 30, 2021  June 30, 2020 
  
Exchange
Transactions
  
Non-Exchange
Transactions
  Total  
Exchange
Transactions
  
Non-Exchange
Transactions
  Total 
Net product sales $7,956,045  $0  $7,956,045  $9,508,166  $0  $9,508,166 
R&D revenue  1,107,366   0   1,107,366   2,101,660   0   2,101,660 
Government grant income  0   5,630,000   5,630,000   0   0   0 
License and royalty revenue  493,058   0   493,058   360,929   0   360,929 
  $9,556,469  $5,630,000  $15,186,469  $11,970,755  $0  $11,970,755 

Exchange transactions are recognized in accordance with ASC Topic 606, Revenue from Contracts with Customers, while non-exchange transactions are recognized in accordance with ASU 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made.

The following table disaggregates Total Revenues by geographic location:

 For the three months ended  For the six months ended 
  June 30, 2021  June 30, 2020  
June 30, 2021
  
June 30, 2020
 
Africa $1,466,356  $552,570  $2,811,214  $1,436,085 
Asia  53,592   119,319   270,547   482,607 
Europe & Middle East  806,209   1,635,017   3,406,485   3,811,172 
Latin America  487,517   780,567   745,536   2,896,963 
United States  3,648,436   2,023,699   7,952,687   3,343,928 
  $6,462,110  $5,111,172  $15,186,469  $11,970,755 

Contract Liabilities

Deferred revenue relates to payments received in advance of performance under the yearcontract. Deferred revenue is recognized as revenue as (or when) the Company performs under the contract. At March 31, 2021, the Company reported $0.4 million in deferred revenue, NaN of which was earned and recognized during the three months ended December 31, 2019 as ifJune 30, 2021. At June 30, 2021, the operations of Orangelife had been includedCompany reported $0.4 million in deferred revenue that is expected to be recognized in the Company’s consolidated statements of operations effective as of January 1, 2019. This pro forma financial information is unaudited and presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the acquisition of Orangelife and the other transactions contemplated by this acquisition had been completed as of January 1, 2019, nor is it necessarily indicative of the future operating results of the Company and Orangelife on a combined and consolidated basis.three months ending September 30, 2021.

 
Unaudited
Pro Forma
December 31, 2019
 
Total revenues $35,157,248 
Net loss $(13,654,001)
Net loss per common share $(0.80)
Diluted net loss per common share $(0.80)


NOTE 4 –— INVENTORY:

Inventories are presented net of reserves and consisted of the following:

 June 30, 2021  December 31, 2020 
Raw materials $6,611,511  $5,955,215 
Work in process  6,921,768   2,549,516 
Finished goods  2,187,013   4,011,671 
  $15,720,292  $12,516,402 

During the three months ended June 30, 2021 the Company recognized a $0.9 million charge related to the write-down of inventory for products that were not salable, based on its periodic review of the current status and future benefits of inventory.

NOTE 5 — STOCKHOLDERS’ EQUITY:

(a)Common Stock

DuringDuring the firstthree and six months ofending June 30, 2021 and 2020, and 2019, there were 36,000 and 46,8750 options exercised, and 2,619,593 and 0 new shares issued in an underwritten secondary public offering, respectively.exercised.

(b)Preferred Stock

Chembio The Company has 10,000,000 shares of preferred stock authorized and 0NaNne of which are issued or outstanding. These shares can become issuable upon an approved resolution by the Boardboard of directors of Chembio (the “Board”) and the filing of a Certificate of Designation with the Statestate of Nevada.

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(c)Treasury Stock

ChembioThe Company has 33,29041,141 shares of common stock held as treasury stock, fromwhich were acquired upon the vesting of restricted stock awards that were remittedrelated to satisfythe tax withholding requirements.requirements paid on behalf of employees.

(d)Options, Restricted Stock, and Restricted Stock Units

The Board or its Compensation Committee may grantissue options, restricted stock, and restricted stock units pursuant to equity incentive plans that have been approved by Chembio’sthe Company’s stockholders.

NOTE 56 – COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS:

(a)Concentrations:

The following table discloses product sales the Company had to the onlyeach customer that purchased in excess of 10% of the Company’s net product sales for the periods indicated:

 For The Three Months Ended  For The Six Months Ended  Accounts Receivable as of  For the three months ended  For the six months ended  Accounts Receivable as of 
 June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019  June 30, 2020  Dec. 31, 2019  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020  June 30, 2021  December. 31, 2020 
 Sales  % of Sales  Sales  % of Sales  Sales  % of Sales  Sales  % of Sales        Sales  % of Sales  Sales  % of Sales  Sales  % of Sales  Sales  % of Sales       
Customer 1 $657,304   17.0% $4,573,434   54% $2,297,376   24.0% $5,615,932   38% $806,196  $941,962  $1,014,638   25.8% $*   *  $1,151,615   14.5% $*   *  $376,075  $* 
Customer 2 $-   0.0% $1,627,075   19% $-   0.0% $3,460,666   23% $-  $-   *   *   657,304   17.0%  *   *   2,297,376   24.0%  *   806,196 

Revenue includes productIn the table above, an asterisk (*) indicates that sales only, while accounts receivable reflectsdid not exceed 10% for the total due from the customer, including freight.period indicated.

ForThere were 0 purchases the three and six months ended June 30, 2020 and 2019, there were no vendorsCompany had from any vendor that sold to the Companytotaled in excess of 10% of the Company’s total purchases.net purchases for the three or six months ending in June, 30 2021.

The Company currently buys materials that are purchased under intellectual property rights agreements and are important components in its products. Management believes that other suppliers could provide similar materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing, either from the logistic and regulatory implications of changing suppliers or from product attributable changes to new components, any of which could result in a possible loss of sales and adversely affect operating results.

(b)Governmental Regulation:

All of the Company’s existing and proposed diagnostic products are regulated by the U.S. Food and Drug Administration or the FDA, U.S. Department of Agriculture, certain U.S., state and local agencies, and/orand comparable regulatory bodies in other countries. Most aspects of development, production and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing and record keeping, are subject to regulatory review. After marketing approval has been granted, the Company must continue to comply with governmental regulations. Failure to comply with applicable requirements can lead to sanctions, including withdrawal of products from the market, recalls, refusal to authorize government contracts, product seizures, civil monetarymoney penalties, injunctions, and criminal prosecution.

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(c)Employment Contracts:

As of June 30, 2020, theThe Company hadhas multi-year contracts with 2 key employees that includeemployees. The contracts call for salaries presently aggregating $765,000$843,292 per year. The contracts are scheduled to expire inon December 20202021, and December 2022. The following table is a schedule of futurethe Company’s minimum salary commitments related tounder the agreements for the last six months of 2021 total $421,646. Under one of those contracts, ashowever, the term of June 30, 2020:the contract will extend automatically until December 31, 2022 if neither party provides, by October 1, 2021, notice electing to have the contract terminate on December 31, 2021. If no such notice is timely delivered, the Company will have a minimum salary commitment under the contract of $460,000 for the year ending December 31, 2022.

2020 $382,500 
2021  765,000 
2022  400,000 

(d)PensionBenefit Plan:

ChembioThe Company has a 401(k) plan established for the Company'sits employees whereby the Companyit matches 40% of the first 5% of salary (or up to 2% of salary) that an employee contributes to the plan. ForMatching contribution expenses totaled $29,933 and $35,456for the three months ended June 30, 2021 and 2020, respectively. Matching contribution expenses totaled $65,388 and $49,407 for the six months endingended June 30, 20202021 and 2019, matching contribution expenses totaled $49,407, and $49,000,2020, respectively.

(e)Leases:

The Company leases facilities in New York, Germany, Malaysia, and Brazil, and certain equipment.

The Company’s facility leases generally include optional renewal periods. Upon entering into a new facility lease, the Company evaluates the leasehold improvements and regulatory requirements related to its operations in that location. To the extent that the initial lease term of the related facility lease is less than the useful life of the leasehold improvements and potential regulatory costs associated with moving the facility, the Company concludes that it is reasonably certain that a renewal option will be exercised, and thus that renewal period is included in the lease term and the related payments are reflected in the right-of-use asset and lease liability.

The Company’s facility leases generally include fixed rental payments with defined annual increases. While certain of the Company’s facility leases are gross leases, the majority of the Company’s facility leases are net leases in which the Company makes separate payments to the lessor based on the lessor’s property and casualty insurance costs, the property taxes assessed on the property, and a portion of the common area maintenance where applicable. The Company has elected the practical expedient not to separate lease and non-leasenonlease components for all of the Company’s facility leases. The

Effective June 2021, the Company has also electedpermanently discontinued its operations in Malaysia. Impairment charges for the practical expedient for short term lease exception for all of itsMalaysian facility leases.right-of-use asset recorded during the three and six months ended June 30, 2021 was $0.1 million.

The components of lease expense were as follows:

 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
  
Three months ended
June 30,
  
Six months ended
June 30,
 
 2020  2019  2020  2019  2021  2020  2021  2020��
Operating lease expense $388,951  $400,658  $852,808  $682,261  $402,329  $388,951  $810,795  $852,808 
                                
Finance lease cost                                
Amortization of right-of-use assets $14,687  $-  $27,085  $-  $17,038  $14,687  $32,796  $27,085 
Interest on lease liabilities  5,156   -   9,367   -   5,368   5,156   10,312   9,367 
Total finance lease expense $19,843  $-  $36,452  $-  $22,406  $19,843  $43,108  $36,452 

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Supplemental cash flow information related to leases was as follows:

 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
  
Three months ended
June 30,
  
Six months ended
June 30,
 
 2020  2019  2020  2019  2021  2020  2021  2020 
Cash paid for amounts included in the measurement of lease liabilities:                        
Operating cash flows for operating leases $292,058  $147,107  $457,277  $305,157  $348,317  $292,058  $696,188  $457,277 
Operating cash flows for finance leases  5,156   -   9,367   -   5,368   5,156   10,312   9,367 
Financing cash flows for finance leases  12,666   -   23,578   -   15,538   12,666   29,820   23,578 
Right-of-use assets obtained in exchange for lease obligations:                                
Operating leases  -   -   -   6,949,611  $694,668  $0  $694,668  $0 
Finance leases $47,499  $233,722  $75,852  $233,722   25,609   47,499   25,609   75,852 

Supplemental balance sheet information related to leases was as follows:

  June 30, 2020  June 30, 2019 
Finance Leases      
Finance lease right of use asset $309,574  $233,722 
Accumulated depreciation  (50,690)  - 
Finance lease right of use asset, net $258,884   233,722 
         
Weighted-Average Remaining Lease Term        
Operating leases 9 years  10 years 
Finance leases 4 years  5 years 
         
Weighted-Average Discount Rate        
Operating leases  8.62%  8.52%
Finance leases  9.73%  7.0%

During the three months ended March 31, 2019, the Company executed an operating sublease related to its former Holbrook, New York facility. The sublease ran conterminously with the base lease, for which the Company was primarily responsible until the end of the lease term in April 2020.
  June 30, 2021  June 30, 2020 
Finance Leases      
Finance lease right-of-use asset $340,762  $309,574 
Accumulated depreciation  (114,815)  (50,690)
Finance lease right-of-use asset, net $225,947  $258,884 
         
Weighted-Average Remaining Lease Term        
Operating leases 7.9 Years  
9.0 Years
 
Finance leases 3.4 Years  
4.0 Years
 
         
Weighted-Average Discount Rate        
Operating leases  8.73%  8.62%
Finance leases  8.43%  9.73%

At the time of the initial assessment, the Company did not have an established incremental borrowing rate and the interest rates implicit in each of the leases were not readily determinable. Therefore, the Company used an interest rate based on the market place for the public debt. In September 2019, the Company entered into a credit agreement for a $20 million term loan as described on Note 6 - Long Term Debt.
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Maturities of lease liabilities were as follows.follows:

  June 30, 2020  June 30, 2019 
  
Operating
Leases
  
Finance
Leases
  
Operating
Leases
  
Finance
Leases
 
2019 and 2020 $682,667  $37,720  $1,129,543  $27,768 
2021  1,209,787   75,440   998,071   55,536 
2022  1,057,757   75,440   1,026,044   55,536 
2023  1,026,272   75,440   1,011,085   55,536 
2024  1,018,875   47,672   -   55,536 
Thereafter  5,773,887   4,774   6,792,767   27,767 
Total lease payments $10,769,245  $316,486  $10,957,510  $277,679 
Less: imputed interest  3,427,535   50,366   3,986,013   43,957 
Total $7,341,710  $266,120  $6,971,497  $233,722 

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(Unaudited)
  June 30, 2021  June 30, 2020 
  
Operating
Leases
  
Finance
Leases
  
Operating
Leases
  
Finance
Leases
 
2020 and 2021
 $708,344  $41,812  $682,667  $37,720 
2022  1,447,249   83,624   1,209,787   75,440 
2023  1,221,017   83,624   1,057,757   75,440 
2024  1,018,875   55,856   1,026,272   75,440 
2025  1,049,442   12,471   1,018,875   47,672 
Thereafter  4,724,446   1,680   5,773,887   4,775 
Total lease payments $10,169,373  $279,067  $10,769,245  $316,487 
Less: imputed interest  2,909,688   39,166   3,427,535   50,366 
Total $7,259,685  $239,901  $7,341,710  $266,121 

(f)Litigation:

SEC Investigation

The SEC is conducting a non-public, fact-finding investigation relating to the public offering of common stock that Chembio completed in May 2020 (the “May 2020 Offering”), and to the FDA’s revocation in June 2020 of an emergency use authorization for the DPP COVID-19 IgM/IgG system that was issued by the FDA in April 2020. Chembio received subpoenas from the SEC in July 2020 and April 2021 seeking the production of documents in connection with this investigation. In addition, the SEC delivered subpoenas in April 2021 to five of Chembio’s employees (including its three executive officers, who consist of its Chief Executive Officer and President, its Executive Vice President and Chief Financial Officer, and its Executive Vice President and Chief Scientific and Technology Officer). An additional subpoena was issued in June 2021 to Chembio’s former Interim Chief Executive Officer and Executive Chair. Each subpoena requested the production of documents relating to the same matters as are the subject of the subpoenas Chembio received. Chembio and the six individuals are cooperating fully in the SEC’s investigation and expect to continue to do so.

The SEC’s letters transmitting the subpoenas expressly provide that the inquiry does not mean that the SEC or its staff have concluded that anyone has violated the federal securities laws or have a negative opinion of any person, entity or security. The Company cannot predict the scope, duration or outcome of the investigation or the impact, if any, of the investigation on its results of operations.

Legal Proceedings


Stockholder Litigation

Putative Stockholder Securities Class-Action Litigation

In 2020, 4 purported securities class-action lawsuits were filed in the United States District Court for the Eastern District of New York by alleged stockholders of Chembio:

Sergey Chernysh v. Chembio Diagnostics, Inc., Richard L. Eberly, and Gail S. Page, filed on June 18, 2020;

James Gowen v. Chembio Diagnostics, Inc., Richard L. Eberly, and Gail S. Page, filed on June 22, 2020;

Anthony Bailey v. Chembio Diagnostics, Inc. Richard J. Eberly, Gail S. Page, and Neil A. Goldman, filed on July 3, 2020; and

Special Situations Fund III QP, L.P., Special Situations Cayman Fund, L.P., and Special Situations Private Equity Fund, L.P. v. Chembio Diagnostics, Inc., Richard Eberly, Gail S. Page, Robert W. Baird & Co. Inc. and Dougherty & Company LLC, filed August 17, 2020.

The plaintiffs in each of the above cases alleged claims under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 thereunder and Section 20(a) of the Exchange Act. Special Situations Fund III QP, L.P., Special Situations Cayman Fund, L.P. and Special Situations Private Equity Fund, L.P. (collectively, the “Special Situations Funds”), also asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”) relating to the May 2020 Offering.

Chembio and the plaintiffs entered into Court-approved stipulations relieving Chembio and the other defendants of the obligation to respond to the complaints in these cases pending the designation of a lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995. NaN motions for appointment as lead plaintiff were filed by various prospective lead plaintiffs. However, all but 2 of these motions were withdrawn or otherwise abandoned, leaving before the Court 2 motions for appointment as lead plaintiff — 1 filed by the Special Situations Funds and 1 by Municipal Employees’ Retirement System of Michigan. By order entered December 29, 2020, Magistrate Judge Lindsay consolidated the cases and appointed the Special Situations Funds and Municipal Employees’ Retirement System of Michigan (together, the “Lead Plaintiffs”), as co-lead plaintiffs and their respective counsel as co-lead counsel. The consolidated cases are now pending under the caption “In re Chembio Diagnostics, Inc. Securities Litigation.”

The Lead Plaintiffs filed their Consolidated Amended Complaint (the “CAC”) on February 12, 2021. In summary, the CAC purports to allege claims based on assertedly false and misleading statements and omissions concerning the performance of the DPP COVID-19 IgM/IgG System, as well as an asserted failure to timely disclose that the emergency use authorization that had been granted by the FDA with respect to the DPP COVID-19 IgM/IgG System “was — or was at an increased risk of — being revoked.” The CAC names as defendants Chembio, Richard L. Eberly, Gail S. Page, Neil A. Goldman, Javan Esfandiari, Katherine L. Davis, Mary Lake Polan, John Potthoff and the underwriters for the May 2020 Offering, Robert W. Baird & Co., Inc. and Dougherty & Company LLC.

The CAC purports to assert five counts under the Securities Act and the Exchange Act. Counts I through III are brought under the Securities Act, allegedly on behalf of a purported class consisting of all persons who purchased Chembio common stock directly in or traceable to the May 2020 Offering pursuant to Chembio’s shelf registration statement on Form S 3 (File No. 333-227398) and the related prospectus, as supplemented by a prospectus supplement dated May 7, 2020 (the “Securities Act Class”). Count I purports to allege a claim for violation of Section 11 of the Securities Act against all defendants other than Messrs. Eberly and Esfandiari. Count II purports to allege a claim for violation of Section 12 of the Securities Act against all defendants other than Messrs. Eberly and Esfandiari. Count III purports to allege a claim under Section 15 of the Securities Act against Ms. Davis, Dr. Polan, Dr. Potthoff, Ms. Page and Mr. Goldman.

Counts IV and V are alleged claims under the Exchange Act on behalf of a purported class consisting of all persons who purchased Chembio common stock on the open market from March 12, 2020 through June 16, 2020 (the “Exchange Act Class”). Count IV purports to allege a claim for violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder against Chembio, Mr. Eberly, Ms. Page, Mr. Goldman and Mr. Esfandiari. Count V purports to allege a claim under Section 20(a) of the Exchange Act against Mr. Eberly, Ms. Page, Mr. Goldman and Mr. Esfandiari.

Lead Plaintiffs seek, on behalf of the Securities Act Class and the Exchange Act Class, among other things, an award of damages in an amount to be proven at trial, as well as an award of reasonable costs, including attorneys’ fees and expenses, expert fees, pre-judgment and post-judgment interest, and such other relief as the Court deems just and proper. The Lead Plaintiffs also seeks rescission “or a rescissory measure of damages” on behalf of the Securities Act Class as to Count II.
17


Pursuant to an order entered by the Court on January 29, 2021, any defendant wishing to move against the amended complaint was required to file, by February 18, 2021, a letter requesting a pre-motion conference. On that date, the defendants submitted letters to the Court requesting a pre-motion conference regarding anticipated motions to dismiss the CAC, and Lead Plaintiffs responded on February 24, 2021. In its January 29, 2021 order, the Court indicated that it would consider a briefing schedule on motions to dismiss after it had received and reviewed the parties’ correspondence.

On March 5, 2021, the Court entered an order in which it advised the parties it had determined a pre-motion conference was not necessary and established a briefing schedule on the defendants’ anticipated motions to dismiss. However, the defendants subsequently agreed with Lead Plaintiffs’ counsel to a modification of the schedule, which was then approved by the Court. Pursuant to that schedule, defendants’ motions and supporting papers were filed on March 26, 2021, the Lead Plaintiffs’ opposition papers were filed on April 16, 2021, and the defendants’ reply papers were filed on April 30, 2021. The defendants’ motions remain pending before the Court. At this stage in the litigation, the Company is not able to predict the probability of a favorable or unfavorable outcome.


Putative Stockholder Derivative Litigation

On September 11, 2020, a putative stockholder derivative action captioned Karen Wong, derivatively on behalf of Chembio Diagnostics, Inc., Plaintiff v. Richard L. Eberly, Gail S. Page, Neil A. Goldman, Javan Esfandiari, Katherine L. Davis, Mary Lake Polan and John G. Potthoff, Defendants, and Chembio Diagnostics, Inc., Nominal Defendant (the “Wong complaint”) was filed purportedly on Chembio’s behalf in the United States District Court for the Eastern District of New York. The Wong complaint purports to assert a claim for violation of Section 14(a) of the Exchange Act and Rule 14a-9 thereunder based on ostensibly false and misleading statements and omissions concerning the Company’s rapid COVID-19 antibody test in the proxy statement disseminated in advance of Chembio’s Annual Meeting of Stockholders held on July 28, 2020. The Wong complaint also asserts claims against the individual defendants for purported breaches of fiduciary duties owed to Chembio, as well as unjust enrichment.

The Wong complaint requests a declaration that the individual defendants have breached or aided and abetted the breach of their fiduciary duties to Chembio, an award of damages to us, restitution, and an award of the plaintiff’s costs and disbursements in the action, including reasonable attorneys’ and experts’ fees, costs and expenses, and improvements to Chembio’s corporate governance and internal procedures regarding compliance with laws. Pursuant to a stipulation by which the individual defendants named in the Wong complaint agreed to waive service of process, the Court ordered that the time for defendants to answer or otherwise respond to the complaint be extended to November 19, 2020. The parties subsequently entered into a stipulation for a stay of proceedings in the action relating to the Wong complaint pending final disposition of motions to dismiss the pending putative class-action litigation, subject to certain conditions. The Court entered an order granting the requested stay on November 3, 2020. At this stage in the litigation, the Company is not able to predict the probability of a favorable or unfavorable outcome.

18


Commercial Litigation

Chembio’s wholly owned subsidiary Chembio Diagnostic Systems Inc. (“Systems”) and BioSure (UK) Ltd. (“BioSure”) entered into the BioSure Sure Check HIV 1/2 Assay OTC Agreement dated April 2, 2014 and as subsequently amended (as so amended, the “Distribution Agreement”). Pursuant to the Distribution Agreement, BioSure acquired the right to sell bundled products in the United Kingdom containing the Company’s Sure Check HIV 1/2 pouched tests. The Distribution Agreement terminated on April 1, 2019. On September 16, 2019, Systems initiated arbitration in the International Arbitration Tribunal of the International Centre for Dispute Resolution in New York, New York. Systems alleges that BioSure (a) breached various provisions of the Distribution Agreement, (b) misappropriated trade secrets of Systems, (c) engaged in deceptive business acts and practices, and (d) breached the implied covenant of good faith and fair dealing. On November 23, 2020, BioSure requested leave to file a counterclaim seeking recession of the Distribution Agreement based on alleged fraudulent concealment by Systems. Systems opposed BioSure’s request for leave to file the counterclaim on procedural and substantive grounds, and on December 11, 2020 the Tribunal denied the request for leave to file the counterclaim. The Tribunal’s denial was without prejudice to BioSure’s ability to assert its claim in a separate proceeding. BioSure continues to deny the relief sought and alleges certain statements Systems made to third parties about the Distribution Agreement were in bad faith and are a defense to Systems’ claims. BioSure also asserts that certain alleged misrepresentations entitle BioSure to “set off” any award Systems might receive from the Tribunal. The parties have completed discovery and submitted their first pre-hearing submissions. Systems intends to vigorously pursue its claims in the arbitration. The final merits hearing took place from April 20, 2021 to April 23, 2021. At this stage in the litigation, the Company is not able to predict the probability of a favorable or unfavorable outcome.


Employee Litigation

On March 19, 2021, John J. Sperzel III, ourChembio’s former chief executive officer, has assertedfiled a right15-count complaint in the United States District Court for the Eastern District of New York. The complaint was filed following the dismissal of an action previously filed by Mr. Sperzel in the United States District Court in Maine, which was dismissed for lack of personal jurisdiction over Chembio. In summary, the complaint filed in the Eastern District of New York alleges that Chembio wrongfully refused to allow Mr. Sperzel to exercise certain options to purchase, for an aggregate exercise price of $943,126, a total of 266,666 shares of common stock that were allegedly vested when he resignedas of the date of his separation from Chembio, on January 3, 2020. Under their terms, those options were exercisable for a period of thirty days after his service to our company ended. The compensation committee of the board, acting in its discretion in accordance withcomplaint alleges that under the terms of the underlying equityapplicable stock incentive plans, has determined that Mr. Sperzel failedhad thirty days after the date on which he ceased to qualify as an “Eligible Person” under the plans within which to exercise the options, inand asserts that by reason of his alleged continued service to us, he remained an “Eligible Person” and ostensibly retained the right to exercise the options. The Compensation Committee of the Board determined that the options expired on February 3, 2020, thirty days after Mr. Sperzel’s separation from Chembio, and that a timely manner prior to their expiration. Chembio intends to vigorously defend against any claimpurported attempt by Mr. Sperzel that he continues to have a right to exercise any options.the options after that date was not valid.

Stockholder Litigation

As of July 31, 2020, 4 purported class action lawsuits had been filed by alleged stockholders of Chembio Diagnostics, Inc. (“Chembio”) in the United States District Court for the Eastern District of New York, including: (1) Sergey Chernysh v. Chembio Diagnostics, Inc., Richard L. Eberly, and Gail S. Page, 20-cv-2706, filed on June 18, 2020, or Chernysh; (2) James Gowen v. Chembio Diagnostics, Inc., Richard L. Eberly, and Gail S. Page, 2:20-cv-02758, filed on June 22, 2020, or Gowen; and (3) Anthony Bailey v. Chembio Diagnostics, Inc. Richard J. Eberly, Gail S. Page, and Neil A. Goldman, 2:20-cv-02961, filed on July 3, 2020, or Bailey; and (4) Ken Hayes v. Chembio Diagnostics, Inc., Richard L. Eberly, Gail S. Page, Katherine L. Davis, Mary Lake Polan, and John G. Potthoff, 1:20-cv-02918, filed on July 1, 2020, or Hayes.

The Chernysh, Gowen and Bailey complaints are brought by purported individual stockholders of Chembio on behalf of all persons and entities who purchased Chembio publicly traded stock during the alleged “class period” and purport to state claims for violations of Section 10(b) and 20(a)Count I of the Securities and Exchange Actcomplaint purports to allege that Chembio breached Mr. Sperzel’s separation agreement by refusing to allow him to exercise the stock options. Counts II through XI of 1934 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission. The Chernysh and Bailey complaints define the “class period” as April 1, 2020 through June 16, 2020, inclusive, whereas the Gowen complaint defines the “class period” as March 12, 2020, through June 16, 2020, inclusive. The plaintiffs in these actions generally purport to allege claims for breach of each of 10 separate stock option agreements, collectively asserting damages of “at least” $3,190,198. Count XII of the complaint alleges a breach of Mr. Sperzel’s separation agreement based on Chembio’s purported failure to pay Mr. Sperzel consulting fees to which he claims to be entitled for consulting services allegedly performed following his separation. Count XIII of the complaint alleges a claim for breach of an implied covenant of good faith and fair dealing under Nevada common law based on the allegation that Chembio prevented Mr. Sperzel from obtaining the defendants named therein misrepresentedbenefits of the stock option agreements and failed to discloseseparation agreement. Mr. Sperzel alleges that Chembio’s DPP COVID-19 IgM/IgG System did not provide high-quality results and there were material performance concerns with the DPP COVID-19 IgM/IgG System’s accuracy, including that it generates false results at a rate higher than expected and higher than reflectedhe suffered damages in its authorized labeling and was not effective in detecting antibodies against COVID 19. The Chernysh, Gowen, and Bailey complaints seek an awardexcess of damages ostensibly sustained$3 million as a result of alleged wrongdoingthe purported breach of the covenant of good faith and fair dealing. Count XIV of the complaint purports to assert a claim for quantum meruit, alleging that “it is reasonable for Sperzel to expect payment in exchange for ... services” he assertedly provided to us and, based on allegations that upon his separation Mr. Sperzel was not informed as to the pending expiration of the stock options he later sought to exercise, that Chembio has been unjustly enriched. Finally, count XV of the complaint seeks a declaratory judgment that Mr. Sperzel is relieved from performance under his separation agreement due to asserted material breaches of the agreement based on the allegations summarized above. The complaint seeks compensatory damages in an unspecified amount, to be proven at triala declaration, as well asdescribed above, and an award of Mr. Sperzel’s costs and expenses in the litigation, including reasonable attorneys’ fees, expert costs and expenses, including expert feesdisbursements. The complaint requests a trial by jury. In recently served initial disclosures, Mr. Sperzel claims entitlement to recover damages in a total amount not less than $10 million, together with prejudgment interest at the rate of 9% per annum.

On May 20, 2021, Chembio filed its answer and pre- and post-judgment interest.  Chembio andaffirmative defenses denying the plaintiffs in Chernysh, Gowen and Bailey have entered into a stipulation, approved by the Court on July 17, 2020, relieving the defendants from the obligation to respod to the complaintsmaterial allegations of Mr. Sperzel’s complaint. At this stage in the cases pendinglitigation, the designationCompany is not able to predict the probability of a lead plaintiff.  Pursuant to the stipulation, within ten days following the entry of an order by the Court appointing a lead plaintiff and a lead plaintiff’s counsel, counsel for the defendants and the lead plaintiff are to confer and submit to the Court a proposed schedule for the filing of a consolidated amended complaint and the defendants’ response to that pleading.favorable or unfavorable outcome.

The Hayes complaint purports
Other

From time to statetime the Company may become involved in legal proceedings or may be subject to claims for violationsarising in the ordinary course of Section 14(a)its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business, operating results, financial condition or cash flows. Regardless of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder by the Securities and Exchange Commission, declaratory relief, and state law claims for breach of fiduciary duty, brought by plaintiff on behalf of himself and all of Chembio’s other public stockholders against Chembio and members of our board of directors to remedy alleged misstatements of material information in the proxy statement disseminated by Chembio in advance of our Annual Meeting of Stockholders held on July 28, 2020 (the “Annual Meeting”). The Hayes plaintiff alleges that the Schedule 14A Proxy Statement filed by Chembio on June 16, 2020 with the Securities and Exchange Commission, or the Proxy Statement, in which Chembio is soliciting stockholder approval of, inter alia, a proposal to change Chembio’s state of incorporation from the State of Nevada to the State of Delaware  (the “Reincorporation Proposal”), contains misstatements of Nevada and Delaware law.  The Hayes plaintiff seeks a declaration that the Proxy Statement is false and misleading and entry ofoutcome, litigation can have an order enjoining the stockholder voteadverse impact on the Reincorporation Proposal until such time as the Proxy Statement has been corrected as well as an order finding our directors liable for breaching their fiduciary dutiesCompany because of defense and awarding plaintiff thesettlement costs, diversion of management resources, and disbursements of the action, including attorneys’ and expert fees.  On July 8, 2020, Chembio filed an amended proxy statement correcting, among other things, the issues raised in the Hayes complaint.  As a consequence of the supplementation, the plaintiff withdrew its motion for a preliminary injunction.  On July 23, 2020, Chembio and the plaintiff entered into a stipulation to the dismissal of the action, with prejudice as to the claims of the named plaintiff.  The stipulation was subject to plaintiff’s reservation of the right to apply for an award of attorneys’ fees and expenses from Chembio within 45 days after entry of an order approving the stipulation in the event the parties are unable to reach agreement on plaintiff’s claim for entitlement to fees.  Also, on July 23, 2020, the plaintiff filed a notice dismissing the named plaintiff’s claims, with prejudice, as to the individual defendants.  On July 27, 2020, the Court entered an order closing the case and providing that plaintiff shall have until September 28, 2020 to move to reopen the case if the attorneys’ fee issue has not been resolved.factors.


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CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)

NOTE 6 –7 — LONG-TERM DEBT:

In September 2017, Chembio entered into an agreement with an equipment vendor to purchase automated assembly equipment for approximately $660,000. The terms call for payments of 30% down, 60% at time of factory acceptance testing and 10% after delivery. The vendor agreed to lend Chembio 15%, 40% and 10% of each originally scheduled payment, respectively. The Company paid interest at an annual rate of 12% until delivery. Beginning in September 2018, Chembio began making monthly payments of principal and interest of approximately $20,150, at an annual rate of 12% over a 24-month period. The remaining balance was classified short-term as of December 31, 2019.

On September 3, 2019, Chembio and certain of its subsidiaries, as guarantors, entered into a Credit Agreement and Guaranty (the “Credit Agreement”) with Perceptive Credit Holdings II, LP (the “Lender”). The Credit Agreement provides for a $20,000,000 senior secured term loan credit facility, which was drawn in full on September 4, 2019. Under the terms of the Credit Agreement, Chembio may use the proceeds (i) for general working capital purposes and other permitted corporate purposes, (ii) to refinance certain of Chembio’sthe Company’s existing indebtedness and (iii) to pay fees, costs and expenses incurred in connection with the Credit Agreement, including the Lender’s closing cost amount of $550,000, which was netted from the proceeds, and a financing fee of $600,000 (3.0% of gross proceeds) payable to Craig-Hallum, Chembio’s financial advisor for the financing.

Principal outstanding under the Credit Agreement bears interest at a rate per annum equal to the sum of (a) the greater of the one-monthone month London Interbank Offered Rate and 2.5%plus (b) 8.75%. At any time at which an event of default has occurred and is continuing, the interest rate will increase by 4.0%. Accrued interest is payable on a monthly basis. On June 30, 20202021 the interest rate was 11.25%.

No principal repayments are due under the Credit Agreement prior to September 30, 2022, unless Chembio elects to prepay principal or principal is accelerated pursuant to an event of default identified in the Credit Agreement. Principal installments in the amount of $300,000 are payable on the last day of each of the 11eleven months from September 2022 through July 2023, and all remaining principal is payable at maturity on September 3, 2023. Chembio may prepay outstanding principal from time to time, subject to payment of a premium on the prepaid principal amount equal to 10% through September 3, 2020, 8% from September 4, 2020 through September 3, 2021 and 4% from September 4, 2021 through September 3, 2022. No premium will be due with respect to any prepayment made on or after September 4, 2022.

Chembio’s obligations underThe Credit Agreement contains financial covenants requiring that Chembio (i) maintain aggregate unrestricted cash of not less than $3,000,000 at all times and (ii) achieve specified minimum total revenue requirements for twelve months preceding each quarter end. The minimum total revenue amounts, which range from $32.0 million to $50.1 million, were developed for purposes of the Credit Agreement are securedand do not reflect the internal estimates and plans used by a first priority, perfected lien on substantially all of its propertyChembio’s management and assets, including its equity interests in subsidiaries.the Board to understand and evaluate the Company’s operating performance, to establish budgets, and to establish operational goals for managing the Company’s business.

As of June 30, 2020,2021, the loan balance, net of unamortized discounts and debt issuance costs, was $17.9$18.5 million, and Chembio was in compliance with its cash balance loan covenant, butcovenants. See Note 2(a)—Basis of Presentation.

NOTE 8 — EQUITY INCENTIVE PLAN:

(a)Equity Plans:

Effective June 3, 2008, Chembio’s stockholders voted to approve the 2008 Stock Incentive Plan (the “2008 Plan”), with 625,000 shares of common stock available to be issued. At the Annual Stockholder Meeting on September 22, 2011 Chembio’s stockholders voted to approve an increase to the shares of common stock issuable under the 2008 Plan by 125,000 to 750,000. Under the terms of the 2008 Plan, which expired during 2018, the Board or its Compensation Committee had the discretion to select the persons to whom awards were to be granted. Awards could be stock options, restricted stock and/or restricted stock units (collectively, “Equity Award Units”). The awards became vested at such times and under such conditions as determined by the Board or its Compensation Committee. Cumulatively through June 30, 2021, there were 714,000 options expired, forfeited or exercised, and at June 30, 2021, 36,000 options were outstanding and 0 Equity Award Units were available to be issued under the 2008 Plan.

Effective June 19, 2014, Chembio’s stockholders voted to approve the 2014 Stock Incentive Plan (the “2014 Plan”), with 800,000 shares of common stock available to be issued. Under the terms of the 2014 Plan, the Board or its Compensation Committee has the discretion to select the persons to whom awards are to be granted. Awards can be in the form of Equity Award Units. The awards vest at such times and under such conditions as determined by the Board or its Compensation Committee. Cumulatively through June 30, 2021, there were 519,782 Equity Award Units expired, forfeited or exercised. At June 30, 2021, 259,157 Equity Award Units were outstanding, 21,061 shares were rolled over into the 2019 Plan, and 0 Equity Award Units remained available to be issued under the 2014 Plan.

20

Effective June 18, 2019, Chembio’s stockholders voted to approve the 2019 Omnibus Incentive Plan (the “2019 Plan”), with2,400,000shares of common stock available to be issued. At the Annual Stockholder Meeting on June 25, 2021, Chembio’s stockholders voted to approve an increase to the shares of common stock issuable under the SIP by 2,400,000 to 4,800,000. In addition, shares of common stock underlying any outstanding award granted under the 2019 Plan that, following the effective date of the 2019 Plan, expire, or are terminated, surrendered or forfeited for any reason without issuance of such shares, shall be available for the grant of new awards under the 2019 Plan. Under the terms of the 2019 Plan, the Board or its Compensation Committee has the discretion to select the persons to whom awards are to be granted. Awards can be in the form of options, stock appreciation rights, restricted stock, restricted stock unit, or other stock-based award under the 2019 Plan (collectively, “2019 Equity Units”). The 2019 Equity Units become vested at such times and under such conditions as determined by the Board or its Compensation Committee. Cumulatively through June 30, 2021, 440,310 2019 Equity Units have been cancelled or forfeited. At June 30, 2021, 2,219,224 2019 Equity Units were outstanding, and2,658,522 2019 Equity Units were available to be awarded.

(b)Stock Compensation Expense:

Stock-based compensation expense (net of recovery) recognized in the condensed consolidated statements of operations was classified as follows:

  
For the three
months ended
June 30
  
For the six
months ended
June 30
 
  2021  2020  2021  2020 
Cost of product sales $43,368  $0  $72,136  $6,300 
Research and development expenses  139,469   90,924   223,704   154,737 
Selling, general and administrative expenses  403,007   293,301   869,792   610,089 
Severance and related costs  0   0   0   (423,985)
  $585,844  $384,225  $1,165,632  $347,141 

The weighted-average assumptions made in calculating the fair values of options are as follows:

 
For the three
months ended
June 30,
2021
  
For the six
months ended
June 30,
2021
 
Expected term (in years)  6.0   5.0 
Expected volatility  76.42%  78.23%
Expected dividend yield  1.01%  0.81%
Risk-free interest rate  2.03%  2.93%

The following table provides stock option activity for the six months ended June 30, 2021:

 Stock Options 
Number
of Shares
 
Weighted
Average
Exercise Price
per Share
 
Weighted
Average
Remaining
Contract Term
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2020
 974,778 $4.12 2.87 years $1,520,910
           
Granted 925,949  4.73    0
Exercised 0  0    0
Forfeited 8,682  5.89    0
Expired 25,000  5.64     
Outstanding at June 30, 2021
 1,867,045 $4.40 7.08 years $388,182
Exercisable at June 30, 2021
 526,210 $4.79 4.28 years $173,621


21

The following table summarizes information about stock options outstanding at June 30, 2021:

 Stock Options Outstanding  Stock Options Exercisable 
Range of
Exercise Prices
 
Number
of Shares
  
Average
Remaining
Contract Term
(Year)
  
Weighted
Average
Exercise
Price
  
Aggregate
Intrinsic
Value
  
Number
of Shares
  
Weighted
Average
Exercise
Price
  
Aggregate
Intrinsic
Value
 
_1 to 2.79999
  636,364   5.71  $2.36  $388,182   284,624  $2.36  $173,621 
2.8 to 4.59999
  27,502   9.92   3.11   0   0   0   0 
4.6 to 6.39999
  946,514   9.16   4.81   0   14,961   5.49   0 
6.4 to 8.19999
  209,790   2.62   7.30   0   198,500   7.27   0 
8.2 to 12
  46,875   2.10   11.45   0   28,125   11.45   0 
Total  1,867,045   7.08  $4.40  $388,182   526,210  $4.79  $173,621 

As of June 30, 2021, there was $2,907,843 of net unrecognized compensation cost related to stock options that had not vested, which is expected to be recognized over a weighted-average period of approximately 2.89 years. The total fair value of options vested during the six months ended June 30, 2021 and 2020 were $335,579 and $112,311, respectively.

The following table summarizes information about restricted stock, restricted stock units and performance stock units outstanding as of June 30, 2021:

 
Number of
Shares & Units
  
Weighted
Average
Grant Date
Fair Value
 
Outstanding at December 31, 2020
  603,531  $3.08 
         
Granted  334,564   4.66 
Vested  130,907   2.36 
Forfeited  4,126   5.34 
Outstanding at June 30, 2021
  803,062  $3.67 

As of June 30, 2021, there was $2,155,021 of net unrecognized compensation cost related to restricted stock and restricted stock units that had not vested, which is expected to be recognized over a weighted average period of approximately 2.51 years.

NOTE 9 — GEOGRAPHIC INFORMATION AND ECONOMIC DEPENDENCY:

The Company produces only one group of similar products, known collectively as “rapid medical tests”, and it operates in compliance witha single operating segment. Net product sales by geographic area were as follows:

 For the three months ended June 30,  For the six months ended June 30, 
  2021  2020  2021  2020 
Africa $1,466,356  $552,570  $2,811,215  $1,436,085 
Asia  53,593   119,319   270,547   482,607 
Europe & Middle East  805,482   734,073   2,299,216   1,909,162 
Latin America  487,517   780,567   745,536   2,896,963 
United States  1,118,435   1,605,045   1,829,531   2,783,349 
  $3,931,383  $3,791,574  $7,956,045  $9,508,166 


22

Property, plant and equipment by geographic area were as follows:

 June 30, 2021  December 31, 2020 
Asia $132,681  $326,267 
Europe & Middle East  130,185   147,692 
Latin America  34,014   14,719 
United States  8,852,580   8,199,725 
  $9,149,460  $8,688,403 

Effective June 2021, the Company permanently discontinued its revenue loan covenant. Chembio obtained a written waiver fromoperations in Malaysia. Impairment charges recorded for the Lender with respect to Chembio’s failure to meet the revenue loan covenant forMalaysian property, plant and equipment during the three months ended June 30, 2020. Chembio's obligations under the Credit Agreement are secured by a first priority, perfected lien on substantially all of its property and assets, including its equity interests in subsidiaries.2021 was $0.2 million.


NOTE 7 – WARRANTS:10 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:

In connection with entering into the Credit Agreement, on September 3, 2019, Chembio issued to the Lender a seven-year warrant (the “Warrant”) to purchase up to 550,000 shares of common stock at a per-share exercise price of $5.22. The Warrant was exercisable for cash or on a net, or “cashless,” basis,Accounts payable and the exercise price of the Warrant was subject to price-based, weighted-average antidilution adjustments for one year after issuance.accrued liabilities consisted of:

 June 30, 2021  December 31, 2020 
Accounts payable – suppliers $5,896,027  $5,727,781 
Accrued commissions and royalties  586,341   807,708 
Accrued payroll  223,111   277,908 
Accrued vacation  525,137   417,238 
Accrued bonuses  234,000   1,193,985 
Accrued severance  0   511,681 
Accrued expenses – other  626,752   1,106,489 
 TOTAL $8,091,368  $10,042,790 

NOTE 11 — GOODWILL, LONG-LIVED ASSETS and INTANGIBLE ASSETS:

The Warrantfollowing table reflects changes in goodwill:

Beginning balance at December 31, 2020
 $5,963,744 
Change in foreign currency exchange rate  (64,213)
Balance at June 30, 2021
 $5,899,531 

Intangible assets consisted of the following at:

     June 30, 2021  December 31, 2020 
  
Weighted Average
Remaining Useful Life
  Cost  
Accumulated
Amortization
  
Net
Book Value
  Cost  
Accumulated
Amortization
  
Net
Book Value
 
Intellectual property  7  $775,801  $166,366  $609,435  $1,638,699  $472,190  $1,166,509 
Developed technology  5   2,036,368   709,538   1,326,830   2,102,526   594,186   1,508,340 
Customer contracts/relationships  6   539,461   145,867   393,594   1,323,424   423,093   900,331 
Trade names  7   4,231   4,231   0   115,318   44,512   70,806 
      $3,355,861  $1,026,002  $2,329,859  $5,179,967  $1,533,981  $3,645,986 

Intellectual property, developed technology, customer contracts/relationships and trade names are amortized over 10, 7, 10 and 11 years, respectively. Amortization expense for the six months ended June 30, 2021 and 2020 was evaluated by$264,608 and $287,253. Amortization expense, subject to changes in currency exchange rates, is expected to average $389,023 per year from 2021 through 2025, and total $384,745 for all of the years thereafter.

Effective June 2021, the Company permanently discontinued its operations in Malaysia. Impairment charges relating to intangible assets recorded during the three months ended June 30, 2021 were as follows: Intellectual property ($0.5 million), Customer contracts/relationships ($0.4 million) and, classified as stockholder’s equity. Its fair value was estimated using a Black-Scholes option-pricing model using the following assumptions:Trade names ($0.1 million).

Stock price on issuance date $5.40 
Strike Price $5.22 
Risk-free interest rate  1.45%
Volatility  43.65%
Expected life 7 years 
23


On the date of grant, the fair value of the Warrant was determined to be approximately $1.4 million at $2.49 per share.
NOTE 12 — ASSET IMPAIRMENT, RESTRUCTURING, SEVERANCE AND RELATED COSTS:

The balanceCompany recorded in the Company’s Stockholders’ Equityan impairment loss of $1.3 million for the Warrant,three and six months ended June 30, 2021 as the result of its write-off of the intangible assets, net, leasehold improvements, net and right-of-use assets for leases, net associated with its Malaysian operations that underwent a retrenchment during the second quarter of allocated issuance costs, was $1.2 million.

2020. During the three months ended June 30, 2020,2021, the WarrantCompany was exercised in fullinformed that the World Health Organization had prioritized its review of prequalification of the manufacture of the Company’s HIV 1/2 STAT-PAK Assay on a cashless basisits U.S. automated manufacturing processes, which would reduce the Company’s reliance on manual labor that otherwise could have been performed at the Malaysian facilities had the Company re-started operations there. During July 2021, the World Health Organization approved the change notification. The products produced on the Company’s automated and manual production lines at any time depend on, among other things, the timing of customer orders and the mix of products being produced.

In light of the uncertainty of the timing and any receipt of those regulatory approvals, the timing of progress on and results of clinical trial programs, and the timing and any receipt of product orders from the commercialization of our COVID-19 and other diagnostic test systems both within and outside the United States, during the second quarter of 2021 the Company engaged the services of an independent financial advisory firm. The independent financial advisory firm worked with management to develop a forecast model to assess the amount and timing of the Company’s liquidity needs, assuming various business cases, and together with legal counsel advised the Company regarding alternative approaches to enhancing its liquidity position, participating in discussions with the Lender, receivedand related matters. During the three months ended June 30, 2021, the Company incurred $0.7 million related to these restructuring matters.

In order to address challenging economic conditions and implement its business strategy, in the first quarter of 2021 the Company continued to execute a program to reduce operating expenses and better align costs with revenues, including by eliminating positions that were no longer aligned with its strategy, and recognized severance charges of $0.1 million.

The table below represents the total costs by category for the periods ending:

 
For the three months ended
June 30, 2021
  
For the six months ended
June 30, 2021
 
Severance $0  $83,087 
Restructuring costs  687,211   687,211 
Asset impairment  1,273,945   1,273,945 
  $1,961,156  $2,044,243 

NOTE 13 — SUBSEQUENT EVENTS:

(a)  At the Market Offering of 253,161Common Stock

On July 19, 2021, Chembio entered into the ATM Agreement with Craig‑Hallum, pursuant to which Chembio can sell from time to time, at its option, up to an aggregate of $60,000,000 of shares of common stock (the “Shares”) through Craig‑Hallum, as sales agent. Any sales of Shares made pursuant to the ATM Agreement is to be made pursuant to Chembio’s shelf registration statement on Form S 3 (File No. 333-254261) and the related prospectus previously declared effective by the SEC on May 5, 2021, as supplemented by a prospectus supplement dated July 19, 2021 that Chembio filed with the SEC, pursuant to Rule 424(b)(5) under the Securities Act on July 19, 2021, as such prospectus supplement may be amended or supplemented from time to time.

Prior to any sale of Shares under the ATM Agreement, Chembio is to deliver a sales notice to Craig‑Hallum that will set the parameters for such sale, including the number of Shares to be issued and sold, the time period during which such sale is requested to be made, any limitation on the number of Shares that may be sold in anyonetrading day and any minimum price below which Sales may not be made. Under the ATM Agreement, Craig‑Hallum is required to use commercially reasonable efforts consistent with its normal trading and sales practices to sell Shares in accordance with the terms of the ATM Agreement and any applicable sales notice.

Subject to the terms and conditions of the ATM Agreement, Craig‑Hallum may sell any Shares only by methods deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act, including sales made directly through the Nasdaq Capital Market, by means of ordinary brokers’ transactions, in negotiated transactions, to or through a market maker other than on an exchange or otherwise, at market prices prevailing at the time of sale, at prices related to such prevailing market prices, or at negotiated prices and/or any other method permitted by law. If any sale of Shares pursuant to the ATM Agreement is not made directly on the Nasdaq Capital Market or any other existing trading market for Chembio’s common stock at market prices at the time of sale, including a sale to Craig‑Hallum acting as principal or a sale in a privately negotiated transactions, Chembio must file a prospectus supplement describing the terms of such sale, the number of Shares sold, the price of the Shares, the applicable compensation, and such other information as may be required pursuant to Rules 424 and 430B under the Securities Act, as applicable, within the time required by Rule 424 under the Securities Act.

Under the terms of the ATM Agreement, Chembio is to pay Craig‑Hallum a placement fee of 3.5% of the gross sales price of Shares sold, unless Craig‑Hallum acts as principal, in which case Chembio may sell the Shares to Craig‑Hallum as principal at a price it agrees upon with Craig‑Hallum. Chembio is obligated to reimburse Craig‑Hallum for certain expenses incurred in connection with the ATM Agreement, and it has provided Craig‑Hallum with customary indemnification and contribution rights with respect to certain liabilities, including liabilities under the Securities Act and the Exchange Act.

The offering of Shares pursuant to the ATM Agreement will terminate upon the earliest of (a) the sale of all of the Shares, (b) the mutual written agreement of Craig‑Hallum and Chembio, (c) written notice from Craig‑Hallum, in its sole discretion, to us, and (d) fivebusiness days’ prior written notice from Chembio, in its sole discretion, to Craig‑Hallum.

See Note 2(a)—Basis of Presentation.

(b)  Issuance of Common Shares

As of the date of the issuance of these financial statements, Chembio had issued and sold pursuant to the ATM Agreement a total of 8,323,242 Shares at a volume-weighted average price of $4.4303 per Share for gross proceeds of approximately $36.9 million and net proceeds, after giving effect to placement fees and other estimated transaction costs, of approximately $34.7 million.

(c)  Customer Purchase Orders

In July 2021 the Company received 2 customer purchase orders that the Company had been pursuing for an extended period of time. The delivery of the full number of tests covered by each of these purchase orders may be affected by limitations of the Company’s supply chain, staffing and liquidity, including matters that are outside the Company’s control. While the Company has established internal plans for delivery of the tests contemplated by the purchase orders, the number of uncertainties related to third parties — including the availability of required personnel and supplies — currently preclude the Company from accurately estimating the extent to which the Company will be able to fulfill the purchase orders on time and at an acceptable cost or at all.

On July 20, 2021, the Company received a $28.3 million purchase order from Bio-Manguinhos for the purchase of DPP SARS-CoV-2 Antigen tests for delivery during 2021 to support the needs of Brazil’s Ministry of Health in addressing the COVID-19 pandemic.
On July 22, 2021, the Company received a $4.0 million purchase order from the net exercise.Partnership for Supply Chain Management, supported by The Global Fund, for the purchase of HIV 1/2 STAT-PAK Assays for shipment to Ethiopia into early 2022.


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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report.report, which we refer to collectively as the Accompanying Financial Statements. In addition to historical information, the following discussion contains forward-looking statements that involves risks, uncertainties and assumptions. See “Forward-Looking"Forward-Looking Statements and Statistical Estimates” on page 3 of this report.Estimates" above. Please read Part I, Item“Item 1A. “RiskRisk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 13, 2020,of Part II Item1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, as filed with the Securities and Exchange Commission on May 4, 2020, and Part II, Item1A. “Risk Factors” of this report for a discussion of factors that could cause our actual results to differ materially from our expectations.

Overview of Six Months Ended June 30, 2020

We develop, manufacture and commercialize diagnosticpoint-of-care tests used for the detection and diagnosis of infectious diseases. We have been expanding ourdiseases, including COVID 19, sexually transmitted disease, and fever and tropical disease.

Our product portfolio is based upon our proprietary DPP technology, a novel, rapid diagnostic platform that uses a drop of blood or alternative sample types from the fingertip to provideprovides high-quality, cost-effective results in approximately 15 minutes. to 20 minutes using fingertip blood, nasal swabs and other sample types. The DPP technology platform addresses the rapid diagnostic test market, which includes infectious diseases, cardiac markers, cholesterol and lipids, pregnancy and fertility, and drugs of abuse. Compared with traditional lateral flow technology, the DPP technology platform can provide enhanced sensitivity and specificity, advanced multiplexing capabilities and, with the DPP Micro Reader, quantitative results.

We target the market for rapid diagnostic test solutions for infectious diseases, which is driven by the high prevalence of infectious diseases globally, an increase in the geriatric population, growing demand for rapid test results, and advancements in multiplexing. We have a broad portfolio of infectious disease products, which prior to 2020 were focused principally on sexually transmitted disease and fever and tropical disease. In February 2020 we began the process of shifting substantially all of our resources to seek to leverage the DPP technology platform to address the acute and escalating need for diagnostic testing for COVID-19. As described our Current Report on Form 8-K filed with the SEC on July 19, 2021, we are continuing to pursue:
an emergency use authorization, or EUA, from the U.S. Food and Drug Administration, or FDA, as well as 510(k) clearance from the FDA, for the DPP SARS-CoV-2 Antigen test system;
an EUA from the FDA for the DPP Respiratory Panel; and
a Clinical Laboratory Improvement Amendment, or CLIA, waiver from the FDA for the DPP HIV-Syphilis test system.

Our products are sold globally, directly and through distributors, to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals, and retail establishments. We continue to seek to expand our commercial distribution channels.

The global COVID-19 pandemic significantly affectedSubstantial Doubt as to Going Concern Status

As we disclosed in our operating results forCurrent Report on Form 8-K filed with the SEC on July 19, 2021, or the July 19 Form 8-K, factors and considerations with respect to our liquidity raised, as of June 30, 2021, substantial doubt as to our ability to continue as a going concern through one year after the date that our financial statements with respect to the three and six months ended June 30, 2020.2021 were expected to be issued. In July 2021 we received two significant customer purchase orders (see “—Recent Events—Customer Purchase Orders” below) and raised funds through an “at-the-market” offering (see “—Recent Events—At-the-Market Offering of Common Stock” below), which were intended to increase our total revenues and improve our liquidity position.

These measures and other plans and initiatives have been designed to provide us with adequate liquidity to meet its obligations for at least the twelve-month period following the filing date of this report, when the Accompanying Financial Statements are being issued. Our execution of those measures and our other plans and initiatives are dependent, however, on factors that are beyond our control or that may not be available on terms acceptable to us, or at all. We anticipatedhave considered how the uncertainties around the delivery of the full number of tests covered by the two purchase orders received in July 2021 and other customer orders may be affected by limitations of our supply chain, staffing and liquidity, uncertainties regarding the achievement of milestones and related recognition of revenue under government grants, and other matters outside our control. We further considered how those uncertainties could impact our ability to meet the obligations specified in the Credit Agreement and Guaranty, or the Credit Agreement, that we and certain of our subsidiaries, as guarantors, entered into with Perceptive Credit Holdings II, LP, or the Lender, over the next year. Those obligations include a covenant requiring minimum total revenue amounts for the twelve months preceding each quarter end. For the next year, the minimum total revenue requirements range from $37.4 million for the twelve months ending September 30, 2021 to $43.8 million for the twelve months ending June 30, 2022. Upon an event of default under the Credit Agreement, the Lender could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. In such an event, there can be no assurance that we would have sufficient liquidity to fund payment of the amounts that would be due under the Credit Agreement or that, if such liquidity were not available, we would be successful in additionraising additional capital on acceptable terms, or at all, or in completing any other endeavor to continue to be financially viable and continue as a going concern. Our inability to raise additional capital on acceptable terms in the near future, whether for purposes of funding payments required under the Credit Agreement or providing additional liquidity needed for our operations, could have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition.


Accordingly, management determined we could not be certain that our plans and initiatives would be effectively implemented within one year after the filing date of this report, when the Accompanying Financial Statements are being issued. Without giving effect to the prospect of raising additional capital pursuant to our at-the-market offering, increasing product revenue in the near future or executing other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent, debt service and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date of this report.

The Accompanying Financial Statements have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business disruptionfor the twelve-month period following the date of this report. As such, the Accompanying Financial Statements do not include any adjustments relating to the recoverability and general economic effects causedclassification of assets and their carrying amounts, or the amount and classification of liabilities that may result should we be unable to continue as a going concern.

Please see note 2(a) to the Accompanying Financial Statements for additional information regarding our going concern assessment in connection with the Accompanying Financial Statements. You are urged to read carefully the information provided below under “—Liquidity and Capital Resources” below as well as in “Because of our liquidity limitations, we have concluded there is a substantial doubt about our ability to continue as a going concern and we may require additional capital to fund our operations, which capital may not be available to us on acceptable terms or at all,” “Because of our liquidity and operational limitations, including the availability of staffing and supply chain resources that are necessary but outside of our control, we may not be able to fulfill all of the requirements of customer purchase orders received in July 2021 without additional capital to fund our operations, which capital may not be available to us on acceptable terms, or at all,” and “The failure to comply with the terms of the Credit Agreement could result in a default under its terms and, if uncured, could result in action against our pledged assets and dilution of our stockholders” under “Item 1A. Risk Factors” of Part II of this report.

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Recent Events

Customer Purchase Orders

In July 2021 we received two customer purchase orders that we had been pursuing for an extended period of time. Our delivery of the full number of tests covered by each of these purchase orders may be affected by limitations of our supply chain, staffing and liquidity, including matters that are outside our control. While we have established internal plans for delivery of the tests contemplated by the pandemic,purchase orders, the number of uncertainties related to third parties — including the availability of required personnel and supplies — currently preclude us from accurately estimating the extent to which we will be able to fulfill the purchase orders on time and at an acceptable cost or at all. Please see “Because of our liquidity and operational limitations, including the availability of staffing and supply chain resources that are necessary but outside of our control, we may not be able to fulfill all of the requirements of customer purchase orders received in July 2021 without additional capital to fund our operations, which capital may not be available to us on acceptable terms, or at all” under “Item 1A. Risk Factors” of Part II of this report.

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DPP SARS-CoV-2 Antigen Test System. As we described under “Item 8.01. Other Matters—Business—COVID-19 Antigen Test System—Commercialization” in the July 19 Form 8-K, throughout 2021 we have been actively pursuing sales opportunities for the DPP SARS-CoV-2 Antigen test system with governmental agencies, non-governmental organizations and distributors in countries where the test system is approved and registered. While we believed there continued to be opportunities for business awards in countries where the DPP SARS-CoV-2 Antigen test system is approved and registered, those business awards, including the issuance of purchase orders, had been repeatedly delayed for various reasons, including the impact of periodic COVID-19 lockdowns affecting product registrations and purchasing organization processes. On July 20, 2021, we received a $28.3 million purchase order from Bio-Manguinhos for the purchase of DPP SARS-CoV-2 Antigen tests for delivery during 2021 to support the needs of Brazil’s Ministry of Health in addressing the COVID-19 pandemic. Bio-Manguinhos, a subsidiary of the Oswaldo Cruz Foundation (known as Fiocruz), is responsible for the development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet demands of Brazil’s national public health system. We have a long-standing relationship with Bio-Manguinhos, having supplied multiple products for point-of-care detection of COVID-19 antibodies, HIV and other infectious diseases. Bio-Manguinhos received regulatory approval from Agência Nacional de Vigilância Sanitária, or ANVISA, in March 2021, following ANVISA approval of the DPP SARS-CoV-2 Antigen test system for our Brazilian subsidiary in November 2020. We are taking advantage of investments we made earlier this year in inventory for DPP SARS-CoV-2 Antigen tests in order to provide an initial number of the tests deliverable under the Bio-Manguinhos purchase order.

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HIV 1/2 STAT-PAK Assay. On July 22, 2021, we received a $4 million purchase order from the Partnership for Supply Chain Management, supported by The Global Fund, for the purchase of HIV 1/2 STAT-PAK Assays for shipment to Ethiopia into early 2022.

At-the-Market Offering of Common Stock

On July 19, 2021, we entered into an At the Market Offering Agreement, or the ATM Agreement, with Craig‑Hallum Capital Group LLC, or Craig‑Hallum, pursuant to which we may sell from time to time, at our option, up to an aggregate of $60,000,000 of shares of common stock through Craig‑Hallum, as sales agent. Any sales of shares made pursuant to the ATM Agreement will be made pursuant to our shelf registration statement on Form S 3 (File No. 333‑254261) and the related prospectus previously declared effective by the SEC on May 5, 2021, as supplemented by a substantialprospectus supplement dated July 19, 2021 that we filed with the SEC, pursuant to Rule 424(b)(5) under the Securities Act, on July 19, 2021, as such prospectus supplement may be amended or supplemented from time to time. Subject to the terms and conditions of the ATM Agreement, Craig‑Hallum may sell any Shares only by methods deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act, including sales made directly through the Nasdaq Capital Market, by means of ordinary brokers’ transactions, in negotiated transactions, to or through a market maker other than on an exchange or otherwise, at market prices prevailing at the time of sale, at prices related to such prevailing market prices, or at negotiated prices and/or any other method permitted by law. For a further description of the terms of the ATM Agreement, please see notes 13(a) and (b) to the  Accompanying Financial Statements and the information set forth under “Item 1.01. Entry into a Material Definitive Agreement” in the July 19 Form 8-K.

To date, we have issued and sold pursuant to the ATM Agreement a total of 8,323,242 shares of common stock at a volume-weighted average price of $4.4303 per share for gross proceeds of approximately $36.9 million and net proceeds, after giving effect to placement fees and other estimated transaction costs, of approximately $34.7 million. Additional shares of common stock may be issued and sold pursuant to the ATM Agreement for gross proceeds of up to approximately $23.1 million, but we cannot provide any assurance that will be able to issue any additional shares under the ATM Agreement at an acceptable price or at all.

We currently anticipate that the net proceeds from sales of shares under the ATM Agreement will be used for general corporate purposes, which may include, but are not limited to, working capital and capital expenditures. In particular, we expect to use a portion of the funding thatnet proceeds to fund operations necessary or desirable in order to deliver products pursuant to the customer purchase orders described above under “—Customer Purchase Orders,” including to fund the plan to incent and retain personnel described below under “—One-Time Incentive Plan.”

This report shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any offer, solicitation, or sale of any securities in any state or country in which such offer, solicitation or sale would otherwise have beenbe unlawful prior to registration or qualification under the securities laws of any such state or country.

One-Time Incentive Plan

On August 8, 2021, the board of directors, upon the recommendation of its compensation committee, approved the adoption of a One-Time Incentive Plan, or the OTIP,  under which up to $1.5 million, or the OTIP Pool, will be available for testingcash awards to our employees. The board intends that the OTIP help us:
•
retain the employment of those employees in the light of our liquidity challenges and a highly competitive employment market stemming, in part, from the COVID-19 pandemic (see “—Substantial Doubt as to Going Concern Status” above, “—Liquidity and Capital Resources” below, and “Because of our liquidity limitations, we have concluded there is a substantial doubt about our ability to continue as a going concern and we may require additional capital to fund our operations, which capital may not be available to us on acceptable terms or at all” and “Because of our liquidity and operational limitations, including the availability of staffing and supply chain resources that are necessary but outside of our control, we may not be able to fulfill all of the requirements of customer purchase orders received in July 2021 without additional capital to fund our operations, which capital may not be available to us on acceptable terms, or at all” in “Item 1A. Risk Factors” of Part II of this report);
optimize our potential to deliver tests in accordance with the two significant customer purchase orders received in July 2021, as described under “—Recent Events—Customer Purchase Orders”; and
position our company on a solid path for infectious diseases addressedthe future.

Of the OTIP Pool, approximately $1.3 million will be available for awards to 37 identified “critical employees,” who include our three executive officers, Richard Eberly, our Chief Executive Officer and President, Javan Esfandiari, our Executive Vice President and Chief Science Officer, and Neil Goldman, our Executive Vice President and Chief Financial Officer. The identified employees are assigned to two tiers, with the 19 members of Tier I having potential awards of up to 25% of their annual base salaries and the 18 members of Tier II having potential awards of up to 15% of their annual base salaries. Each of our executive officers is a member of Tier 1, and their maximum award amounts are as follows: Mr. Eberly, $115,000; Mr. Esfandiari, $95,750; and Mr. Goldman, $85,250. The remaining approximately $0.2 million available under the OTIP is reserved for future allocation to other employees, which allocations are to be based on a methodology similar to that used in allocating potential awards to the 37 identified employees (as described below) and are to be made to employees who are identified by our diagnostic tests, such asmanagement, subject to approval by the human immunodeficiency viruscompensation committee.

Sixty percent, or HIV,up to $900,000, of the OTIP Pool would be redirectedavailable upon compliance with three performance milestones based on our receipt of payment for tests delivered under the two significant  customer purchase orders, as follows:
20%, or up to testing$180,000, would be payable to OTIP participants following our receipt of payment for the novel coronavirus that causes COVID-19. initial delivery of tests under either order;
30%, or up to $270,000, would be payable to OTIP participants following our receipt of payments under the orders totaling approximately $16.2 million (one-half of the aggregate purchase prices of the two orders); and
50%, or up to $450,000, would be payable to OTIP participants upon our receipt of payment for the total purchase prices of the two orders.
In February 2020 we begangeneral, compliance with the processperformance milestones is to be completed by March 31, 2021.

The remaining forty percent, or $600,000, of shifting substantially allthe OTIP Pool is designed for employee retention, and will be available to OTIP participants who continue to be our employees in good standing as of August 31, 2022.

Non-Cash Write-Downs

Based on internal reviews conducted as part of our resources to leveragefinancial closing procedures for the three months ended June 30, 2021, we recorded two non-cash write-downs that affected our DPP lateral flow technology to addressreported operating results for the acute and escalating need for an accurate diagnostic test for COVID-19.

In the latter half of the first quarter of 2020, we developed, and began to manufacture for commercialization, the DPP COVID-19 System, which consists of our new serological test for COVID-19 and our Micro Reader analyzer. The DPP COVID-19 System can provide discrete, accurate readings for IgM and IgG antibody levels in approximately 15 minutes from a simple fingerstick drop of blood. Our actions in the first-quarter led to several subsequent key achievements:period.

We acquiredrecorded an impairment loss of $1.3 million for the three regulatory approvalsmonths ended June 30, 2021 as the result of our write-off of the DPP COVID-19 System inintangible assets, net, leasehold improvements, net and right-of-use assets for leases, net associated with our targeted global testing market: an Emergency Use Authorization, or EUA, granted byMalaysian operations that underwent a retrenchment during the three months ended June 30, 2020. During the three months ended June 30, 2021, we were informed that WHO had prioritized its review of prequalification of the manufacture of our HIV 1/2 STAT-PAK Assay on our U.S. Foodautomated manufacturing processes, which would reduce our reliance on manual labor that otherwise could have been performed at our Malaysian facilities had we re-started operations there. During July 2021, WHO approved the change notification. The products produced on our automated and Drug Administration, or FDA, in April 2020; an approval for emergency use issued by Brazil’s Agência Nacional de Vigilância Sanitária, or ANVISA, in April 2020,manual production lines at any time depend on, among other things, the timing of customer orders and the mix of products being produced, including the timing and mix of products to be delivered pursuant to the customer purchase orders described above under “—Customer Purchase Orders.” See note 12 to the Accompanying Financial Statements.

We incurred a CE Markingloss of $0.9 million for the European Union obtained in early May 2020.
Stony Brook Medicine selectedthree months ended June 30, 2021 related to the DPP COVID-19 System to help identify persons who have recovered from COVID-19write-down of inventory for use in an FDA-approved investigation to determine if those persons’ convalescent blood plasma can help treat patients with an active COVID-19 infection.
We began shipping the DPP COVID-19 System to fulfill a $4 million purchase order from Bio-Manguinhos, a long-standing customerproducts that is a subsidiarywere not salable based on our periodic review of the foundation responsible for the developmentcurrent status and productionfuture benefits of vaccines, diagnostics and biopharmaceuticals for Brazil’s national public health system.
We initiated commercial shipments of the DPP COVID-19 System to customers in the United States.
We strengthened our balance sheet by raising $28.4 million in a secondary public offering in May 2020.
We stablished a non-exclusive distribution relationship with Thermo Fisher Scientific’s healthcare channel for the distribution of Chembio’s DPP COVID-19 System in the U.S.

In addition, in June 2020 our DPP platform received further U.S. regulatory approval upon the FDA’s granting of a 510(k) for our DPP Zika IgM System, which includes both a test for Zika IgM antibodies and a Micro Reader. The development and regulatory submission of the DPP Zika IgM System was funded by the Biomedical Advanced Research and Development Authority, part of the Office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services (BARDA). The DPP Zika IgM System had previously received an EUA from the FDA. This was the first 510(k) that includes our Micro Reader, which is the same device used with DPP COVID-19 Systems and DPP HIV-Syphilis Systems, the latter which is pending FDA review for a PMA.inventory.

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However, laterConsolidated Results of Operations

Three Months Ended June 30, 2021 Versus Three Months Ended June 30, 2020

The results of operations for the three months ended June 30, 2021 and 2020 were as follows (dollars in thousands). Percentages are percentages of total revenues.

  For the three months ended June 30, 
  2021  2020 
             
TOTAL REVENUES $6,462   100% $5,111   100%
                 
OPERATING COSTS AND EXPENSES:                
Cost of product sales  4,040   63%  5,671   111%
Research and development expenses  2,797   43%  1,922   38%
Selling, general and administrative expenses  6,001   93%  4,397   86%
Asset impairment, restructuring, severance and related costs  1,961   30%  388   8%
   14,799       12,378     
                 
LOSS FROM OPERATIONS  (8,337)      (7,267)    
                 
OTHER EXPENSE, NET  (727)      (712)    
                 
LOSS BEFORE INCOME TAXES  (9,064)  (140)%  (7,979)  (156)%
                 
Income tax (expense) benefit  -       135     
NET LOSS $(9,064)     $(7,844)    


Total Revenues

Total revenues during the three months ended June 30, 2021 were $6.5 million, an increase of $1.4 million, or 26.4%, compared to the three months ended June 30, 2020. In June 2020 the FDA revoked our EUA for the DPP COVID-19 System, which we refer to as the Revocation, and since then we have been focused on revising the COVID-19 System for antibodies (serology) in anticipation of resubmitting it to the FDA for an EUA. Additionally, as announced in early July 2020, we are developing a DPP COVID-19 System for antigen detection with the support of a $0.6 million award from the Biomedical Advanced Research and Development Authority or BARDA, which is part of the Office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services.

The diminished focus on our existing product portfolio and extensive economic disruption caused by the COVID-19 pandemic, exacerbated by the Revocation in June 2020 and the related impact on product returns and variable consideration, was reflected in our results for the six months ended June 30, 2020 as compared to the prior year period, as total revenue decreased 35.0% to $12.0 million and product sales decreased 38.3% to $9.5 million.

In order to address challenging economic conditions and accelerate implementation of our new business strategy, we are executing a program to reduce operating expenses and better align our costs with revenues. For a further description of this program, see  “—Expense  Reduction  Program” below. Our cash and cash equivalents totaled $36.4 million at June 30, 2020, compared to $18.3 million at December 31, 2019.

DPP COVID-19 System

We believe we have a proven track record in rapidly responding to global health emergencies. Building upon our extensive experience in developing and manufacturing high-quality HIV tests, we received EUAs for DPP tests related to the global outbreak of Ebola, which began in 2014, and Zika, which commenced in 2015 and was awarded a 510(k) in June 2020 as discussed above. When the novel coronavirus emerged, we were confident that we could leverage our DPP platform and our scientific and operational expertise to create an antibody test that could detect the presence of antibodies indicative of recent infection or past infection generated in response to the virus. DPP technology is an advanced, versatile lateral flow testing platform with the capability to multiplex, or detect multiple biomarkers, from a single patient sample. The speed with which we were able to develop a test for COVID-19 illustrates the DPP platform’s applicability to new and emerging infectious diseases.

During the six months ended June 30, 2020, we refocused our business strategy to apply our DPP technology to address the escalating need for COVID-19 diagnostic tests, including  tests that can be performed both close to the patient and at a laboratory or hospital. In February 2020 we began the process of shifting substantially all of our resources to the development and commercialization of the DPP COVID-19 IgM/IgG System, which consists of our new serological test for COVID-19 and our Micro Reader analyzer. In the latter half of the first quarter of 2020, we developed, and in preparation for commercialization, began to manufacture the DPP COVID-19 IgM/IgG System.

During the second quarter of 2020, prior to the Revocation, we focused on responding to a substantial number of commercial leads for the DPP COVID-19 IgM/IgG System, establishing and servicing qualified new customers, building a distributor relationship with Thermo Fisher Scientific’s healthcare channel, and manufacturing product to meet demand.

The DPP COVID-19 IgM/IgG System detects antibodies in the blood that are produced by the body in response to a novel coronavirus infection. Detection of an acute infection, as determined by the level of IgM antibodies, helps determine if a patient is still infectious. As the infection progresses, the body typically begins to produce IgG antibodies. As the IgG antibody levels increase, the IgM antibody levels will decrease and eventually disappear. IgG antibodies remain, evidencing the earlier infection. It is not currently known how long IgG antibodies to coronavirus remain in the body.

The DPP COVID-19 System offers discrete detection of IgM and IgG antibodies, with high sensitivity and specificity, from a simple fingerstick drop of blood after approximately 15 minutes of reaction time. Our portable Micro Reader analyzer then reports accurate results in approximately 15 seconds. Objective results produced by the Micro Reader reduce the possibility of the types of human error that can be experienced in the visual interpretations required by many other serological tests. The system is portable, provides accurate results from fingerstick blood or other samples, and can detect multiple biomarkers simultaneously and discretely. At the same time, the easy-to-use testing workflow is scalable. Clinicians can run multiple tests at the same time because cartridges are only required to be inserted in the Micro Reader for 15 seconds to obtain results following the 15-minute test incubation period.

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The DPP COVID-19 Antigen System that is under development with the support of BARDA is expected to consist of a DPP COVID-19 Antigen Assay and Micro Reader and to use a respiratory specimen, such as a nasal or nasopharyngeal swab, to detect SARS-CoV-2 antigens. Antigen tests such as the one we are developing are important in the overall response against COVID-19 as they can be provided on a decentralized basis, closer to the point of care, at lower cost and with faster results than alternative molecular test options.

Key Developments

While we have been focusing on a test for COVID-19 for a relatively short time, we have achieved several key developments that we believe demonstrate the potential utility and marketability of the DPP COVID-19 System.

Shipment to Brazil. In March 2020 we received a $4 million purchase order for DPP COVID-19 Systems from Bio-Manguinhos, a long-standing customer that is a subsidiary of the foundation responsible for the development and production of vaccines, diagnostics and biopharmaceuticals for Brazil’s national public health system. In April 2020 we began shipping DPP COVID-19 Systems to Bio-Manguinhos to fulfill this purchase order.

Issuance of EUA. On April 14, 2020, the FDA issued an EUA for emergency use of the DPP COVID-19 System pursuant to Section 564 of the Federal Food, Drug, and Cosmetic Act of 1938. EUA authority allows the FDA, following a declaration of emergency or threat-justifying authorization of emergency use by the Secretary of Health and Human Services, to authorize the introduction into interstate commerce of drugs, devices, or biologics intended for use in an actual or potential emergency involving a biological, chemical, radiological, or nuclear agent. Under this authority, the FDA may authorize such products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions caused by such agents when appropriate findings are made concerning the nature of the emergency, the availability of adequate and approved alternatives, and the quality of available data concerning the effectiveness of the medical product under consideration for emergency use. On February 4, 2020, the Secretary of Health and Human Services determined that the novel coronavirus presented a public health emergency that has a significant potential to affect national security or the health and security of U.S. citizens living abroad and declared that circumstances existed justifying the authorization of emergency use of in vitro diagnostics for detection and/or diagnosis of the novel coronavirus that causes COVID-19. On February 29, 2020, the FDA issued immediately in effect guidance for clinical laboratories, commercial manufacturers and FDA staff to provide a policy to help accelerate the availability of COVID-19 diagnostic tests, and updated that guidance on March 16, 2020 to provide more specific detail to laboratories and commercial manufacturers developing COVID-19 diagnostic tests. To date, the FDA has issued many EUAs for serological tests for use in detecting COVID-19-related antibodies. On May 4, 2020, the FDA further updated its COVID- 19 diagnostic test guidance to require EUA submissions for all serology tests that were previously marketed under FDA enforcement discretion following submission of a notification to FDA. FDA policies regarding diagnostic tests, therapies and other products used to diagnose, treat or mitigate COVID-19 remain in flux as the FDA responds to new and evolving public health information and clinical evidence.

Selection for Use in FDA-Approved Study. In April 2020, Stony Brook Medicine selected the DPP COVID-19 System to assist in the recruitment of patients who have recovered from COVID-19 infections. Stony Brook Medicine is conducting a study intended to determine if convalescent blood plasma from people who have recovered from COVID-19 can help treat hospitalized patients with active COVID-19 infection. Stony Brook University Hospital has received Investigational New Drug approval from the FDA to offer convalescent blood plasma treatment to its patients through a randomized, controlled study and is expected to enroll up to 500 patients from the Long Island, New York area. The DPP COVID-19 System is being used to confirm that patients enrolled in the study had been infected with COVID-19 and now have adequate levels of IgG antibodies to make them eligible to donate convalescent plasma.

Initial Shipments in United States. We made our initial commercial shipments of the DPP COVID-19 System to U.S. customers late in April 2020 and continued to ship product until receipt of the Revocation.

Revocation of EUA. On June 16, 2020, the FDA stated that it was revoking our EUA for the DPP COVID-19 IgM/IgG System was revoked, based in part on the performance of our system in the NCI’s methodology for the evaluation of COVID-19 serology tests. The FDA’s original letter of authorization for the EUA required our participation in a National Institutes of Health/National Cancer Institute (NCI) study. However, the letter stated that the NCI submission and evaluation would only be used to revise our product labeling. After we learned of the results of the NCI study -- but before the FDA took action with respect to the EUA -- we engaged in a number of communications with the FDA about the results of the NCI study and other topics.

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Despite the Revocation, we continue to be excited about our opportunities in the market for DPP COVID-19 IgM/IgG Systems, as follows:

We stand behind the real-world clinical data, including that which we submitted to the FDA, in connection with the DPP COVID-19 IgM/IgG System EUA, and
The FDA’s recent identification of the performance criteria for COVID-19 serology tests clarified our path forward in working to revise the DPP COVID-19 IgM/IgG System to meet or exceed current FDA requirements.

Regarding the real-world clinical data for our original DPP COVID-19 System, including the data we submitted to the FDA in connection with our system’s EUA:

We acknowledge the policy change that led the FDA to create performance criteria and rely on the NCI study for those purposes.
On April 15, 2020, the DPP COVID-19 IgM/IgG System was granted an EUA. Subsequently, the FDA announced the adoption of a performance review process based in part on a NCI methodology for the evaluation of COVID 19 serology tests. The NCI report acknowledges that this process, which evaluates COVID-19 serology test sensitivity and specificity using a panel of pre-selected samples, may not be indicative of either performance in the real-world or performance of finger stick blood as used in the Chembio system.
In addition, the NCI study does not invalidate the real-world clinical data that we submitted to the FDA, including that compiled by Chembio as well as independent evaluators at two university medical centers.
The importance of our system’s real-world performance has been highlighted by a number of customers.

Targeted Uses and Customers

By changing the way people interact and function in everyday life, the COVID-19 pandemic has created new types of customer needs and has expanded the use cases for diagnostic testing. We believe the DPP COVID-19 System is well-positioned to address both existing and emerging markets by, for example, monitoring infection progression in individuals to improve clinical outcomes, surveilling community populations to determine herd immunity, and facilitating evaluation of potential therapeutic treatments and potential vaccine development processes. Because the DPP COVID-19 System is portable, uses a fingerstick blood sample or other samples, can produce accurate results, and requires approximately 15 minutes for test processing and approximately 15 seconds for results processing, we believe tests can be conducted in a wide variety of settings, including on a decentralized basis without significant infrastructure.

Because the EUA issued by the FDA for emergency use of the DPP COVID-19 System was limited to laboratories certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, to perform moderate and high complexity tests, we are working with the FDA to identify and understand the requirements and guidelines that would be applicable to receiving a certificate of waiver under CLIA with respect to the DPP COVID-19 System. CLIA generally regulates laboratories that test human specimens and ensures laboratories produce accurate, reliable, and timely patient test results, regardless of where the test is performed. As defined by CLIA, waived tests are categorized as simple laboratory examinations and procedures that have an insignificant risk of an erroneous result. A CLIA-waived test can be performed as a point-of-care test at any laboratory with a Certificate of Waiver without need for a highly trained laboratory technician to administer the test, which makes the test more accessible and economical. This would include many physician offices, health clinics and urgent care centers, pharmacies and nursing homes. In the event that FDA approves our application for waived status under CLIA, we anticipate that a diverse customer base will be interested in using the DPP COVID-19 System, based on the DPP COVID-19 System’s portability, accuracy, speed, cost-effectiveness and ease of use.

If we are granted an EUA for the revised DPP COVID-19 System and, until the FDA authorized waived status under CLIA, we will focus our sales efforts on target hospitals, moderately complex physician office labs, urgent care clinics and state and city health departments authorized to perform moderate and high complexity tests in regions that have been most effected by the pandemic. Outside the known health care arena, we anticipate there will be increasing interest from larger institutions and employers as the world evaluates its path back to work and whether individuals may have been exposed to COVID-19 and may have immunity.

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Legacy Infectious Disease Product Portfolio

We are a leading provider of diagnostic tests for infectious diseases with a broad portfolio of infectious disease products. We refer to our infectious disease products, other than the DPP COVID-19 System, as our legacy products. As described above under “—DPP COVID-19 System,” in the six months ended June 30, 2020 we began the process of shifting substantially all of our resources to the development and commercialization of the DPP COVID-19 System. As a result, and as illustrated by our results for the six months ended June 30, 2020, we expect to generate a diminished amount of revenue from our legacy products for the foreseeable future, while we continue to focus on the manufacture and commercialization of the DPP COVID-19 System. Thereafter, we intend to recommence the development, marketing, manufacture and sale of the legacy product portfolio consistent with market demand.

Nearly all of our legacy infectious disease products are based on our DPP technology. They require only a single drop of blood from the fingertip or other samples, and provide results in approximately 15 minutes. These products feature:

enhanced sensitivity and specificity;
advanced multiplexing; and
•
when used with our Micro Reader, accurate results processed in approximately 15 seconds.

Regulatory Approvals

We have obtained FDA approvals and, directly or through our partners, international regulatory approvals for legacy infectious disease tests as follows:

ProductU.S.International
DPP COVID-19 IgM/IgG System✓
DPP HIV 1/2 Assay✓✓
DPP HIV-Syphilis SystemPending FDA Approval✓
DPP Syphilis Screen & Confirm Assay✓
DPP ZCD IgM/IgG System✓
DPP Dengue NS1 Antigen System✓
DPP Dengue IgM/IgG System✓
DPP Zika IgM System✓✓
DPP Zika IgM/IgG System✓
DPP Chikungunya System✓
DPP Ebola Antigen System
✓ EUA
DPP Leishmaniasis Assay✓
HIV 1/2 STAT-PAK Assay✓✓
Chagas STAT-PAK Assay✓
SURE CHECK HIV 1/2 Assay✓✓
SURE CHECK HIV Self-Test✓

Historically, we have sought to leverage our FDA approvals and, directly or through our partners, international regulatory approvals for infectious disease tests as follows:

our registration of existing and new products in unchartered countries and regions, such as selected countries in Latin America and Southeast Asia;
our entry into new market segments, such as international HIV self-testing; and
advances in our product pipeline in infectious disease with key products, including a multiplex test for HIV and Syphilis targeted for sale in the United States and tests for Chikungunya, Dengue and Zika for sale internationally.

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Legacy Products

Our legacy products include both stand-alone and multiplex tests for sexually transmitted infectious diseases, such as HIV and Syphilis. HIV and Syphilis continue to be major global public health issues. According to estimates of the World Health Organization, or WHO:

HIV has claimed more than 35 million lives, including 770,000 in 2018. Approximately 37.9 million people were living with HIV at the end of 2018, and 1.7 million were newly infected during 2018.
There were 18.0 million prevalent cases of Syphilis as of 2012, and 5.6 million new infections were estimated to occur annually.
Elimination of mother-to-child transmission, or MTCT, of both HIV and Syphilis is a global health priority. In 2013, 1.9 million pregnant women were infected with Syphilis worldwide. Congenital syphilis contributes significantly to infant mortality, accounting for 305,000 annual perinatal deaths worldwide in 2013. Globally, more than 1.4 million pregnant women were infected with HIV as of 2015, and MTCT of HIV is estimated to have resulted in over 150,000 infant cases in 2015.

We have sought to address the global concerns related to HIV and Syphilis co-infection through the development of a novel, multiplex test for both HIV and Syphilis. We developed a DPP HIV-Syphilis multiplex test and received regulatory approvals covering a number of international markets, including Brazil, Europe, Malaysia and Mexico. In February 2020, we received a “not approvable” letter from the FDA with respect to our Premarket Approval, or PMA, application on our DPP HIV-Syphilis multiplex test for commercial use in the United States. The FDA requested the repeat of the reproducibility study, as one of the sites in the trial reported greater variability compared to the other sites. We completed and submitted  the repeat study to the FDA in April 2020 and are awaiting its formal review. When appropriate and subject to issuance of the PMA, we will continue the pursuit of the associated CLIA waiver. We believe we continue to be well-positioned to be the first company to introduce a multiplex, rapid test for HIV and Syphilis in the United States.

Our legacy products also include tests for selected fever and tropical diseases such as Chagas, Ebola, Leishmaniasis and Zika. The market for lateral flow tests for mosquito-borne diseases includes established markets for diseases such as Dengue and Malaria, which WHO estimates collectively account for more than 600 million annual infections worldwide. There are also a number of emerging markets for lateral flow tests for infectious diseases such as Burkholderia, Chikungunya, Dengue, lassa, leptospirosis, Marburg, Rickettsia and Zika. Though certain of these have not been commercialized, our legacy products include tests using our DPP platform to detect all of the aforementioned fever and tropical diseases, as stand-alone or multiplex tests.

Our investments in these products are attracting international attention. In April 2020, we received a second $1.5 million purchase order from UNICEF for multiplex Zika, Chikungunya and Dengue (DPP ZCD) Systems, including tests and Micro Readers. The orders follow the successful completion of conditions set forth in the previously announced long term arrangement (LTA). Along with the firm purchase commitment of $1.5 million, the LTA includes additional potential purchases of up to $2.0 million, for a total potential amount of up to $3.5 million. Along with the previous UNICEF order for Chembio’s multiplex Zika IgM/IgG System announced in February 2020, the combined LTAs contemplate up to $7.0 million in potential orders. Shipments under these orders commenced during the quarter ended June 30, 2020 and will scheduled for delivery through 2021.

Our DPP ZCD System can accurately detect three unique viral infections, all of which are transmitted by the same type of mosquito, have similar symptoms and are often associated with co-infections. We believe that testing for these viruses in combination will be critical in addressing these co-circulating pathogens. This novel multiplex test will enhance both surveillance capabilities and clinical response efforts, providing significant advantages over current lab-based tests by allowing healthcare providers to take rapid action.

Chembio’s multiplex DPP ZCD System allows simultaneous and discrete detection of antibodies for both active (IgM) and prior exposure (IgG) to Zika, Chikungunya and Dengue viruses. The DPP ZCD System has received approval from ANVISA in Brazil and is CE Marked.

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Third-Party Funding

Since 2015, we have received over $12.2 million of funding from some of the world’s leading health organizations, which has helped us accelerate the expansion of our pipeline of infectious disease tests. Our collaborators have included: the Bill & Melinda Gates Foundation; The Paul G. Allen Family Foundation, or Paul Allen Foundation; The Oswaldo Cruz Foundation (Fiocruz); and the Foundation for Innovative New Diagnostics, or FIND, as well as U.S. government agencies such as the Centers for Disease Control and Prevention, or CDC, the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services, or BARDA, and the U.S. Department of Agriculture.

Legacy Products Under Development

Several tests in our infectious disease pipeline are approaching commercialization, and several have received initial regulatory approvals:

ProductCollaborator
Phase I
Feasibility
Phase II
Development
Phase III
Verification &
Validation
Phase IV
Clinical &
Regulatory
Phase V
Commercial
Launch
DPP HIV-Syphilis System (US)Self-funded✓✓✓✓PMA pending
DPP Dengue IgM/IgG SystemSelf-funded✓✓✓✓CE and ANVISA
DPP Dengue NS1 Antigen SystemSelf-funded✓✓✓✓CE and ANVISA pending
DPP Chikungunya IgM/IgG SystemSelf-funded✓✓✓✓CE and ANVISA
DPP Zika Chikungunya Dengue IgM/IgG SystemSelf-funded✓✓✓✓CE and ANVISA
DPP Ebola Antigen SystemCDC✓✓✓✓FDA-EUA
DPP Fever Assay AsiaFIND✓✓✓✓
DPP Fever Assay AfricaPaul Allen Foundation✓✓✓
DPP Fever Assay MalaysiaSelf-funded✓✓✓✓

Sales Channels

We believe our deep experience with infectious diseases, including our development of tests that can multiplex as many as eight different diseases with a single drop of blood and deliver accurate results with our Micro Readers, illustrates our ability to expand our DPP technology into a broader range of tests. Our initial focus for the DPP COVID-19 System is in the United States and in fulfilling existing orders from Brazil, but we expect to expand our sales efforts to include Europe and elsewhere, as demand determines.

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There is a diverse customer base interested in using the DPP COVID-19 System. This potential group includes various hospital departments, state and city health departments, ambulatory surgery centers, physician offices, health clinics and urgent care centers, pharmacies, and nursing homes. Outside the known health care arena, we anticipate there will be increasing interest from larger institutions and employers as the world evaluates its path back to work and whether individuals may have been exposed to COVID-19 and may have immunity. We are focusing our initial sales efforts for the DPP COVID-19 System principally on hospitals, physician offices with moderately complex labs, urgent care clinics and state and city health departments in the regions that have been most affected by the pandemic, while monitoring existing and escalating demand throughout the United States and internationally.
Our broader infectious disease portfolio of products is sold globally, both directly and through distributors, to hospitals and clinics, physician offices, clinical laboratories, public health organizations, government agencies and consumers. Historically, we marketed and sold our products only in a small number of countries and regions. While we are focusing substantially on the market for the DPP COVID-19 System, we intend to maintain our relationships with the United Nations Children’s Fund, or UNICEF, and other organizations and agencies that influence market decisions for our legacy products and products under development.

To support our commercial efforts and support future growth, we are also adding to our marketing and customer service teams in a manner that is aligned with our growth expectations.

Manufacturing

In April 2020, we initiated a retrenchment of our Malaysian facility that was completed during the second quarter of 2020 and that included termination of employment of our Malaysian workforce. We now manufacture all of our tests in the United States and Brazil and all of our Micro Readers in Germany.

In 2018, we began process of automating some of our manufacturing processes and expanding our manufacturing capacity in the United States. We initiated the process of automating our U.S. manufacturing processes because we believe the reduced variable costs associated with automated manufacturing lines will improve product gross margins.

As described under “—Business Update—DPP COVID-19 System” above, since February 2020 we have been shifting resources to develop and commercialize the DPP COVID-19 System. Accordingly, and in connection with receipt of an EUA from the FDA for the DPP COVID-19 System, during the three months ended March 31, 2020 we began the process of shifting substantially all of our test manufacturing capacity to the DPP COVID-19 System. This shift included investment totaling approximately $0.8 million to increase tooling capacity, advance our automated manufacturing, and begin recruiting additional workers to expand capacity and supplement absenteeism associated with employee self-quarantines as the result of the COVID-19 pandemic.

During the initial period of expected high demand for COVID-19 tests such as the DPP COVID-19 System, the ultimate duration of which we continue to evaluate, we worked to scale both our manual and automated processes for the assembly of tests for the DPP COVID-19 System. We have designed, and will seek to implement, a capacity growth plan intended to ramp production. Our actual growth in capacity will be tied to market demand, and our ability to ramp capacity will be subject to our ability to fund, manage and execute our internal manufacturing requirements and to continue to have the necessary support of our supply chain and other vendors.

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Research & Development Services
Our commercially available products employ either our proprietary DPP technology or traditional lateral flow technology. In recent years, we have, while concurrently developing our own products, executed a strategy to leverage DPP intellectual property, as well as our scientific and operational expertise, through our Research & Development Services program of collaborative projects.

Research & Development Services develops tests for third parties using our DPP platform and, in limited cases, other platforms in projects that we believe have the potential to create value for the rest of our business. Research and development, or R&D, costs related to these collaborations are fully funded by our collaborators. We believe that, in addition to providing revenue to support our R&D organization, these activities further validate the DPP platform’s ability to provide superior diagnostic performance compared with products that utilize traditional lateral flow technology. The projects also expand the know-how of our R&D team, which we seek to leverage in the development of our own products.

Examples of projects performed by Research & Development Services include the following:

In January 2015 we entered into an agreement with the Concussion Science Group Division of Perseus Science Group LLC, or Perseus, to develop a rapid diagnostic test for traumatic brain injury utilizing both our DPP and optical analyzer technologies.
In October 2017 we signed a biomarker development project agreement with AstraZeneca plc, or AstraZeneca, utilizing both our DPP and optical analyzer technologies.
In April 2018, we entered into a collaboration agreement with LumiraDx to develop new rapid diagnostic tests for infectious diseases. Under terms of the agreement, we receive funding from LumiraDx, subject to satisfying certain milestones, to develop certain neibiw rapid infectious disease tests. Following the regulatory approval and commercialization of tests in accordance with the agreement, we will both sell reagents to, and receive royalty payments from, LumiraDx on sales of all products developed through this collaboration.
In July 2019 we entered into a collaboration agreement with Shire, a subsidiary of Takeda Pharmaceutical to develop a novel rapid diagnostic test to detect an undisclosed biomarker.
In March 2020 we completed the technical feasibility phase for a potential companion/compatible diagnostic test being developed in collaboration with Shire. The program is focused within Takeda’s Rare Diseases Therapeutic Area Unit, which aspires to transform the treatment of rare diseases in immunology, hematology, metabolic and lysosomal storage disorders. Based on the progress, in March 2020 Takeda provided the next tranche of funding for the next phase of the program.
We entered into agreements with LumiraDx in March 2020 (as amended in April 2020) to, among other things, develop a diagnostic test for the detection of the COVID-19 virus and IgM and IgG antibodies on the LumiraDx platform.
In July 2020, we were selected to conduct a second research and development services program for Takeda utilizing our DPP technology and Micro Reader analyzers.

We believe leading global healthcare organizations and others have chosen to collaborate with us based on our deep scientific expertise with our DPP technology platform and capabilities, our successful record of developing DPP tests with a diverse set of collaborators, including global commercial companies, governments and non-governmental organizations, and our extensive experience in obtaining regulatory approvals from various regulatory authorities in the United States, Brazil, the European Union, and Mexico, as well as prequalifications from WHO.

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The following table illustrates the status of work within our Research & Development Services program:

ProductCollaborator
Phase I
Feasibility
Phase II
Development
Phase III Verification &Validation
Phase IV Clinical/
Regulatory
Phase V Commercial Launch
DPP Rare Disease (undisclosed biomarker)Takeda✓✓
DPP (undisclosed biomarker)Takeda✓
DPP COVID-19 Antigen SystemBARDA✓
COVID-19 TestLumiraDx✓✓
✓
Infectious Disease PortfolioLumiraDx✓✓
DPP Biomarker Development Project
(undisclosed biomarker)
AstraZeneca✓✓✓
CE Mark*
DPP TBIPerseus✓✓

*For use in pharmaceutical research

Competition

General

Many of our competitors are significantly larger than us, and they may have market presence, engineering, technical and marketing capabilities and financial, personnel and other resources substantially greater than our own. Important competitive factors include product quality, analytical performance, ease of use, price, customer service and reputation.   Industry competition is based on these and the following additional factors:

patent protection;
scientific expertise;
ability to develop and market products and processes;
ability to obtain required regulatory approvals;
ability to manufacture cost-effective products that meet applicable regulatory requirements;
access to adequate capital; and,
ability to attract and retain qualified personnel.

Our ability to develop and market other products is in large measure dependent on our having additional resources and collaborative relationships. Some of our product development efforts have been funded by a third party on a project or milestone basis. We believe our proprietary know-how relating to our DPP technology has been instrumental in obtaining collaborations. We believe our patent protection enhances our ability to develop new, more profitable collaborative relationships.

DPP COVID-19 System

Competition is, and will likely continue to be, particularly intense in the market for COVID-19 diagnostic tests. Numerous companies in the United States and internationally have announced their intention to offer new products, services and technologies that could be used in substitution for the DPP COVID-19 System. Many of those competitors are significantly larger, and have substantially greater financial, engineering and other resources, than our company. Existing and potential competitors in the market for COVID-19 diagnostic tests include developers of antigen, serological and molecular tests.

We expect competition to continue to increase as other established and emerging companies enter the market, as customer requirements evolve, and as new products, services and technologies are introduced. The entrance of new competitors is being encouraged by governmental authorities, who are offering funding to support development of testing solutions for COVID-19. For example, on April 29, 2020, the U.S. National Institutes of Health announced it would be using a portion of its $1.5 billion in federal stimulus funding to fund a $500 million national challenge designed to help the agency identify the best candidates for an at-home or point-of-care test for COVID-19. Some of our existing or new competitors may have strong relationships with current and potential customers, including governmental authorities, and, as a result, may be able to respond more quickly to new or changing regulatory requirements, new or emerging technologies, and changes in customer requirements. In addition, during the time period between the Revocation and resubmission we anticipate for EUA, competitors have gained progress in their commercialization efforts, and customers have gained experience in using competitive product.

We believe we will be able to compete successfully based upon (a) the capabilities and attributes of the DPP COVID-19 System, which can provide, for a competitive price, rapid and accurate test results for both IgM and IgG antibodies through portable, close-to-the-patient tests and analyzers, (b) our extensive experience in developing rapid tests to respond to the HIV crisis and the Ebola and Zika global outbreaks.

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Expense Reduction Program

During the six months ended June 30, 2020, we began implementing a multi-faceted expense reduction program to reduce operating expenses and facilitate profitable growth. We undertook actions to adjust the size and composition of our organization, including by removing positions that were non-essential in light of our new business strategy, and to remove other expenses, all of which we expect will provide savings throughout, and after, 2020. Certain actions were taken with a view to facilitating our new focus on the development, manufacture and commercialization of the DPP COVID-19 System.

In light of market dynamics, we also completed a retrenchment of our Malaysian operations, including the termination of employment of our Malaysian workforce during the three months ended June 30, 2020. We will maintain our Malaysian subsidiary and facility and sustain the product registrations that were obtained throughout southeast Asia, with the benefit of having that entity to preserve the opportunity to restart operations there in the future when market conditions warrant.

Based on these activities, the Company recorded a restructuring charge ranging of $0.4 million during the three months ended June 30, 2020.

Consolidated Results of Operations

Three Months Ended June 30, 2020 Versus Three Months Ended June 30, 2019

Our results of operations for the three months ended June 30, 2020 and 2019 were as follows (dollars in thousands):

 June 30, 2020  June 30, 2019 
TOTAL REVENUES $5,111   100% $9,888   100%
                 
OPERATING COSTS AND EXPENSES:                
Cost of product sales  5,671   111%  6,990   71%
Research and development expenses  1,922   38%  2,101   22%
Selling, general and administrative expenses  4,397   41%  4,097   43%
Severance and restructuring costs  388   0%  -   0%
   12,378       13,188     
                 
LOSS FROM OPERATIONS  (7,267)      (3,300)    
                 
OTHER (EXPENSE) INCOME, NET  (712)      6     
                 
LOSS BEFORE INCOME TAXES  (7,979)  (156)%  (3,294)  (36)%
                 
Income tax benefit  (135)      (107)    
NET LOSS $(7,844)     $(3,187)    

Percentages in the table reflect the percent of total revenues.

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Total Revenues
Total revenues during the three months ended June 30, 2020 were $5.1 million, a decrease of $4.8 million, or 48.3%, compared to the three months ended June 30, 2019. As discussed above, in the second quarter, we executed the initial steps to implement our new business model and focus our resources on the development and commercialization of COVID-19 testing products. At the same time, the customers of our legacy infectious disease tests also focused much of their resources on COVID-19 management.

The Revocation had a significant negative impact on our net product revenuessales during the comparable period of 2020 by triggering the recall of unused tests from customers in the United States. In addition, given the uncertainty of the regulatory environment outside the U.S.,United States, we did not recognize $2.7 million of net product sales revenue induring the second quartercomparable period of 2020 for our shipments of the COVID-19 System outside the U.S.United States during that quarter due to the GAAP requirement that we have a high degree of confidence that it is probable that a significant reversal in revenue will not occur. Many factors can affect that consideration, including factors outside our influence, actions of third parties and evidence from similar situations. After considering all the information available to us at that time, we were not able to recognize the product sales revenue from those shipments in the second quarter due to our not having a high degree of confidence that it was probable that a significant reversal in revenue would not occur. The $2.7 million of revenue for such sales was recognized during the three months ended September 30, 2020.

The increase in total revenues compared to the comparable quarter of 2020 also reflected (a) the benefit of Government grant income totaling $2.3 million associated with our $12.7 million award from Biomedical Advanced Research and Development Authority, or BARDA, and an increase of $0.1 million in net product sales reflecting higher sales in Africa, Europe and the Middle East, predominantly offset by lower sales in the United States, Latin America and Asia, offset in part by (b) a $1.2 million decrease in research and development revenue.

Gross Product Margin

Cost of product revenuesales is primarily composed of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses.

freight and distribution costs. Gross product margin is net product revenue less cost of product revenue,sales, and gross product margin percentage is gross product margin as a percentage of net product revenue. sales.

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Gross product margin during the three months ended June 30, 2020 decreased2021 increased by $3.7$1.8 million or 205%,to $(0.1) million from $(1.9) million in the comparable period of 2019.2020. The gross product margin reductionduring the three months ended June 30, 2021 was unfavorably impacted by a $0.9 million charge related to the write-down of inventory for products that were not salable based on our periodic review of the current status and future benefits of inventory. The gross product margin during the comparable period of 2020 was impacted by costs related to the Revocation during the second quarter, which triggered the return of COVID-19 Systems that were produced and sold to customers in the United States. It also resulted from cost of product sales including the cost of COVID-19 Systems that were produced and shipped outside the United States, but for which the corresponding $2.7 million of revenue was not recognized during the second quarter of 2020 as described under “—Total Revenues” above.

The following schedule calculates gross product margin (dollars in thousands):

  
For the three months
ended June 30,
  Favorable/(unfavorable) 
  2021  2020  $ Change  % Change 
Net product sales $3,931  $3,792  $139   3.7%
Less: Cost of product sales  (4,040)  (5,671)  1,631   28.8%
Gross product margin $(109) $(1,879) $1,770   94.2%
Gross product margin percentage  (2.8)%  (49.6)%        

During the three months ended June 30, 2021, with the support of BARDA, we invested in developing and offering products to address the COVID-19 pandemic, which we expect to have average selling prices greater than those of our legacy products. The $1.8 million increase in gross product margin was comprised of (a) $1.7 million from relatively favorable product margins reflecting the relative impacts on the cost of product sales described above and (b) $0.1 million from favorable product sales volume as described under “—Total Revenues” above.

Research and Development


This category includes costs incurred for clinical and regulatory affairs and other research and development, as follows (dollars in thousands):

  
For the three months
ended June 30,
  Favorable/(unfavorable) 
  2021  2020  $ Change  % Change 
Clinical and regulatory affairs $871  $178  $(693) $(389.3)%
Other research and development  1,926   1,744   (182)  (10.4)%
Total research and development $2,797  $1,922  $(875)  (45.5)%

The increase in research and development costs for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily associated with Clinical and regulatory affairs costs related to pursuing an EUA and 510(k) from the FDA for the DPP SARS-CoV-2 Antigen test system and an EUA for the DPP Respiratory Panel, each pursuant to awards from BARDA.

Selling, General and Administrative Expense

Selling, general and administrative expense includes administrative expenses, sales and marketing costs (including commissions), and other corporate items.

The $1.6 million, or 36.5%, increase in selling, general and administrative expense for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 principally reflected increased costs associated with fees for legal services relating to shareholder litigation and compensation costs related to our expanded U.S. commercial team.

Asset Impairment, Restructuring, Severance and Related Costs

We incurred asset impairment, restructuring, severance and related costs of $2.0 million during the three months ended June 30, 2021 as follows:
•
We recorded an impairment loss of $1.3 million for the three months ended June 30, 2021 as the result of our write-off of the intangible assets, net, leasehold improvements, net and right-of-use assets for leases, net associated with our Malaysian operations, which underwent a retrenchment during the second quarter of 2020. See “—Recent Events—Non-Cash Write-Downs.”
In light of the uncertainty of the timing and receipt of regulatory approvals, the timing of progress on and results of clinical trial programs, and the timing and any receipt of product orders from the commercialization of our COVID-19 and other diagnostic test systems both within and outside the United States, during the second quarter of 2021 we engaged the services of an independent financial advisory firm. The financial advisory firm worked with management to develop a forecast model to assess the amount and timing of our liquidity needs, assuming various business cases, and together with legal counsel advised us regarding alternative approaches to enhancing our liquidity position, participating in discussions with the Lender, and related matters. During the three months ended June 30, 2021, we incurred $0.7 million related to these restructuring matters.

Other Expense, Net

Other expense, net consists principally of interest expense, net of interest income earned on our deposits, which increased in the three months ended June 30, 2021 compared to the comparable period in 2020 due to interest accruing on long-term debt incurred in September 2019, of which $20 million (carrying value of $18.5 million) was outstanding at June 30, 2021. For a description of this long-term debt, please see “—Liquidity and Capital Resources—Sources of Funds—Credit Agreement” below.

Income Tax Benefit

During the three months ended June 30, 2021, we did not recognize a tax benefit related to losses generated by our foreign subsidiaries. As of June 30, 2021 and 2020, our U.S.  and international deferred tax assets included a full valuation allowance.

Six Months Ended June 30, 2021 Versus Six Months Ended June 30, 2020

The results of operations for the six months ended June 30, 2021 and 2020 were as follows (dollars in thousands). Percentages are percentages of total revenues.

  For the six months ending June 30, 
  2021  2020 
             
TOTAL REVENUES $15,186   100% $11,971   100%
                 
OPERATING COSTS AND EXPENSES:                
Cost of product sales  7,588   50%  10,045   84%
Research and development expenses  5,660   37%  3,881   32%
Selling, general and administrative expenses  12,087   80%  8,554   71%
Asset impairment, restructuring, severance and related costs  2,044   13%  1,111   9%
Acquisition  -   -   64   1%
   27,379       23,655     
                 
LOSS FROM OPERATIONS  (12,193)      (11,684)    
                 
OTHER EXPENSE, NET  (1,440)      (1,374)    
                 
LOSS BEFORE INCOME TAXES  (13,633)  (90)%  (13,058)  (109)%
                 
Income tax (expense) benefit  68       215     
NET LOSS $(13,565)     $(12,843)    

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Total Revenues

Total revenues during the six ended June 30, 2021 were $15.2 million, an increase of $3.2 million, or 26.9%, compared to the six months ended June 30, 2020. The Revocation in June 2020 had a significant negative impact on our net product sales during the comparable period of 2020 by triggering the recall of unused tests from customers in the United States. In addition, given the uncertainty of the regulatory environment outside the United States, we did not recognize $2.7 million of net product sales revenue during the comparable period of 2020 for our shipments of the COVID-19 System outside the United States during that period due to the GAAP requirement that we have a high degree of confidence that it is probable that a significant reversal in revenue will not occur. Many factors can affect that consideration, including factors outside our influence, actions of third parties and evidence from similar situations. After considering all the information available to us at that time, we were not able to recognize the product sales revenue from those shipments in the period due to our not having a high degree of confidence that it was probable that a significant reversal in revenue would not occur. The $2.7 million of revenue for such sales was recognized during the three months ended September 30, 2020.

The increase in total revenues compared to the six months ended June 30, 2020 also reflected the benefit of Government grant income totaling $5.6 million associated with tour $12.7 million award from BARDA, offset by a decrease of $1.0 million in R&D revenue from non-government contracts, and a $1.6 million reduction in Net product sales, the latter reflecting the net impact of  lower sales in Latin America, United States and Asia, partially offset by increased sales in Africa, Europe and the Middle East, the former principally related to HIV Self-Tests.

Gross Product Margin

Cost of product sales is primarily composed of material, labor, manufacturing overhead, depreciation and amortization, and freight and distribution costs. Gross product margin is net product sales less cost of product sales, and gross product margin percentage is gross product margin as a percentage of net product revenue.

Gross product margin during the six months ended June 30, 2021 increased by $0.9 million to $0.4 million from $(0.5) million in the comparable period of 2020. The gross product margin during the six months ended June 30, 2021 was unfavorably impacted by a $0.9 million charge related to the write-down of inventory for products that are not salable based on our periodic review of the current status and future benefits of inventory. The gross product margin during the comparable period of 2020 was impacted by costs related to the Revocation during the second quarter, which triggered the return of COVID-19 Systems that were produced and sold to customers in the U.S. It also resulted from cost of product revenuesales including the cost of COVID-19 Systems that were produced and shipped outside the U.S., but for which the corresponding $2.7 million of revenue was not recognized due to the requirement of GAAPduring that we have a high degree of confidence that it is probable that a significant reversal in revenue will not occur. Many factors can affect that consideration, including,quarter as examples, things outside our influence, actions of third parties, and evidence from similar situations. After considering all the information available to us, we were not able to recognize the product revenue from those shipments in the second quarter due to the hurdle that requires a high degree of confidence that it is probable that a significant reversal in revenue will not occur.described under “—Total Revenues” above.

The following schedule calculates gross product margin (dollars in thousands):

 
For the Three Months
Ended June 30
  Favorable/(Unfavorable)  
For the six months
ended June 30,
  Favorable/(unfavorable) 
 2020  2019  $ Change  % Change  2021  2020  $ Change  % Change 
Net product sales $3,792  $8,785  $(4,993)  56.8% $7,956  $9,508  $(1,552)  (16.3)%
Less: Cost of product sales  (5,671)  (6,990)  1,319   18.9%  (7,588)  (10,045)  2,457   24.5%
Gross product margin $(1,879) $1,795  $(3,674)  204.7% $368  $(537) $905   168.5%
Gross product margin percentage  (49.6)%  20.4%          4.6%  (5.6)%        

The $3.7 million decreaseDuring the six months ended on June 30, 2021 we invested in gross product margin was composeddeveloping and offering products to address the COVID-19 pandemic, which we expect to have average selling prices greater than those of the following:

$1 million unfavorable product sales volume as described above, together with
$2.6 million unfavorable product margins relatedour legacy products. We also continued to the cost of returned product and product shipped outside the U.S.

We believe the our investmentimplement automation in automation willorder to reduce our reliance on manual labor and contribute to improvedimprove our product margins. The $0.9 million increase in gross margins.product margin was comprised of (a) $1.0 million from favorable product margins reflecting the relative impacts on the cost of product sales described above, offset in part by (b) $0.1 million of lower product sales volume as described under “—Total Revenues” above.

Research and Development

This category includes costs incurred for clinical and regulatory affairs and other R&D as follows (dollars in thousands):

  
For the Three Months
Ended June 30
  Favorable/(Unfavorable) 
  2020  2019  $ Change  % Change 
Clinical and regulatory affairs $178  $323  $145   44.9%
Other research and development  1,744   1,778   34   1.9%
Total research and development $1,922  $2,101  $179   8.5%

The decrease in R&D costs for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily associated with the reduction in clinical trial cost related to the DPP HIV-Syphilis System during 2019, offset by costs related to the development of the DPP COVID-19 System.

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Selling, General and Administrative Expense
Selling, general and administrative expense includes administrative expenses, sales and marketing costs (including commissions), and other corporate items.

The $0.3 million, or 7.3%, increase in selling, general and administrative expense for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 is primarily related to one-time period costs and equity compensation costs.

Other Income (Expense), net

Other expenses/income, net consists principally of interest expense, net of interest income earned on our deposits, which increased in the three months ended June 30, 2020 compared to comparable period in 2019 due to interest accruing on long-term debt incurred on September 3, 2019, of which $20 million (carrying value of $17.9 million) was outstanding at June 30, 2020. For a description of this long-term debt, please see “—Liquidity and Capital Resources—Sources of Funds—Credit Agreement” below.

Income Tax Benefit

During the three months ended June 30, 2020, we recognized a tax benefit of $0.1 million related to losses generated by our foreign subsidiaries. As of June 30, 2020 and 2019, our U.S. deferred tax assets included a full valuation allowance.

Six Months Ended June 30, 2020 versus Six Months Ended June 30, 2019

The results of operations for the six months ended June 30, 2020 and 2019 were as follows (dollars in thousands):

  June 30, 2020  June 30, 2019 
TOTAL REVENUES $11,971   100% $18,430   100%
                 
OPERATING COSTS AND EXPENSES:                
Cost of product sales  10,045   84%  12,002   65%
Research and development expenses  3,881   32%  4,318   23%
Selling, general and administrative expenses  8,554   71%  8,110   44%
Severance and restructuring costs  1,111   9%  -   0%
Acquisition costs  64   1%  396   2%
   23,655       24,827     
                 
LOSS FROM OPERATIONS  (11,684)      (6,396)    
                 
OTHER (EXPENSE) INCOME, NET  (1,374)      13     
                 
LOSS BEFORE INCOME TAXES  (13,058)  (109)%  (6,383)  (35)%
                 
Income tax benefit  (215)      (380)    
NET LOSS $(12,843)     $(6,003)    

Percentages in the table reflect the percent of total revenues.

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Total Revenues
Total revenues during the six months ended June 30, 2020 were $12 million, a decrease of $6.5 million, or 35% compared to the six months ended June 30, 2019. As discussed above, in the second quarter, we executed the initial steps to implement our new business model and focus our resources on the development and commercialization of COVID-19 testing products. At the same time, the customers of our legacy infectious disease tests also focused much of their resources on COVID-19 management. The Revocation had a significant negative impact on our net product revenues by triggering the recall of unused tests from customers in the United States. In addition, given the uncertainty of the regulatory environment outside the U.S., we did not recognize revenue in the second quarter for our shipments of the COVID-19 System outside the U.S. Total revenues for the six months ended June 30, 2020 was also adversely affected by our shift in focus from offering and selling legacy products to developing and beginning to commercialize the DPP COVID-19 System.

Gross Product Margin

Cost of product sales is primarily composed of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses.

Gross product margin is net product revenue less cost of product revenue, and gross product margin percentage is gross product margin as a percentage of net product revenue. Gross product margin during the six months ended June 30, 2020 decreased by $4 million, or 116%, from the comparable period of 2019. The gross product margin reduction resulted from losses related to the revocation during the second quarter, which triggered the return of COVID-19 Systems that were produced and sold to customers in the U.S. It also resulted from cost of product revenue including the cost of COVID-19 Systems that were produced and shipped outside the U.S., but for which revenue was not recognized due to the requirement of GAAP that we have a high degree of confidence that it is probable that a significant reversal in revenue will not occur. Many factors can affect that consideration, including, as examples, things outside our influence, actions of third parties, and evidence from similar situations. After considering all the information available to us, we were not able to recognize the product revenue from those shipments in the second quarter due to the hurdle that requires a high degree of confidence that it is probable that a significant reversal in revenue will not occur.

The following schedule calculates gross product margin (dollars in thousands):

  For the Six Months Ended  Favorable/(Unfavorable) 
  June 30, 2020  June 30, 2019  $ Change  % Change 
Net product sales $9,508  $15,409  $(5,901)  38.3%
Less: Cost of product sales  10,045   (12,002)  1,957   16.3%
Gross product margin $(537) $3,407  $(3,944)  115.8%
Gross product margin percentage  (5.6)%  22.1%        

The $3.9 million decrease in gross product margin was composed of the following:

$1.3 million unfavorable product sales volume as described above, together with
$2.6 million unfavorable product margins related to the cost of returned product and product shipped outside the U.S.

We believe our investment in automation will reduce our reliance on manual labor and contribute to improved product gross margins.

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Research and Development
This category includes costs incurred for clinical and regulatory affairs and other research and development, as follows (dollars in thousands):

 For the Six Months Ended  Favorable/(Unfavorable)  
For the six months
ended June 30,
  Favorable/(unfavorable) 
 June 30, 2020  June 30, 2019  $ Change  % Change  2021  2020  $ Change  % Change 
Clinical and regulatory affairs $500  $763  $263   34.5% $1,636  $500  $(1,136) $(227.2)%
Other research and development  3,381   3,555   174   4.9%  4,024   3,381   (643)  (19.0)%
Total Research and Development $3,881  $4,318  $437   10.1%
Total research and development $5,660  $3,881  $(1,779)  (45.8)%

The decreaseincrease in R&Dresearch and development costs for the six months ended June 30, 20202021 compared to the six months ended June 30, 20192020 was primarily associated with the reduction externally funded programs and clinical trial costswork related to pursuing an EUA and 510(k) from the FDA for the DPP HIV-Syphilis System during 2019, offset by costs related to the development ofSARS-CoV-2 Antigen test system and an EUA for the DPP COVID-19 System.Respiratory Panel, each pursuant to awards from BARDA.

Selling, General and Administrative Expense

Selling, general and administrative expense includes administrative expenses, sales and marketing costs (including commissions), and other corporate items.

The $0.4$3.5 million, or 5.5%41.3%, increase in selling, general and administrative expense for the six months ended June 30, 20202021 compared to the six months ended June 30, 20192020 principally reflected increased costs associated with (a) fees for legal services relating to stockholder litigation, (b) compensation related to one-time period costsour expanded U.S. commercial team, (c) insurance; and (d) non-cash equity compensation, costs.which was expanded to include all global employees.

Asset Impairment, Restructuring, Severance and Related Costs

We incurred asset impairment, restructuring, severance and related costs of $2.0 million during the six months ended June 30, 2021 as follows:
We recorded an impairment loss of $1.3 million for the six months ended June 30, 2021 as the result of our write-off of the intangible assets, net, leasehold improvements, net and right-of-use assets for leases, net associated with our Malaysian operations, which underwent a retrenchment during the second quarter of 2020. See “—Recent Events—Non-Cash Writedowns.”
In light of the uncertainty of the timing and receipt of regulatory approvals, the timing of progress on and results of clinical trial programs, and the timing and any receipt of product orders from the commercialization of our COVID-19 and other diagnostic test systems both within and outside the United States, during the second quarter of 2021 we engaged the services of an independent financial advisory firm. The financial advisory firm worked with management to develop a forecast model to assess the amount and timing of our liquidity needs, assuming various business cases, and together with legal counsel advised us regarding alternative approaches to enhancing our liquidity position, participating in discussions with the Lender, and related matters. During the six months ended June 30, 2021, we incurred $0.7 million related to these restructuring matters.
In order to address challenging economic conditions and implement its business strategy, in the first quarter of 2021 we continued to execute a program to reduce operating expenses and better align costs with revenues, including by eliminating positions that were no longer aligned with its strategy, and recognized severance charges of $0.1 million during the six months ended June 30, 2021.

Other (Expense) Income, netExpense, Net

Other expenses/income,expense, net consists principally of interest expense, net of interest income earned on our deposits, which increased in the six months ended June 30, 20202021 compared to comparable period in 20192020 due to interest accruing on long-term debt incurred onin September 3, 2019, of which $20 million (carrying value of $17.9$18.5 million) was outstanding at June 30, 2020. For a description of this long-term debt, please see “—Liquidity and Capital Resources—Sources of Funds—Credit Agreement” below.

Income Tax Benefit

During the six months ended June 30, 2020,2021, we recognized a tax benefit of $0.2$0.1 million related to losses generated by our foreign subsidiaries.subsidiaries, which offset the deferred tax liability balances recorded on the acquisition date. As of June 30, 20202021 and 2019,2020, our U.S. deferred tax assets included a full valuation allowance.

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Liquidity and Capital Resources

General

Our cash and cash equivalents totaled $5.6 million at June 30, 2021 (which included a restricted amount of $0.4 million), a decrease of $8.8 million from $14.4 million at March 31, 2021 and a decrease of $17.5 million from $23.1 million at December 31, 2020. During the six months ended June 30, 2020first half of 2021, we have funded our business operations, including capital expenditures and working capital requirements, principally from cash and cash equivalents. Our operations used $7.3$8.7 million of cash and we received proceeds on issuance of stock of $28.5 million (net of expenses). As ofduring the three months ended June 30, 2020,2021 and $15.9 million of cash during the six months ended June 30, 2021. Revenues during the three and six months ended June 30, 2021 did not meet our expectations, and the shortfall in revenues was a principal cause of our limited cash and cash-equivalents position at June 30, 2021. Our decrease in cash and cash-equivalents over the first two quarters of 2021 reflected market, clinical trial and regulatory complications we had outstanding debt (excluding leases)faced in seeking to develop and commercialize a portfolio of COVID-19 test systems during the amountcontinuing, but evolving, uncertainty of $20.1 million (carrying amount of $17.9 million), consisting of loans of $20.0 million under a credit agreement entered into on September 3, 2019the COVID‑19 pandemic. The decrease in cash and $0.1 million under a seller-financed note payablecash-equivalents also resulted in part from significant continuing expenses incurred in connection with our purchasepending legal matters (see “Note 6(f) –Commitments, Contingencies, and Concentrations: Litigation”); delayed achievement of automated manufacturing equipment.milestones associated with government grant income; investments in inventory; and, the continuing automation of U.S. manufacturing.

In light of the uncertainty of the timing and any receipt of regulatory approvals, the timing of progress on and results of clinical trial programs, and the timing and any receipt of product orders from the commercialization of our COVID-19 and other diagnostic test systems both within and outside the United States, during the three months ended June 30, 2021 we engaged the services of an independent financial advisory firm. The financial advisory firm worked with management to develop a forecast model to assess the amount and timing of our liquidity needs, assuming various business cases and, together with legal counsel, advised us regarding alternative approaches to enhancing our liquidity position, participating in discussions with the Lender under our credit facility and related matters. For additional information regarding our consultation with the financial advisory firm, see “Item 2.02. Results of Operations and Financial Condition —Estimated Cash Position and Related Actions” in the July 19 Form 8-K. During the three months ended June 30, 2021, we incurred $0.7 million related to these restructuring matters.

As we disclosed in the July 19 Form 8-K, factors and considerations with respect to our liquidity raised, as of June 30, 2021, substantial doubt as to our ability to continue as a going concern through one year after the date that our financial statements with respect to the three and six months ended June 30, 2021 were expected to be issued. Subsequent to the July 19 Form 8-K, in July 2021 we received two significant customer purchase orders (see “—Recent Events—Customer Purchase Orders” above and raised funds through an “at-the-market” offering (see “—Recent Events—At-the-Market Offering of Common Stock” above), which were intended to increase our total revenues and improve our liquidity position.

These measures and other plans and initiatives have been designed to provide us with adequate liquidity to meet its obligations for at least the twelve-month period following the filing date of this report, when the Accompanying Financial Statements are being issued. Our execution of those measures and our other plans and initiatives are dependent, however, on factors that are beyond our control or that may not be available on terms acceptable to us, or at all. We have considered how the uncertainties around the delivery of the full number of tests covered by the two purchase orders received in July 2021 and other customer orders may be affected by limitations of our supply chain, staffing and liquidity, uncertainties regarding the achievement of milestones and related recognition of revenue under government grants, and other matters outside our control. We further considered how those uncertainties could impact our ability to meet the obligations specified in the our existing Credit Agreement over the next twelve months, which include a covenant requiring minimum total revenues for the twelve months preceding each quarter end. Those requirements range from $37.4 million for the twelve months ending September 30, 2021 to $43.8 million for the twelve months ending June 30, 2022. Upon an event of default under the Credit Agreement, the Lender could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. In such an event, there can be no assurance that we would have sufficient liquidity to fund payment of the amounts that would be due under the Credit Agreement or that, if such liquidity were not available, we would be successful in raising additional capital on acceptable terms, or at all, or in completing any other endeavor to continue to be financially viable and continue as a going concern. Our inability to raise additional capital on acceptable terms in the near future, whether for purposes of funding payments required under the Credit Agreement or providing additional liquidity needed for our operations, could have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition.

Accordingly, management determined we could not be certain that our plans and initiatives would be effectively implemented within one year after the filing date of this report, when the Accompanying Financial Statements are being issued. Without giving effect to the prospect of raising additional capital pursuant to our at-the-market offering, increasing product revenue in the near future or executing other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent, debt service and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date of this report.

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The Accompanying Financial Statements have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of this report. As such, the Accompanying Financial Statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should we be unable to continue as a going concern.

Please see note 2(a) to the Accompanying Financial Statements for additional information regarding our going concern assessment in connection with the Accompanying Financial Statements. You are urged to read carefully the information provided in “Because of our liquidity limitations, we have concluded there is a substantial doubt about our ability to continue as a going concern and we may require additional capital to fund our operations, which capital may not be available to us on acceptable terms or at all,” “Because of our liquidity and operational limitations, including the availability of staffing and supply chain resources that are necessary but outside of our control, we may not be able to fulfill all of the requirements of customer purchase orders received in July 2021 without additional capital to fund our operations, which capital may not be available to us on acceptable terms, or at all,” and “The failure to comply with the terms of the Credit Agreement could result in a default under its terms and, if uncured, could result in action against our pledged assets and dilution of our stockholders” under “Item 1A. Risk Factors” of Part II of this report.

Our cash and cash equivalents totaled $37.8 million at July 31, 2021, an increase of $32.2 million from June 30, 2021, reflecting funds raised through the offering pursuant to the ATM Agreement. Our cash and cash equivalents at July 31, 2021, which included a restricted amount of $0.4 million, were held for working capital and other general corporate purposes. We are obligated to maintain aggregate unrestricted cash of not less than $3,000,000 at all times under a covenant in our credit facility.

We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends. We have not entered into, and do not expect to enter into, investments for trading or speculative purposes. Our accounts receivable and inventory balances fluctuate from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, raw material lead times, the mix of vendor terms, and the timing of shipment of our products and the invoicing of our research and development activities.

We continually evaluate our liquidity requirements, capital needs and availability of capital resources based on our operating needs and our planned growth initiatives, particularly in the light of our shift in business focus to the DPP COVID-19 System. We believe our existing cash and cash equivalents and our cash flow from operating activities will be sufficient to meet our anticipated cash needs for at least the next twelve months.initiatives. Our future working capital needs will depend on many factors, including the timing of our planned submission of the revised DPP COVID-19 System for an EUA and a successful award of such by the FDA; the rate of our business and revenue growth, particularly if we are ablethe availability and cost of human, material and other resources required to resume commercialization of the DPP COVID-19 System;build and deliver products in accordance with our existing or future product orders, the timing of our continuing automation of U.S. manufacturing;manufacturing, and the timing of our investment in our research and development as well as sales and marketing. If we are unable to increase our revenues and manage our expenses in accordance with our operating plan, weit may need to reduce the level or slow the timing of the growth plans contemplated by our operating plan, which would likely curtail or delay the growth in our business contemplated by our operating plan and could impair or defer our ability to achieve profitability and generate cash flow, or to seek to raise additional funds through debt or equity financings, strategic relationships, or other arrangements. There can be no assurance that we would be able to complete any proposed financing on terms acceptable to us, or at all, or that we otherwise will be successful in any of our other endeavors to continue to be financially viable and continue as a going concern. Our inability to raise additional capital on acceptable terms could have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition. If we were to raise additional funds through the issuance of equity or convertible securities, the issuance could result in substantial dilution to existing stockholders, and the holders of those new securities may have rights, preferences and privileges senior to those of the holders of common stock. Furthermore, any decline in the market price of our common stock could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

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Sources of Funds

Equity and Equity-Related Securities. In July 2021 we issued and sold pursuant to the ATM Agreement a total of 8,323,242 shares of common stock at a volume-weighted average price of $4.4303 per share for gross proceeds of approximately $36.9 million and net proceeds, after giving effect to placement fees and other estimated transaction costs, of approximately $34.7 million. Additional shares of common stock may be issued and sold pursuant to the ATM Agreement for gross proceeds of up to approximately $23.1 million, but we cannot provide any assurance that we will be able to issue any additional shares under the ATM Agreement at an acceptable price or at all. For more information about the ATM Agreement, please see “—Recent Events—At-the-Market Offering of Common Stock” above.

Credit Agreement. The following description summarizes certain key provisions of the Credit Agreement:

●
Principal Amount. The Credit Agreement provides for a $20,000,000 senior secured term loan credit facility, which was drawn in full on September 4, 2019. Under the terms of the Credit Agreement, we may use the proceeds (a) for general working capital purposes and other permitted corporate purposes, (b) to refinance certain of our existing indebtedness and (c) to pay fees, costs and expenses incurred in connection with the Credit Agreement, including the Lender’s closing cost amount of $550,000, which was netted from the proceeds, and a financing fee of $600,000 (3.0% of gross proceeds) payable to Craig-Hallum, our financial advisor for the financing.

●
Interest Rate. Principal outstanding under the Credit Agreement bears interest at a rate per annum equal to the sum of (a) the greater of the one-month London Interbank Offered Rate and 2.5% plus (b) 8.75%. At any time at which an event of default (as described under “—Default Provisions” below) has occurred and is continuing, the interest rate will increase by 4.0%. Accrued interest is payable on a monthly basis. On June 30, 2021 the interest rate was 11.25%.

●
Scheduled Repayment. No principal repayments are due prior to September 30, 2022, unless we elect to prepay principal as described under “—Optional Prepayment” below or principal is accelerated pursuant to an event of default as described under “—Default Provisions” below. Principal installments in the amount of $300,000 are payable on the last day of each of the eleven months from September 2022 through July 2023, and all remaining principal is payable at maturity on September 3, 2023.

●
Optional Prepayment. We may prepay outstanding principal from time to time, subject to payment of a premium on the prepaid principal amount equal to 8% through September 3, 2021 and 4% from September 4, 2021 through September 3, 2022. No premium will be due with respect to any prepayment made on or after September 4, 2022.

●
Guaranties. Our subsidiaries Chembio Diagnostic Systems Inc. and Chembio Diagnostics Malaysia Sdn Bhd. have guaranteed, and the Lender from time to time may require our other subsidiaries to guarantee, our obligations under the Credit Agreement.

●
Security. Our obligations under the Credit Agreement are secured by a first priority, perfected lien on substantially all of our property and assets, including our equity interests in our subsidiaries. Our subsidiary Chembio Diagnostic Systems Inc. has secured its guarantee of our Credit Agreement obligations with a lien on substantially all of its assets, and the Lender from time to time may require Chembio Diagnostics Malaysia Sdn Bhd. and any of our other subsidiaries that has guaranteed our Credit Agreement obligations to do the same.

●
Representations and Warranties; Financial and Other Covenants. In the Credit Agreement we made customary representations and warranties as well as customary affirmative and negative covenants, including covenants limiting additional indebtedness, liens, guaranties, mergers and acquisitions, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates, and fundamental changes. The Credit Agreement also contains financial covenants requiring that (a) we maintain aggregate unrestricted cash of not less than $3,000,000 at all times and (b) we achieve specified minimum total revenue requirements for the twelve months preceding each quarter end. The minimum total revenue amounts, which range from $32.0 million to $50.1 million, were developed for purposes of the Credit Agreement and do not reflect the internal estimates and plans used by our management and board of directors to understand and evaluate our operating performance, to establish budgets, and to establish operational goals for managing our business. We therefore do not believe that the covenant requirements provide useful information to investors or others in enhancing an understanding of our future prospects. the Credit Agreement for the next twelve months, which include attaining Minimum Total Revenue (as such term is defined in the Credit Agreement) requirements for the twelve months preceding each quarter end. For the next year, the minimum total revenue requirements range from $37.4 million for the twelve months ending September 30, 2021 to $43.8 million for the twelve months ending June 30, 2022 (see Note 7 – Long-Term Debt).

●
Default Provisions. The Credit Agreement provides for customary events of default, including events of default based on non-payment of amounts due under the Credit Agreement, defaults on other debt, misrepresentations, covenant breaches, changes of control, insolvency, bankruptcy and the occurrence of a material adverse effect on our company. Upon an event of default resulting from a voluntary or involuntary proceeding for bankruptcy, insolvency or receivership, the amounts outstanding under the Credit Agreement will become immediately due and payable and the Lender’s commitments will be automatically terminated. Upon the occurrence and continuation of any other event of default, the Lender may accelerate payment of all obligations and terminate its commitments under the Credit Agreement. Upon an acceleration of payment following an event of default occurring prior to September 4, 2021, the amounts due and payable by us will include a prepayment premium on accelerated principal in the amount described under “—Optional Prepayment” above.

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Research and Development Awards. We routinely seek research and development programs that may be awarded by government, non-governmentalorganizations, and non-profit entities, including private foundations. Since 2015 we have received over $19.8 million of funding from some of the world’s leading health organizations, which has helped us accelerate the expansion of our pipeline of infectious disease tests. Our collaborators have included Bill & Melinda Gates Foundation, The Paul G. Allen Family Foundation, Fiocruz and FIND, as well as U.S. government agencies such as Centers for Disease Control and Prevention, BARDA, and the U.S. Department of Agriculture. See “Item 1. Business—Products” above.

During the six months ended June 30, 2021 we recognized government grant income totaling $5.6 million, which was awarded under a contract we entered into with BARDA on December 2, 2020. A total of up to $12.7 million of awards are available from BARDA under that contract to assist us in (a) developing, and requesting an EUA from the FDA for, the DPP Respiratory Panel and (b) performing the clinical trials for and submitting the DPP SARS-CoV-2 Antigen test system to the FDA for 510(k) clearance.

Working Capital.The following table sets forth selected working capital information:information (dollars in thousands):

  June 30, 2020 
  (in thousands) 
Cash and cash equivalents $36,427,468 
Accounts receivable, net of allowance for doubtful amounts  2,610,587 
Inventories, net  14,131,540 
Prepaid expenses and other current assets  742,908 
Total current assets  53,912,503 
Less: Total current liabilities  14,296,153 
Working capital $39,616,350 

We received net proceeds of $28.4 million from an underwritten public offering of Common Stock in May 2020.

On April 20, 2020, we entered into an agreement with the U.S Small Business Administration for a loan of $3 million under the Paycheck Protection Program. The loan bears a 1% interest rate and has a two-year term beginning on the date of disbursement. Principal and interest is due at maturity. This loan was returned on May 2020.

On April 24, 2020, we were awarded a grant of $1.0 million from Empire State Development to be used as working capital for the development and production of IgM/IgG serology tests for COVID-19 for sale in the State of New York. Of that total, $0.5 million was funded during the three months ended June 30, 2020.

Our cash and cash equivalents at June 30, 2020, which included a restricted amount of $3.3 million, was held for working capital purposes. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends. We have not entered into, and do not expect to enter into, investments for trading or speculative purposes. Our accounts receivable and investory balances fluctuate from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, and the timing of shipment of our products and the invoicing of our research and development activities.
  June 30, 2021 
    
Cash and cash equivalents $5,564 
Accounts receivable, net of allowance for doubtful amounts  2,977 
Inventories, net  15,720 
Prepaid expenses and other current assets  1,065 
Total current assets  25,326 
Less: Total current liabilities  9,428 
Working capital $15,898 

Uses of Funds

Cash Flow Used in Operating Activities. Our operations used $7.3$15.9 million of cash during the six months ended June 30, 2020, reflecting2021, primarily due to: a netloss adjusted for non-cash items of $11.2$9.0 million; a $4.0 million (which included $1.1increase in inventory related to materials and manufacturing costs for COVID-19 systems in anticipation of potential customer orders and regulatory approvals; a $2.0 million decrease in accounts payable and other accrued liabilities; and a $1.2 million decrease in deferred revenue. Those uses of severance and restructuring costs and $0.1 million of acquisition costs),cash were offset in part by a $1.1$0.5 million decrease in accounts receivable offset by a $4.5 million increase in inventory, a $3.3 million increase in accounts payable and accrued liabilities and a $4.0$0.1 million increasedecrease in deferred revenue.deposits and other assets.

During the six months ended June 30, 2020, we continued to invest in manufacturing equipment, leasehold improvements and other fixed assets, particularly in the light of our shift in business focus to our DPP COVID-19 System.Capital Expenditures. Our capital expenditures totaled $2.4$1.3 million in the six months ended June 30, 2020.2021, all of which related to investments in automated manufacturingequipment, facilities, and other fixed assets. As of June 30, 2021, we had capital purchase obligations of $1.1 million related to additional automated manufacturing equipment, with payments expected to come due during 2021 based on vendor performance milestones.

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Effects of Inflation

Other than the impact of increases in minimum wage levels in New York, inflation and changing prices have not had a material effect on our business, and we do not expect that they will materially affect our business in the foreseeable future. Any impact of inflation on cost of revenue and operating expenses, especially employee compensation costs (including any effects of future increases in minimum wages levels in New York), may not be readily recoverable in the price of our product offerings.

Off-Balance Sheet Arrangements

As of June 30, 2020,2021, we did 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, or the Exchange Act.

Significant Accounting Policies and Critical Accounting Estimates

The following description ofThere were no significant changes in our significant accounting policies and critical accounting estimates augmentsduring the disclosure set forththree and six months ended June 30, 2021 to augment the critical accounting estimates disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

Revenue Recognition

We recognize revenueReport on Form 10-K for product salesthe fiscal year ended December 31, 2020, other than those described in accordance with FASB ASC 606, Revenue from Contracts with Customers. Revenues from product sales are generallyrecognized when the customer obtains control of our product, which occurs at a point in time, typically upon tenderingnotes to the customer, subject to variable consideration and other provisions of ASC 606. We expense incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial. Freight and distribution activities on products are performed after the customer obtains control of the goods. We have made an accounting policy election to account for shipping and handling activities that occur either when or after goods are tendered to the customer as a fulfillment activity, and therefore recognizes freight and distribution expenses in Cost of Product Sales. We exclude certain taxes from the transaction price (e.g., sales, value added and some excise taxes).

For certain contracts, we recognize revenue from research and development, milestone and grant revenues when earned.  Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned. For certain collaborative research projects, we recognize revenue by defining milestones at the inception of the agreement and applying judgement and estimates in recognizing revenue for relevant contracts.Accompanying Financial Statements.

Recently Issued Accounting Pronouncements

A discussion of recent accounting pronouncements was included in our 2019Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and is updated in subsection (v) of note 2 to the condensed consolidated financial statements included elsewhere in this report.Accompanying Financial Statements.

ITEM 4.CONTROLS AND PROCEDURES

(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 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 June 30, 2020 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 principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, 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 three months ended June 30, 2020,
(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 Exchange Act, as of June 30, 2021. Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that as of June 30, 2021 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 principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, 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 three months ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Employee Litigation

John J. Sperzel, our former chief executive officer, has asserted a right to exercise certain options to purchase, for an aggregate exercise price of $943,126, a total of 266,666 shares of common stock that were vested when he resigned on January 3, 2020. Under their terms, those options were exercisable for a period of thirty days after his service to our company ended. The compensation committee of the board, acting in its discretion in accordance with the terms of the underlying equity incentive plans, has determined that Mr. Sperzel failed to exercise the options in a timely manner prior to their expiration. Chembio intends to vigorously defend against any claim by Mr. Sperzel that he continues to have a right to exercise any options.

Stockholder Litigation

As of July 31, 2020, four purported class action lawsuits had been filed by alleged stockholders of our company in the United States District Court for the Eastern District of New York, including: (1) Sergey Chernysh v. Chembio Diagnostics, Inc., Richard L. Eberly, and Gail S. Page, 20-cv-2706, filed on June 18, 2020, or Chernysh; (2) James Gowen v. Chembio Diagnostics, Inc., Richard L. Eberly, and Gail S. Page, 2:20-cv-02758, filed on June 22, 2020, or Gowen; and (3) Anthony Bailey v. Chembio Diagnostics, Inc. Richard J. Eberly, Gail S. Page, and Neil A. Goldman, 2:20-cv-02961, filed on July 3, 2020, or Bailey; and (4) Ken Hayes v. Chembio Diagnostics, Inc., Richard L. Eberly, Gail S. Page, Katherine L. Davis, Mary Lake Polan, and John G. Potthoff, 1:20-cv-02918, filed on July 1, 2020, or Hayes.

The Chernysh, Gowen and Bailey complaints are brought by purported individual stockholders of our company on behalf of all persons and entities who purchased our publicly traded stock during the alleged “class period” and purport to state claims for violations of Section 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission. The Chernysh and Bailey complaints define the “class period” as April 1, 2020 through June 16, 2020, inclusive, whereas the Gowen complaint defines the “class period” as March 12, 2020, through June 16, 2020, inclusive. The plaintiffs in these actions generally purport to allege that the defendants named therein misrepresented and failed to disclose that our DPP COVID-19 IgM/IgG System did not provide high-quality results and there were material performance concerns with the DPP COVID-19 IgM/IgG System’s accuracy, including that it generates false results at a rate higher than expected and higher than reflected in its authorized labeling and was not effective in detecting antibodies against COVID-19. The Chernysh, Gowen, and Bailey complaints seek an award of damages ostensibly sustained as a result of alleged wrongdoing in an amount to be proven at trial as well as an award of reasonable attorneys’ fees and expenses, including expert fees and pre- and post-judgment interest.  We and the plaintiffs in Chernysh, Gowen and Bailey have entered into a stipulation, approved by the Court on July 17, 2020, relieving the defendants from the obligation to respond to the complaints in the cases pending the designation of a lead plaintiff.  Pursuant to the stipulation, within ten days following the entry of an order by the Court appointing a lead plaintiff and a lead plaintiff’s counsel, counsel for the defendants and the lead plaintiff are to confer and submit to the Court a proposed schedule for the filing of a consolidated amended complaint and the defendants’ response to that pleading.

The Hayes complaint purports to state claims for violations of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder by the Securities and Exchange Commission, declaratory relief, and state law claims for breach of fiduciary duty, brought by plaintiff on behalf of himself and all of our other public stockholders against our company and directors to remedy alleged misstatements of material information in the proxy statement disseminated by Chembio in advance of our Annual Meeting of Stockholders held on July 28, 2020, or the Annual Meeting. The Hayes plaintiff alleges that the Schedule 14A Proxy Statement we filed on June 16, 2020 with the Securities and Exchange Commission, or the Proxy Statement, in which we were soliciting stockholder approval of, inter alia, a proposal to change our state of incorporation from the State of Nevada to the State of Delaware  (the “Reincorporation Proposal”), contained misstatements of Nevada and Delaware law.  The Hayes plaintiff sought a declaration that the Proxy Statement was false and misleading and entry of an order enjoining the stockholder vote on the Reincorporation Proposal until such time as the Proxy Statement has been corrected as well as an order finding our directors liable for breaching their fiduciary duties and awarding plaintiff the costs and disbursements of the action, including attorneys’ and expert fees.  On July 8, 2020, we filed an amended proxy statement correcting, among other things, the issues raised in the Hayes complaint.  As a consequence of the supplementation, the plaintiff withdrew its motion for a preliminary injunction.  On July 23, 2020, weo and the plaintiff entered into a stipulation to the dismissal of the action, with prejudice as to the claims of the named plaintiff.  The stipulation was subject to plaintiff’s reservation of the right to apply for an award of attorneys’ fees and expenses from us within 45 days after entry of an order approving the stipulation in the event the parties are unable to reach agreement on plaintiff’s claim for entitlement to fees.  Also, on July 23, 2020, the plaintiff filed a notice dismissing the named plaintiff’s claims, with prejudice, as to the individual defendants.  On July 27, 2020, the Court entered an order closing the case and providing that plaintiff shall have until September 28, 2020 to move to reopen the case if the attorneys’ fee issue has not been resolved.

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This information is set forth under “Note 6(f) – Commitments, Contingencies and Concentrations – Litigation – Legal Proceedings” to the Accompanying Financial Statements and is incorporated herein by reference.
 
ITEM 1A.RISK FACTORS

Except as set forth below, there have been no material changes to the risk factors described in the section captioned “Item 1A. “Risk Factors” in Part I, Item 1A, “Risk Factors,”II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, as filed with the SEC on May 5, 2021, as amended and supplemented by the information in the section captioned “Item 8.01. Other Events—Risk Factors” in our 2019July 19 Form 10-K.8-K. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the sectionsections captioned “Item 1A. Risk Factors” in Part I, Item 1A, II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 and “Item 8.01. Other Events—Risk Factors,”Factors” in our 2019July 19 Form 10-K,8-K filed with the SEC on July 19, 2021, which factors could materially affect our business, financial condition or future results. Moreover, you should interpret many of the risks identified in our 2019 Form 10-Kthose sections as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. The risks described in our 2019 Form 10-Kthose sections and in this report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition, and/or operating results.

For purposes of the following risk factors, we refer to our DPP COVID-19 IgM/IgG Systems and DPP COVID-19 Antigen Systems collectively as DPP COVID-19 Systems.
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Risks Related to Our Business

We have refocused our business strategy to respond to COVID-19, which is a new and rapidly developing market, making it difficult to evaluate our business and future prospects.

The market for COVID-19 diagnostic testing is new and rapidly developing, which makes it difficult to evaluate our business and future prospects. We have encountered, and will continue to encounter, risks and difficulties frequently experienced in rapidly changing industries, including those related to:

Because of our liquidity limitations, we have concluded there is a substantial doubt about our ability to compete with companiescontinue as a going concern and we may require additional capital to fund our operations, which capital may not be available to us on acceptable terms or at all.

As described under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Substantial Doubt as to Going Concern Status,” and “—Liquidity and Capital Resources—General” and in note 2(a) to the Accompanying Financial Statements, management has determined we could not be certain that our plans and initiatives to increase our total revenues and improve our liquidity position would be effectively implemented within one year after the filing date of this report, when the Accompanying Financial Statements are currently in, or maybeing issued. Without giving effect to the prospect of raising additional capital pursuant to our at-the-market offering under the ATM Agreement, increasing product revenue in the near future enter, the market foror executing other mitigating plans, many of which are beyond our products;
our ability to control, costs, including our operating expenses;
our ability to successfully expand our business;
our ability to meet customer demand;
the amount and timing of operating expenses, particularly sales and manufacturing expenses, related to the maintenance and expansion of our business, operations and infrastructure; and
general economic and political conditions in our markets.

Given the unpredictable nature of the COVID-19 pandemic, the potential size of this market and the timing of its developmentit is highly uncertain. Our future success is dependent on the manner in which the market for COVID-19 diagnostics develops. If the market develops in a manner that does not facilitate the inclusion of our products, or fails to grow in the manner in which we expect, our business may not continue to grow.

We are allocating substantially all of our resources to the production of our DPP COVID-19 Systems for the foreseeable future, and our long-term business success could be negatively impacted by our diversion of resources from our legacy business of diagnostic testing for other infectious diseases.

We are committing substantially all of our financial and personnel resources to the development, manufacturing and commercialization of DPP COVID-19 Systems. This resource allocation may negatively impact our legacy product portfolio, as we expect to spend limited funds and time on updating pre-existing products and regulatory approvals or on completing products that were in development prior to our strategic decision to focus on DPP COVID-19 Systems. Our business could be negatively impacted by our allocation of significant resources to a global health threat that is unpredictable and could dissipate; there is no guarantee that current or anticipated demand will continue, or if demand does continue,unlikely that we will be able to produce in quantitiesgenerate sufficient cash flows to meet our required financial obligations, including our rent, debt service and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the demand.twelve-month period following the date of this report.

Our diagnostic test products require ongoing funding to continue our current development and operational plans and we have a history of net losses. We intend to reestablish our legacy business in the future, but there can be no assurance that we will be ablecontinue to successfully recommence the development and commercialization of our legacy products and products under development.

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Our near-term success is highly dependent on the success of our DPP COVID-19 Systems, and we cannot be certain that it will attain market acceptance or be successfully commercialized in the United States or elsewhere.

Even if we are able to obtain an EUA for either of our revised DPP COVID-19 Systems, that product may not gain broad market acceptance among physicians, healthcare payers, patients, and the medical community. We have conducted our own research into the markets for our product candidates, including our DPP COVID-19 Systems; however, we cannot guarantee market acceptance of our product, and have somewhat limited information on which to estimate our anticipated level of sales. Our products will require healthcare providers and doctors to accept and adopt our technology. Our industry is susceptible to rapid technological developments and there can be no assurance that we will be able to match any new technological advances. If we are unable to match the technological changes in the needs of our customers the demand for our products will be reduced. Acceptance and use of any products we market will depend upon a number of factors including:

perceptions by members of the health care community, including physicians, about the safety and effectiveness of our products;
limitation on use or warnings required by FDA in our product labeling;
cost-effectiveness of our products relative to competing products;
convenience and ease of administration;
potential advantages of alternative treatment methods;
availability of reimbursement for our products from government or other healthcare payers; and
effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any.

Because we expect virtually all of our product revenuesexpend substantial resources for the foreseeable future to be generated from salesin connection with the two significant customer purchase orders we received in July 2021 (see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Events—Customer Purchase Orders”), but we may encounter challenges in fulfilling our obligations, and therefore receiving revenue, under those purchase orders. See “—Because of our current productsliquidity and DPP COVID-19 Systems in particular,operational limitations, including the failureavailability of these products to find market acceptance would substantially harmstaffing and supply chain resources that are necessary but outside of our business and would adversely affect our revenue. If our DPP COVID-19 Systems are not as successfully commercialized as expected,control, we may not be able to generate sufficient revenuefulfill all of the requirements of customer purchase orders received in July 2021 without additional capital to become profitable. Any failure of eitherfund our operations, which capital may not be available to us on acceptable terms, or at all” below. We will also incur costs associated with research and development activity, corporate administration, business development, debt service, marketing and selling of our DPP COVID-19 Systems to be successfully commercialized in the United Statesproducts, and litigation. In addition, other unanticipated costs may have a material adverse effect on our business, operating result financial condition and cash flows, and could result in a substantial decline in the price of our common stock.

Our Revised DPP COVID-19 IgM/IgG System may not gain wide industry acceptance, and industry adoption of alternative technology could negatively impact our ability to compete successfully.

Of the 171 manufacturers and commercial laboratories to receive an EUA for COVID-19 diagnostics as of July 31, 2020, 35 were for serology tests, 134 were for molecular tests, and 2 were for antigen tests. Customers or the industry as a whole could adopt alternative technologies for testing, including molecular point-of-care testing, which could result in lower demand for our serological test. Various advances in the treatment and monitoring of patients could cause lower demand for our revised DPP COVID-19 IgM/IgG System or for serological testing for COVID-19 as a whole.

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The diagnostic testing market, particularly with respect to COVID-19, is highly competitive, and many of our competitors are larger, better established and have greater technical and marketing capabilities and financial and other resources than we have.arise.

The diagnostics market, particularly with respect to COVID-19 diagnostic tests, is highly competitive andAs of June 30, 2021, we had outstanding indebtedness of $20.0 million under the Credit Agreement. We may face substantial competition based on factors such as product quality, analytical performance, ease of use, price, customer service and reputation. Industry competition is also based the following additional factors:

patent protection;
scientific expertise;
ability to develop and market products and processes;
ability to obtain required regulatory approvals;
ability to manufacture cost-effective products that meet applicable regulatory requirements;
access to adequate capital; and
ability to attract and retain qualified personnel.

Numerous companies in the United States and internationally have announced their intention to offer new products, services and technologies that could be used in substitution for the DPP COVID-19 Systems. Many of those competitors are significantly larger, and have substantially greater financial, engineering and other resources, than us. In addition, our competitors may have or may develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Iffurther liquidity challenges if we are unable to compete effectively,meet obligations set forth in the Credit Agreement, including a financial covenant requiring that we may failachieve specified minimum total revenue amounts measured as of the end of each quarter. A breach of the minimum total revenue covenant or any other covenant in the Credit Agreement would result in a default under the Credit Agreement, which could enable the Lender to meet our strategic objectives,declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and our business, financial condition and operating results could be harmed. In addition,payable. We cannot assure you that, in such an event, we would have sufficient assets to pay amounts due under the production of an efficacious vaccine or other treatment for COVID-19 may reduce the demand for diagnostic products. The success or failure, or perceived success or failure, of other companies may adversely impact our ability to obtain any future funding, or to ultimately commercialize our DPP COVID-19 Systems.

TheCredit Agreement. See “The failure to comply with the terms of our Credit Agreement and Guaranty could result in a default under its terms and, if uncured, could result in action against our pledged assets and dilution of our stockholders.

On September 3, 2019, we entered into a Credit Agreement and Guaranty, or Credit Agreement, with Perceptive Credit Holdings II, LP, or Perceptive. Under the Credit Agreement, we received a $20,000,000 senior secured term loan credit facility, which was drawn in full on September 4, 2019. The credit agreement is secured by a first priority, perfected lien on substantially all of our property and assets, including our equity interests in our subsidiaries.

The Credit Agreement contains covenants that restrict our ability to finance future operations or capital needs or to engage in other business activities. The Credit Agreement restricts our ability and the ability of our restricted subsidiaries to:stockholders” below.

incur, assume or guarantee additional Indebtedness (as defined in the Credit Agreement);
repurchaseAs a result, we may need to raise capital stock;
make other restricted payments including, without limitation, paying dividends and making investments;
create liens;
sell or otherwise dispose of assets, including capital stock of subsidiaries;
enter into agreements that restrict dividends from subsidiaries;
enter into mergers or consolidations; and
enter into transactions with affiliates

The Credit Agreement provides for specified quarterly minimum consolidated net revenue covenants of us and our subsidiaries for the trailing twelve-month period ended on each such calculation date during the term of the Credit Agreement. The Credit Agreement also contains covenants requiring us and our subsidiaries to maintain cash and cash equivalents held in one or more accounts subjectdebt and/or equity offerings to fund our operations and obligations. There can be no assurance, however, that we will be successful in raising the necessary capital or that any such offering will be available to us on terms acceptable to us, or at all. If we are unable to raise additional capital that may be needed on terms in sufficient amounts or on terms acceptable to us, it could have a material adverse effect on our company. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue our deliveries under our outstanding customer purchase orders or the development or commercialization of one or more of our products or one or more of our other research and development initiatives. The outbreak of the COVID-19 pandemic has significantly disrupted world financial markets, negatively impacted U.S. market conditions and may reduce opportunities for us to seek out additional funding. A decline in the market price of our common stock, whether or not coupled with the suspension of trading of our common stock on the Nasdaq Capital Market, could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate, or at all.

Continuing doubt about our ability to continue as a going concern may materially and adversely affect the price of our common stock, and it may be more difficult for us to obtain financing. Any uncertainty about our ability to continue as a going concern may also adversely affect our relationships with current and future employees, suppliers, vendors, customers, grantors, creditors, regulators and investors, who may become concerned about our ability to meet our ongoing financial obligations. There is risk that, among other things:
third parties lose confidence in our ability to continue to operate in the ordinary course, which could impact our ability to execute on our business strategy;
it may become more difficult for us to attract, retain or replace employees;
employees could be distracted from performance of their duties;
we could lose some or a significant portion of our liquidity, either due to stricter credit terms from vendors, or, in the event we undertake a Chapter 11 proceeding and conclude that we need to procure debtor-in-possession financing, an inability to obtain any needed debtor-in-possession financing or to provide adequate protection to certain secured lenders to permit us to access some or all of our cash; and
our vendors and service providers could seek to renegotiate the terms of our arrangements, terminate their relationships with us or require financial assurances from us.
The Accompanying Financial Statements have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of this report. As such, the Accompanying Financial Statements do not include any adjustments relating to the first priority perfected security interestsrecoverability and classification of assets and their carrying amounts, or the lenders underamount and classification of liabilities that may result should we be unable to continue as a going concern.

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Because of our liquidity and operational limitations, including the Credit Agreementavailability of not less than $3,000,000. The breachstaffing and supply chain resources that are necessary but outside of any of these covenants would result in a default under the Credit Agreement. We failed to meet the specified quarterly minimum consolidated net revenue covenant for the quarter ended June 30, 2020, and we were required to obtain a waiver from Perceptive in order to avoid an event of default. If we fail to meet such covenant for a future quarter,our control, we may not be able to obtain a waiver from Perceptive,fulfill all of the requirements of customer purchase orders received in July 2021 without additional capital to fund our operations, which has total discretion in deciding whethercapital may not be available to grant a waiver,us on acceptable terms, or at all.

In July 2021 we received two customer purchase orders, or the July Orders, that we had been pursuing for an extended period of time. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Events—Customer Purchase Orders” above. Our delivery of the full number of tests covered by each of the July Orders may be affected by limitations of our supply chain, staffing and liquidity, including matters that are outside our control. We have established internal plans designed to maximize the number of tests we can deliver timely, or at all, pursuant to the July Orders, and we may incurexpect to continue to revise those plans as we obtain new information. The number of uncertainties related to third parties — including the availability of required personnel, raw materials and other resources — currently preclude us, however, from accurately estimating the extent to which we will be able to fulfill the July Orders on time and at an event of default. If an event of default occurs, Perceptive could electacceptable cost, or at all. Our ability to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we were unable to pay such amounts, Perceptive could proceed againstgenerate revenue from the collateral pledged to them. We have pledged our inventory, accounts receivable, cash, securities, other general intangiblesJuly Orders, and the capital stockmargins we can realize from that revenue, will depend on the availability and cost of certain subsidiarieshuman, material and other resources required to build and deliver tests in accordance with the lenders. In such an event, we cannot assure you that we would have sufficient assets to pay amounts due under the Credit Agreement.
July Orders.

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Shareholder litigationreceipt of significant purchase orders in 2021, during the first half of 2021 we continued to invest in automating our test manufacturing processes, all of which are now based in the United States, by, among other actions, validating and implementing automated lines to expand our manufacturing capabilities. We did not know, however, the number or mix of tests for which purchase orders might be received, and we now need to configure our automated manufacturing lines for the most efficient use feasible, subject to numerous personnel and other constraints, in producing the combination of DPP SARS-CoV-2 Antigen tests and HIV 1/2 STAT-PAK Assays contemplated by the July Orders. Our inability to quickly and successfully configure our automated manufacturing lines to produce high quality tests could negatively impact our business, operating resultsdelay the rate at which we can produce and financial condition.

We may incur additional costs in connection withdeliver tests pursuant to the defense or settlement of existingJuly Orders and any future shareholder litigation, including four shareholder lawsuits to date that have been brought against us. See Part II, Item 1. “Legal Proceedings” above for additional information regarding these lawsuits. These lawsuits or other future litigation maycould adversely affect the abilityprofitability of our technical and management personnel, and our directors, to perform their normal responsibilities. We could incur significant costs in connection with any such litigation lawsuits, including costs associated with the indemnification of obligations to our directors.those tests.

The number of tests to be delivered pursuant to the July Orders significantly exceeds the capacity of our automated manufacturing lines. We expect competition to with respect to testing solutions for COVID-19 to continuehave neither the time nor the resources to increase our automated manufacturing capacity meaningfully during the delivery schedules contemplated by the July Orders. We therefore will need to rely upon manual assembly processes to produce a significant portion of the tests deliverable under the July Orders and other orders, which will require that we successfully recruit, hire and train a significant number of personnel for employment at our success will depend on widespread market acceptance ofLong Island, New York facilities. Identifying, hiring and retaining assembly line, formulations, production, warehouse, quality control and other personnel for our products.

We expect competition to continue to increase as other established and emerging companies enter the market, as customer requirements evolve, and as new products, services and technologies are introduced. The entrance of new competitors is being encouraged by governmental authorities, which are offering funding to support development of testing solutions for COVID-19. Some of our existing or new competitors may have strong relationships with current and potential customers, including governmental authorities, and, as a result, may be able to respond more quickly to new or changing regulatory requirements, new or emerging technologies, and changes in customer requirements. Our products may not compete favorably, and we may not be successfulLong Island facilities at acceptable compensation levels has been challenging in the facepast, and those circumstances have been exacerbated by the continuing effects of increasing competitionthe COVID-19 pandemic, which may discourage potential employees from new productsreturning to a physical worksite at compensation levels that are acceptable to us, or at all. Our inability to identify and technologies introduced by ourhire assembly line personnel, and to manage turnover of currently existing competitors or new companies entering our markets. Any failure to compete effectivelyand newly hired personnel, could materially and adversely affectlimit our business, financial condition and operating results.ability to deliver tests under the July Orders, or at all.

Our useWe must obtain additional raw materials in order to manufacture tests to meet the requirements of third-party suppliers,the July Orders. Some raw materials require significant ordering lead time, and some of which may constitute our sole supply source, for certain important product components and materials presents risks that could have negative consequences for our business.

We purchase certain HIV antigens, a syphilis antigen, COVID-19 antigens, the nitrocellulose, and certain other critical components used in our STAT-PAK, STAT-VIEW, SURE CHECK and DPP product linesare currently obtained from a sole supplier or a limited numbergroup of sources. If for any reason thesesuppliers. It is possible that one or more of our suppliers may become unwilling or unable to supply our antigen, nitrocellulose, or other critical component needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, nitrocellulose or other critical components used in our products would require additional development work and approval by the FDA and other regulatory agencies. In addition, itdeliver materials to us. It may be difficult to find such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. As a result, the termination or limitation of our relationship with one or more of these suppliers could require significant time to complete, increase our costs, and disrupt or discontinue our ability to manufacture and sell the affected products. In addition, governmental purchasers or funding programs in a particular country may require that we purchase key components from suppliers in that country, which could significantly limit our ability to obtain the components with the quality, and at the price, we seek.

With some of these suppliers, we do not have long-termlong term agreements and instead purchase components and materials through a purchase order process. As a result, these suppliers may stop supplying us components and materials, limit the allocation of supply and equipment to us due to increased industry demand, or significantly increase their prices at any time with little or no advance notice. Our reliance on a limited number of suppliers could also result in delivery problems, reduced control over product pricing and quality, and our inability to identify and qualify another supplier in a timely manner.

Moreover, someWe currently are seeking to schedule deliveries of these suppliers may experience financial difficultiesraw materials required in connection with the July Orders, but we are early in that process given that we could prevent them from supplying us with components or subassemblies usednot begin arranging for supply deliveries until we received the order commitments reflected by the July Orders. Any shortfall in the designsupply of raw materials, or our inability to quickly and manufacturecost effectively obtain alternative sources for this supply, could have a material adverse effect on our ability to produce tests for delivery under the July Orders. Even if we succeed in arranging to obtain needed raw materials, our receipt of those raw materials may be significantly delayed by the suppliers’ production schedules. For example, we have been advised by one of our products. In addition, thesesole source suppliers may experience manufacturing delays or shut downsbased in Europe that the supplier will not be able to begin forecasting a delivery schedule for our purposes until the latter half of August, due to circumstances beyond their control, such as complications relatedthe supplier being closed for a scheduled shutdown during the first half of August and that, in any event, due to COVID-19, labor issues, political unrest or natural disasters.

existing orders the supplier might not be able to begin deliveries to us for a number of weeks thereafter. Any supply chain deficiencies could materially and adversely affect our ability to fulfill customer orders and our results of operations.the July Orders. The availability of critical components andraw materials from sole-sole or limited source suppliers could reduce our control over pricing, quality and timely delivery, increase our costs, couldand disrupt, or even preclude, our ability to manufacture and sell and preclude us from manufacturing and selling, certain of our products into onetests pursuant to the July Orders. Our inability to obtain required raw materials, or more markets. Any such eventa significant delay in receiving those raw materials, could have a material adverse effect on our resultstotal revenues, cost of operations,sales and related margin as well as our cash flow and business.

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The COVID-19 pandemic could continue to spread rapidly and affect our suppliers and employees, and cause disruptions in current and future plans for operations and expansion.

The COVID-19 pandemic may directly and indirectly adversely impact our business, financial condition and operating results. The extent to which this will continue will depend on numerous evolving factors that are highly uncertain, rapidly changing and cannot be predicted with precision or certainty at this time.flow.

Our businessBecause of the foregoing factors and considerations, we may be disrupted dueunable to timely deliver a significant number of the costs incurred as a result of additional necessary actions and preparedness plans to help ensure the health and safety of our employees and continued operations, including enhanced cleaning processes, protocols designed to implement appropriate social distancing practices, and/or adoption of additional wage and benefit programs to assist employees. We may also have difficulty meeting demand for our products if our employees are affected by COVID-19, or if we do not have adequate space to produce our product with social distancing practices implemented. We also cannot predict the effect of COVID-19 pandemic on our supply chain’s reliability and costs,

In addition, our business and operations, and the operations of our suppliers, may be adversely affectedtests required by the COVID-19 pandemic. The pandemic, including the related response, could cause disruptions due to potential suspension or slowdown of activities at our third-party suppliers, or increased prices implemented by our suppliers. The adverse effect on our employees or suppliers could have an adverse impact on our business, results of operations and financial condition.

We base our estimates or judgments relating to critical accounting policies on assumptions that can change or prove to be incorrect.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States and our discussion and analysis of financial condition and results of operations is based on such statements. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We continuously evaluate significant estimates used in preparing our financial statements, including those related to (i) revenue recognition, including uncertainties related to variable consideration and milestones; (ii) stock-based compensation; (iii) allowance for uncollectible accounts receivable; (iv) inventory reserves and obsolescence; (v) customer sales returns and allowances; (vi) contingencies; and (vii) income taxes, (viii) goodwill and intangibles, (ix) business acquisition, and (x) research and development costs.

For example, for the quarter ended June 30, 2020, our cost of product sales included the cost of COVID-19 systems that were produced and shipped outside the U.S., but forJuly Orders, which revenue was not recognized in the quarter. We decided we were unable to recognize the revenue from those shipments in the second quarter due to the GAAP requirement that we have a high degree of confidence that it is probable that a significant reversal in revenue will not occur in the future. Many factors can affect such a decision, including, for example, actions of third parties and other considerations that are outside our influence or control. As a result, we recognized negative gross margin in the quarter.

Our estimates are based on historical experience and various other assumptions that we believe to be reasonable, as set forth in our discussion and analysis of financial condition and results of operations, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these and other estimates if our assumptions change or if actual circumstances differ from those in our assumptions. If our operating results fall below the expectations of securities analysts and investors, the price of our Common Stock may decline.

We are subject to governmental export controls that couldwould impair our ability to compete in international markets.

The United Statesachieve desired profit margins and various foreign governments have imposed controls, export license requirements and restrictions on the export of certain products and technologies. We must export our products in compliance with export controls in the United States, including the Commerce Department’s Export Administration Regulations and various economic and trade sanctions established by the Treasury Department’s Office of Foreign Assets Controls. We may not always be successful in obtaining necessary export licenses, and our failure to obtain required import or export approval for our products or limitations on our ability to export or sell our products imposed by these laws may harm our international and domestic sales and adversely affect our revenue. Noncompliance with these laws could have negative consequences, including government investigations, penalties and reputational harm.

If the United States government imposes restrictions on the export of DPP COVID-19 Systems, or any of our other products, such restrictions could have a material impact on our ability to sell our products to existing or potential customers outside of the United States and harm our ability to compete internationally. Any change in export regulations or legislation, or change in the countries, persons or technologies targeted by export regulations, could decrease our ability to export or sell our products outside the United States or to existing or potential customers with international operations. Changes in our ability to sell our products outside the United States could negatively impact our business prospects and adversely affect our business and results of operations.

Third-party reimbursement policies and potential cost constraints could negatively affect our business.

The potential end-users of our products include hospitals, physicians and other healthcare providers. If these end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors, the use of our products could be negatively impacted. Furthermore, the net sales of our products could also be adversely affected by changes in reimbursement policies of government or private healthcare payors.

Hospitals, physicians and other healthcare providers who purchase diagnostic products in the United States generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product. Due to the overall escalating cost of medical products and services, especially in light of the COVID-19 outbreak and its straining of healthcare systems across the globe, there is increased pressure on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States, available levels of reimbursement may change for our existing products or products under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for our products or our ability to sell our products on a profitable basis.

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Risks Related to Regulations

COVID-19 diagnostic tests, including our DPP COVID-19 Systems, are subject to changes in CLIA, FDA, ANVISA and other regulatory requirements.

Our DPP COVID-19 Systems are subject to regulations of the U.S. Food and Drug Administration, or FDA, International Organization for Standards and other regulatory requirements, including Agência Nacional de Vigilância Sanitária or ANVISA, Brazil’s health regulatory agency. The regulations regarding the manufacture and sale of  DPP COVID-19 Systems may be unclear and are subject to change. Newly promulgated regulations could require changes to DPP COVID-19 Systems, necessitate additional procedures, or make it impractical or impossible for us to market DPP COVID-19 Systems for certain uses, in certain markets, or at all. The FDA and other regulatory authorities also have the ability to impose new or additional requirements relating to DPP COVID-19 Systems. The implementation of such changes or new or additional requirements may result in a substantial additional costs and could delay or make it more difficult or complicated to sell our products.

The FDA issued, and then revoked, an Emergency Use Authorization, or EUA, for emergency use of the DPP COVID-19 IgM/IgG System. Such revocation precludes the sale of DPP COVID-19 IgM/IgG Systems in the United States unless and until a further regulatory approval or authorization is obtained. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations.

We are currently working to obtain EUAs for our DPP COVID-19 IgM/IgG Systems and approvals for waived statuses under CLIA, which would permit any laboratory with a Certificate of Waiver, including physician offices and urgent care clinics, to perform the tests. The time required to obtain marketing authorizations and other approvals from regulatory authorities is unpredictable. The standards that the FDA and its foreign counterparts use when evaluating clinical trial data can change, and does often change, during development, which makes it difficult to predict with any certainty how they will be applied. We may also encounter unexpected delays or increased costs due to new government regulations, including future legislation or administrative action, or changes in FDA policy during the period of FDA regulatory review.

Because we may not be able to obtain or maintain the necessary regulatory approvals for some of our products, we may not generate revenues in the amounts we expect, or in the amounts necessary to continue our business. Our existing products as well as our manufacturing facilities must meet quality standards and are subject to inspection by a number of domestic regulatory and other governmental and non-governmental agencies, as well as certain customers.

All of our proposed and existing products are subject to regulation in the U.S. by the U.S. Food and Drug Administration or FDA, the U.S. Department of Agriculture, and/or other domestic and international governmental, public health agencies, regulatory bodies or non-governmental organizations. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products. The process of obtaining required approvals or clearances varies according to the nature of, and uses for, a specific product. These processes can involve lengthy and detailed laboratory testing, human or animal clinical trials, sampling activities, and other costly, time-consuming procedures. The submission of an application to a regulatory authority does not guarantee that the authority will grant an approval or clearance for that product. Each authority may impose its own requirements and can delay or refuse to grant approval or clearance, even though a product has been approved in another country.

The time taken to obtain approval or clearance varies depending on the nature of the application and may result in the passage of a significant period of timecash flow from the date of submission of the application. As an example, the time required to obtain an Emergency Use Authorization, or EUA, from the FDA for COVID‑19 tests has lengthened markedly over the past months due to, among other things, application volume. Delays in the approval or clearance processes increase the risk that we will not succeed in introducing or selling the subject products, and we may determine to devote our resources to different products.

Changes or developments in government regulations, policies or interpretations could increase our costs and could require us to undergo additional trials or procedures, or could make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. For example, on June 16, 2020, the FDA revoked the EUA it had granted for our DPP COVID-19 IgM/IgG System based in part on performance criteria identified after the Emergency Use Authorization was granted on April 14, 2020. Moreover, FDA regulations, policies and procedures with respect to COVID-19 tests may be significantly impacted by the future development of one or more proposed vaccines for COVID-19.

Changes in government regulations may adversely affect our financial condition and results of operations because we may have to incur additional expenses if we are required to change or implement new testing, manufacturing and control procedures.Purchase Orders. If we are requiredunable to devote resources to develop such new procedures, we may not have sufficient resources to devote to research and development, marketing, or other activities that are critical to our business. We are, for example, expending resources to modifytimely meet the design of our DPP COVID-19 IgM/IgG System to achieve performance targets consistent with the FDA’s performance criteria issued subsequent to the granting of our original EUA.

We can manufacture and sell our products only if we comply with regulations and quality standards established by government agencies such as the FDA and the U.S. Department of Agriculture as well as by non-governmental organizations such as the ISO and WHO. We have implemented a quality control system that is intended to comply with applicable regulations. Although FDA approval is not required for the export of our products, there are export regulations promulgated by the FDA that specifically relate to the export of our products that require compliance with FDA QSRs and that also require meeting certain documentary requirements regarding the approval of the product in export markets. We also may be subject to import regulations in connection with international sourcing of components and materials incorporated in the manufacturing of our products.

If we do not comply with FDA or other regulatory requirements, we may be required to suspend production or sale of our products or institute a recall, which could result in higher costs and a loss of revenues.

Regulations of the FDA and other federal, state and foreign regulatory agencies have significant effects on many aspects of our operations, and the operations of our suppliers and distributors, including packaging, labeling, manufacturing, adverse event reporting, recalls, distribution, storage, advertising, promotion and record keeping. We are subject to routine inspection by the FDA and other agencies to determine compliance with QSRs and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. We believe that our facilities and procedures are in material compliance with the FDA requirements and ISO standards, but the regulations may be unclear and are subject to change, and we cannot be sure that the FDA or other regulators will agree with our compliance with these requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products. Regulatory agencies may impose restrictions on our or our distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market.

Our inability to comply with the applicable requirements of the FDA can resultJuly Orders, it could harm our relationships with our customers and impair our reputation within the industry, which, in among other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, recall or seizure of products, civil penalties, withdrawal of product registrations, total or partial suspension of production, refusal to grant premarket clearance for devices, a determination that a device is not approvable, marketing clearances or approvals, or criminal prosecution. For example, in February 2020, we received a “not approvable” letter from the FDA with respect to our premarket approval submission on our DPP HIV-Syphilis multiplex test for commercial use in the United States and in June 2020 we received notice from the FDA that the EUA for our DPP COVID-19 IgM/IgG System had been revoked. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations.

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We must frequently make judgment decisions with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with how we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. Our reputation could be substantially impaired if we are assessed any civil and criminal penalties and limit our ability to manufacture and market our products whichturn, could have a material adverse effect on our business. Moreover, in the event we do not timely deliver tests under the July Orders, the customers, including Bio-Manguinhos, could choose to purchase products from our competitors with whom our customers already have existing business relationships, which competitors may have greater technical, financial and other resources than we have. Under the July Order with Bio-Manguinhos, the initial tranche of tests were due to be delivered in July 2021, and our inability to timely deliver those or future tests due to delays in converting automated manufacturing assembly, hiring additional personnel or obtaining need raw materials could impair our ability to meet the minimum total revenue covenant under the Credit Agreement for the twelve months ended September 30, 2021 or thereafter.

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As a result of the foregoing, we may need to raise additional funds pursuant to the ATM Agreement or through other debt or equity financings, strategic relationships, or other arrangements. There can be no assurance that we would be able to complete any proposed financing on terms acceptable to us, or at all, or that we otherwise will be successful in any of our other endeavors to continue to be financially viable and continue as a going concern. Our inability to respond to changes in regulatory requirements could adversely affect our business.

We believe that our existing products and procedures are in material compliance with all applicable FDA regulations, ISO requirements, and other applicable regulatory requirements, but the regulations regarding the manufacture and sale of our products, the QSR and ISO requirements, and other requirements may be unclear and are subject to change. Newly promulgated regulations could require changes to our products, necessitateraise additional clinical trials or procedures, or make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory authorities also have the ability to change the requirements for obtaining product approval and/or impose new or additional requirements as part of the approval process. These changes or new or additional requirements may occur after the completion of substantial clinical work and other costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain approvals and sell our products. In addition, the FDA may revoke an Emergency Use Authorization under which our products are sold, where it is determined that the underlying health emergency no longer exists or warrants such authorization. Such revocation would preclude the sale of our affected products unless and until a further regulatory approval or authorization is obtained. For example, For example,capital on June 16, 2020, the FDA revoked the EUA it had granted for our DPP COVID-19 IgM/IgG System based in part on performance criteria identified after the Emergency Use Authorization was granted on April 14, 2020, and since that time we have been expending resources to modify the design of our DPP COVID-19 IgM/IgG System to achieve performance targets consistent with the FDA’s performance criteria. We cannot anticipate or predict the effect, if any, that these types of changes might have on our business, financial condition or results of operations.

Demand for our products may be affected by FDA regulation of laboratory-developed tests and genetic testing.

Regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical laboratories is covered by the FDA, including our Micro Reader analyzer. The FDA has previously taken the position that it has regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion by not regulating most LDTs performed by high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. These laboratories are subject to CLIA regulation but such laboratories have previously not been subject to regulation by the FDA under the agency’s medical device requirements.

However, the FDA has announced that it would begin regulating LDTs, and in October 2014 the FDA issued proposed guidance on the regulation of LDTs for public comment. But, on November 18, 2016, the FDA announced that it would not finalize the proposed guidance prior to the end of the Obama administration. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. We cannot predict what policies the Trump administration will adopt with respect to LDTs. If the FDA increases regulation of LDTs, it could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could reduce demand for our products and adversely impact our revenues.

Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products from being developed, cleared, approved, authorized, or commercialized in a timely manner or at all, which could negatively impact our business.

The ability of the FDA to review and clear, approve, or authorize new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also slow the time necessary for medical devices or modifications to be cleared or approved, medical devices to be reviewed and/or approved by necessary government agencies, which would adversely affect our business.  For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.

Separately, in response to the global COVID-19 pandemic, on March 10, 2020 the FDA announced its intention to postpone most foreign inspections of manufacturing facilities and products, and subsequently, on March 18, 2020, the FDA announced its intention to temporarily postpone routine surveillance inspections of domestic manufacturing facilities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, whichacceptable terms could have a material adverse effect on our business.business, prospects, results of operations, liquidity and financial condition.

The failure to comply with the terms of the Credit Agreement could result in a default under its terms and, if uncured, could result in action against our pledged assets and dilution of our stockholders

On September 3, 2019, we and certain of our subsidiaries, as guarantors, entered into the Credit Agreement, under which we received a $20,000,000 senior secured term loan credit facility that was drawn in full on September 4, 2019. The Credit Agreement is secured by a first priority, perfected lien on substantially all of our property and assets, including our equity interests in our subsidiaries. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources of Funds—Credit Agreement.”

The Credit Agreement also contains financial covenants requiring that we (a) maintain aggregate unrestricted cash of not less than $3,000,000 at all times, which must be held in one or more accounts subject to the first priority perfected security interests of the Lender under the Credit Agreement, and (b) achieve specified minimum total revenue requirements for the twelve months preceding each quarter end. The minimum total revenue amounts over the next year increase from $37.4 million for the twelve months ending September 30, 2021 to $43.8 million for the twelve months ending June 30, 2022 (see note 7 to the condensed consolidated financial statements included elsewhere herein). These minimum revenue requirements were developed for purposes of the Credit Agreement and do not reflect the internal estimates and plans used by our management and board of directors to establish operational goals for managing our business. The minimum revenue requirements for the twelve months ending September 30, 2021 do not, for example, take into account the challenges we are facing during the three months ending September 30, 2021 in ramping up production, including hiring personnel and obtaining commitments from our supply chain as described above in “Because of our liquidity and operational limitations, including the availability of staffing and supply chain resources that are necessary but outside of our control, we may not be able to fulfill all of the requirements of customer purchase orders received in July 2021 without additional capital to fund our operations, which capital may not be available to us on acceptable terms, or at all.”

In addition, the Credit Agreement contains covenants that restrict our ability to finance future operations or capital needs or to engage in other business activities. The Credit Agreement restricts the ability of Chembio and its restricted subsidiaries to:
incur, assume or guarantee additional Indebtedness (as defined in the Credit Agreement);
repurchase capital stock;
make other restricted payments, including paying dividends and making investments;
create liens;
sell or otherwise dispose of assets, including capital stock of subsidiaries;
enter into agreements that restrict dividends from subsidiaries;
enter into mergers or consolidations; and
enter into transactions with affiliates.

A breach of the minimum total revenue covenant or any other covenant in the Credit Agreement would result in a default under the Credit Agreement. If an event of default under our Credit Agreements occurs, the Lender could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we were unable to pay such amounts, the Lender could proceed against the collateral pledged to them. We have pledged substantially all of our assets, including our inventory, accounts receivable, cash, securities, other general intangibles and the capital stock of certain subsidiaries, to the Lender. We cannot assure you that, in such an event, we would have sufficient assets to pay amounts due under the Credit Agreement.

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You may experience future dilution as a result of Contentsfuture equity offerings, exercises of outstanding options and vesting of restricted stock units.
On July 19, 2021, we entered into the ATM Agreement, pursuant to which we may sell from time to time, at our option, up to an aggregate of $60,000,000 of shares of common stock through Craig Hallum, as sales agent. To date, we have issued and sold pursuant to the ATM Agreement a total of 8,323,242 shares of common stock at a volume-weighted average price of $4.4303 per share for gross proceeds of approximately $36.9 million and net proceeds, after giving effect to placement fees and other estimated transaction costs, of approximately $35.6 million. For additional information about the at-the-market offering pursuant to the ATM Agreement, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Events—At-the-Market Offering of Common Stock” in Part I of this report.

In order to raise additional capital, we may seek to offer pursuant to the ATM Agreement additional shares of common stock for up to approximately $23.1 million in gross proceeds and we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock. There can be no assurance that we will be able to sell additional shares in the at-the-market offering made pursuant to the ATM Agreement, or in any other offering, at a price per share that is equal to or greater than the price per share paid by existing stockholders. Investors purchasing securities in other offerings in the future could have rights superior to existing stockholders.

As of the close of business on August 3, 2021, our market capitalization was approximately $61 million, and as a result existing stockholders may experience significant dilution in connection with our issuance and sale of up to $23.1 million of additional shares of common stock pursuant to the ATM Agreement. In addition, as of June 30, 2021, 2,502,911 shares of common stock were reserved for future issuance under our 2019 Omnibus Incentive Plan, 1,867,045 shares were subject to outstanding options, and 802,947 shares were subject to outstanding restricted stock units. Stockholders will incur dilution upon vesting of restricted stock units, and they may incur dilution upon exercises of stock options.

The volatility of our common stock and stockholder base may hinder or prevent us from engaging in beneficial corporate initiatives.

Our stockholder base is comprised of a large number of retail, or non-institutional, investors, which creates more volatility because our common stock may change hands more frequently. In accordance with our governing documents and applicable laws, there are a number of initiatives that require the approval of stockholders at an annual or special meeting. To hold a valid meeting, a quorum comprised of stockholders representing a majority of the voting power of our outstanding shares of capital stock is necessary. A record date is established to determine which stockholders are eligible to vote at the meeting, which record date must be not more than sixty days or less than ten days prior to the meeting. Since our stock changes hands frequently, there can be a significant turnover of stockholders between the record date and the meeting date, which makes it harder to get stockholders to vote. While we make every effort to engage retail investors, such efforts can be expensive and the resulting frequent turnover can create logistical issues. Further, retail investors tend to be less likely to vote in comparison to institutional investors. Failure to secure sufficient votes or to achieve the minimum quorum needed for a meeting to happen may impede our ability to move forward with initiatives that are intended to grow the business and create stockholder value or prevent us from engaging in such initiatives at all. If we find it necessary to delay or adjourn meetings or to seek approval again, it will be time consuming and we will incur additional costs.

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ITEM 6.EXHIBITS

Number Description
1.1
Underwriting Agreement dated May 7, 2020 between Chembio Diagnostics, Inc. and Robert W. Baird & Co. Incorporated, as representative of the several underwriters named therein
10.1†3.1
 Amendment No. 1 to Amended and Restated Bylaws of Chembio Diagnostics, Inc.
10.1
At the Market Offering Agreement, dated June 16, 2020, to the letter agreement dated January 17, 2020July 19, 2021, between Chembio Diagnostics, Inc. and Gail S. Page
Craig-Hallum Capital Group LLC10.2†‡
Letter agreement dated June 15, 2020 between Chembio Diagnostics, Inc. and Gail S. Page
10.3†
Amendment No. 1, dated June 30, 2020, (incorporated by reference to the letter agreement dated June 15, 2020 between Chembio Diagnostics, Inc. and Gail S. Page
Exhibit 10.1 to Current Report on Form 8-K filed on July 19, 2021)
31.1
 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*32.1†
 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
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Label Linkbase Document
101.PRE Inline XBRL Taxonomy Presentation Linkbase Document
104 Cover page formatted as Inlineinteractive date file (embedded within the XBRL and contained in Exhibit 101

†Indicates management contract or compensatory plan or arrangement.
*The certifications attached as Exhibit 32.1 accompany the Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
‡Certain sensitive personally identifiable information in this exhibit was omitted by means of redacting a portion of the text and replacing it with [***].document)

†
The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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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.
  
Date: August 7, 20209, 2021By: /s/ Richard L. Eberly
 Richard L. Eberly
 Chief Executive Officer and President
  
Date: August 7, 20209, 2021By: /s / Neil A. Goldman
 Neil A. Goldman
 Chief Financial Officer and Executive Vice President



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