| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: a) Basis of Presentation: The preceding (a) condensed consolidated balance sheet as of December 31, 2017, which has been derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements as of September 30, 2018 and for the three- and nine-month periods ended September 30, 2018 and 2017, respectively, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to provide for fair presentation. The interim financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, previously filed with the SEC on March 8, 2018. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s condensed consolidated financial position as of September 30, 2018, its condensed consolidated results of operations for the three- and nine-month periods ended September 30, 2018 and 2017, and its condensed consolidated cash flows for the nine-month periods ended September 30, 2018 and 2017, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods. b) Revenue Recognition: In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with customers, Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers The new revenue standards became effective for the Company on January 1, 2018 and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any material accounting changes that impacted the amount of reported revenues with respect to its product revenue, license and royalty revenue, and R&D, milestone and grant revenues, no adjustment to retained earnings was required upon adoption. The Company adopted the standards to contracts that were not completed at the date of initial application (January 1, 2018). Under the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligation. Product Revenues Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon tendering to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial. Freight and distribution activities on products are performed after the customer obtains control of the goods. The Company has made an accounting policy election to account for shipping and handling activities that occur either when or after goods are tendered to the customer as a fulfillment activity, and therefore recognizes freight and distribution expenses in Cost of Product Sales. Reserves for Discounts and Allowances Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers. The Company’s process for estimating reserves established for these variable consideration components does not differ materially from its historical practices. Product revenue reserves, which are classified as a reduction in product revenues, are generally related to discounts. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based on all information (historical, current and forecasted) that is reasonably available to the Company, taking into consideration the type of customer, the type of transaction and the specific facts and circumstances of each arrangement. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from the Company’s estimates. If actual results vary, the Company adjusts these estimates, which could have an effect on earnings in the period of adjustment. Royalty Revenues The Company receives royalty revenues on sales by its licensees of products covered under patents that it owns. The Company does not have future performance obligations under these license arrangements. The Company records these revenues based on estimates of the sales that occurred during the relevant period as a component of license and royalty revenues. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical royalties that have been paid to the Company, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. Historically, adjustments have not been material when compared to actual amounts paid by licensees. R&D, milestone and grant revenue All such contracts are evaluated under the five-step model described above. For certain contracts that represent grants where the funder does not meet the definition of a customer, the Company recognizes revenue when earned. Such contracts are further described under Disaggregation of Revenue The Company follows the recognition of revenue under the milestone method for certain collaborative research projects defining milestones at the inception of the agreement. Disaggregation of Revenue In August 2016, the Company was awarded a grant of $5.9 million from BARDA, which is part of the U.S. Department of Health and Human Resources, to develop a rapid Zika virus assay. The Company earned $0.3 million and $1.5 million during the three and nine months ended September 30, 2018, respectively as R&D, milestone and grant revenue in the Condensed Consolidated Statements of Operations. In September 2016, the Company was awarded a $0.7 million contract from the U.S. Department of Agriculture to develop a Bovid TB assay. The Company earned $20,000 and $0.2 million during the three and nine months ended September 30, 2018, respectively, as R&D, milestone and grant revenue in the Condensed Consolidated Statements of Operations. The following table disaggregates Total Revenues for the three and nine months ended September 30, 2018: For the three months ended For the nine months ended Exchange Transactions Non-Exchange Transactions Total Exchange Transactions Non-Exchange Transactions Total Net product sales $ 7,856,038 $ - $ 7,856,038 $ 21,112,126 $ - $ 21,112,126 License and royalty revenue 228,553 - 228,553 707,010 - 707,010 R&D, milestone and grant revenue 960,332 331,870 1,292,202 2,328,058 1,667,057 3,995,115 $ 9,044,923 $ 331,870 $ 9,376,793 $ 24,147,194 $ 1,667,057 $ 25,814,251 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 December 31, 2017, the Company reported $50,000 in deferred revenue of which $50,000 was earned and recognized as R&D, milestone and grant revenue during the nine months ended September 30, 2018, respectively. c) Inventories Inventories September 30, 2018 December 31, 2017 Raw materials $ 2,750,356 $ 1,767,684 Work in process 780,114 286,413 Finished goods 2,447,956 2,369,521 $ 5,978,426 $ 4,423,618 Inventories are stated at the lower of cost and net realizable value. There were reserves against inventory of approximately $67,000 and $195,000 as of September 30, 2018 and December 31, 2017, respectively. d) Loss Per Share: Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share for the three- and nine-month periods ended September 30, 2018 and 2017 reflects the potential dilution from the exercise or conversion of other securities into common stock, if dilutive. There were 693,116 and 699,663 weighted-average number of options outstanding as of September 30, 2018 and 2017, respectively, that were not included in the calculation of diluted per common share equivalent for the three months ended September 30, 2018 and 2017 respectively, because the effect would have been anti-dilutive. There were 709,042 and 668,510 weighted-average number of options outstanding as of September 30, 2018 and 2017, respectively, that were not included in the calculation of diluted per common share equivalent for the nine months ended September 30, 2018 and 2017 respectively, because the effect would have been anti-dilutive. e) Stock Incentive Plan: Effective June 3, 2008, the Company’s stockholders voted to approve the 2008 Stock Incentive Plan (“SIP”), with 625,000 shares of Common Stock available to be issued. At the Annual Stockholder meeting on September 22, 2011, the Company’s stockholders voted to approve an increase to the shares of Common Stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, which expired in 2018, the Compensation Committee of the Company’s Board had the discretion to select the persons to whom awards are to be granted. Awards could be stock options, restricted stock and/or restricted stock units (‘Equity Award Units”). The awards became vested at such times and under such conditions as determined by the Compensation Committee. As of September 30, 2018, there were 508,889 options exercised, 99,132 options outstanding and no options still available to be issued under the SIP. Effective June 19, 2014, the Company’s stockholders voted to approve the 2014 Stock Incentive Plan (“SIP14”), with 800,000 shares of common stock available to be issued. Under the terms of the SIP14, the Compensation Committee of the Company’s Board of Directors 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 Compensation Committee. As of September 30, 2018, 85,407 shares of common stock had been issued pursuant to the exercise of options granted under the SIP14, options to purchase 405,968 shares of common stock were outstanding and 332,224 shares of common stock were available to be issued pursuant to Equity Award Units granted under the SIP14. S For the three months ended For the nine months ended September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017 Cost of product sales $ 5,800 $ 12,800 $ 19,800 $ 34,200 Research and development expenses 3,600 12,100 19,000 77,300 Selling, general and administrative expenses 65,400 62,200 260,200 185,200 $ 74,800 $ 87,100 $ 299,000 $ 296,700 Stock option compensation expense in each of the periods presented represents the estimated fair value of options outstanding, amortized on a straight-line basis over the requisite vesting periods of the entire awards. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of the Company’s common stock and other contributing factors. The expected term is based on the Company’s historical experience with similar type options. The weighted-average assumptions made in calculating the fair values of options are as follows: For the three months ended For the nine months ended September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017 Expected term (in years) 4.5 4.5 4.9 4.8 Expected volatility 39.69 % 41.22 % 39.91 % 43.01 % Expected dividend yield 0 % 0 % 0 % 0 % Risk-free interest rate 2.70 % 1.48 % 2.70 % 1.54 % The following table provides stock option activity for the nine months ended September 30, 2018: Stock Options Number of Shares Weighted Average Exercise Price per Share Weighted Average Remaining Contract Term Aggregate Intrinsic Value Outstanding at December 31, 2017 810,670 $ 5.18 3.69 years $ 2,477,853 Granted 93,750 9.80 - Exercised 144,947 4.83 523,527 Forfeited/expired/cancelled 47,505 8.82 - Outstanding at September 30, 2018 711,968 $ 5.62 3.58 years $ 3,520,084 Exercisable at September 30, 2018 343,113 $ 4.33 2.51 years $ 2,126,832 The following table summarizes information about stock options outstanding at September 30, 2018: 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 - - $ - $ - - $ - $ - 2.8 to 4.59999 304,343 2.15 3.45 2,145,916 254,343 3.46 1,791,731 4.6 to 6.39999 152,875 3.69 5.85 710,662 58,020 5.80 272,870 6.4 to 8.19999 207,875 5.31 7.31 663,506 21,375 7.59 62,231 8.2 to 12 46,875 4.85 11.45 - 9,375 11.45 - Total 711,968 3.58 $ 5.62 $ 3,520,084 343,113 $ 4.33 $ 2,162,832 As of September 30, 2018, there was $790,321 of net unrecognized compensation cost related to stock options that are not vested, which is expected to be recognized over a weighted average period of approximately 2.64 years. The total fair value of shares vested during the nine-month periods ended September 30, 2018 and 2017 was $379,384 and $323,113, respectively. f) Geographic Information and Economic Dependency The Company produces only one group of similar products known collectively as “rapid medical tests”, and it operates in a single business segment. Net product sales by geographic area were as follows: For the three months ended For the nine months ended September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017 Africa $ 3,064,034 $ 965,606 $ 6,929,104 $ 1,797,285 Asia 211,261 93,101 1,201,182 1,637,065 Europe & Middle East 716,030 401,730 1,743,680 1,441,890 Latin America 3,115,811 3,556,815 9,071,994 6,701,923 United States 748,902 1,115,473 2,166,166 2,874,934 $ 7,856,038 $ 6,132,725 $ 21,112,126 $ 14,453,097 g) Fair Value of Financial Instruments: The carrying value for cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair value of the Company’s note payable approximates the recorded value as the rate is based upon the current rates offered to the Company for similar financial instruments. h) Accounts Payable and Accrued Liabilities: Accounts payable and accrued liabilities consist of: September 30, 2018 December 31, 2017 Accounts payable – suppliers $ 4,199,275 $ 1,494,759 Accrued commissions 451,741 126,827 Accrued royalties / license fees 667,207 429,297 Accrued payroll 285,233 187,305 Accrued vacation 404,933 309,767 Accrued bonuses 494,340 282,500 Accrued expenses – other 295,871 215,848 TOTAL $ 6,798,600 $ 3,046,303 i) Goodwill and Intangible Assets: Goodwill represents the excess of the purchase price the Company paid over the fair value of the net tangible and identifiable intangible assets acquired in its acquisition of CDM in January 2017. Goodwill is not amortized but rather is tested annually as of the first day of the fiscal fourth quarter for impairment or more frequently if the Company believes that indicators of impairment exist. The Company makes a qualitative evaluation about the likelihood of goodwill impairment, which is based on a number of applicable factors. If the Company concludes that it is more likely than not that the carrying value of the applicable reporting unit is greater than its fair value, then the Company recognizes an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. There was no impairment recorded for the nine months ended September 30, 2018. Following is a table that reflects changes in Goodwill: Beginning balance December 31, 2017 $ 1,666,610 Change in foreign currency exchange rate (37,746 ) Balance at September 30, 2018 $ 1,628,864 In addition, the Company recorded certain intangible assets as part of the CDM acquisition as follows: September 30, 2018 December 31, 2017 Cost Accumulated Amortization Net Book Value Cost Accumulated Amortization Net Book Value Intellectual property $ 866,786 $ 151,687 $ 715,099 $ 886,872 $ 88,687 $ 798,185 Customer contracts/relationships 758,438 132,727 625,711 776,013 77,601 698,412 Order backlog 216,842 216,842 - 221,867 221,867 - Trade names 108,348 17,237 91,111 110,859 10,079 100,780 $ 1,950,414 $ 518,493 $ 1,431,921 $ 1,995,611 $ 398,234 $ 1,597,377 Order backlog was amortized during the period of the related sales during 2017, and intellectual property, customer contracts/relationships, and trade names are amortized over 10, 10, and 11 years, respectively. Amortization expense for the three months ended September 30, 2018 and 2017 was approximately $43,854 and $47,199, respectively. Amortization expense for the nine months ended September 30, 2018 and 2017 was approximately $ 134,208 j) Taxes: The Company did not record an income tax provision The zero rate reflects the Company’s judgement that The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries previously tax deferred and creates new taxes on certain foreign-sourced earnings. The Company has applied the guidance in ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, when accounting for the enactment-related effects of the Act. The Company has accounted for the tax effects of the Act under the guidance of SAB 118 on a provisional basis. During the nine months ended September 30, 2018, the Company did not recognize any adjustments to the provisional amounts recorded as of December 31, 2017. The Company will continue to assess the Act’s impact for the rest of 2018, including its interpretation by regulatory authorities and the courts, and will adjust its disclosures and financial presentation as necessary. k) Recent Accounting Pronouncements Affecting the Company: In May 2014, FASB issued converged guidance on recognizing revenue in contracts with customers, ASU 2014-09, Revenue from Contracts with Customers . The intent of the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is for a company to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and in certain circumstances, allowing estimates of variable consideration to be recognized before contingencies are resolved. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The standard was effective for the Company as of January 1, 2018. In addition to expanding disclosures in these interim financial statements, the Company completed its evaluation of the new standard and assessed the impact of adoption on its consolidated financial statements. The Company reviewed significant open contracts with customers for each revenue stream, and based on its evaluation, revenue recognition under the new standard did not have a material impact on the Company’s consolidated financial statements. The Company also assessed its control framework as a result of adopting the new standard and noted minimal, insignificant changes to its systems and other controls processes. The new standard permits two adoption methods under ASU 2014-09. The guidance may be adopted through either retrospective application to all periods presented in the consolidated financial statements (full retrospective) or through a cumulative effect adjustment to retained earnings at the effective date (modified retrospective). The Company adopted the new standard effective January 1, 2018 using the modified retrospective transition method. Under that method, the Company applied the rules to all contracts existing as of January 1, 2018. The cumulative effect was immaterial, and therefore no adjustment to the opening balance of retained earnings was required. The disclosures in the notes to the consolidated financial statements related to revenue recognition are expanded under the new standard, specifically around the quantitative and qualitative information about performance obligations, changes in contract assets and liabilities, and disaggregation of revenue. In November 2015, FASB issued ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under the new guidance. This ASU was adopted January 1, 2018. In February 2016, the FASB issued ASU 2016-02, which amends the ASC and creates Topic 842, Leases. Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous US GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. The Company is in the initial stages of evaluating the effect of the standard on its financial statements and will continue to evaluate. While not yet in a position to assess the full impact of the application of the new standard, the Company expects that the impact of recording the lease liabilities and the corresponding right-to-use assets will have a significant impact on its total assets and liabilities with a minimal impact on equity. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017. The guidance in ASU 2016-15 is generally consistent with the Company’s current cash flow classifications, and it was adopted effective January 1, 2018, without any material impact on the Company’s consolidated financial statements. In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting , to provide clarity to which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This update was adopted effective January 1, 2018, without any material effect on the Company’s consolidated financial statements. |
