| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. In addition to historical information, the following discussion contains forward-looking statements that involves risks, uncertainties and assumptions. See “Forward-Looking Statements” above. Please read “Item 1A. Risk Factors” in Part II of this report for a discussion of factors that could cause our actual results to differ materially from our expectations.
Overview
We develop and commercialize point-of-care tests used for the rapid detection and diagnosis of infectious diseases, including sexually transmitted disease, insect vector and tropical disease, COVID-19 and other viral and bacterial infections, enabling expedited treatment.
Our product portfolio is based upon our proprietary DPP technology, a diagnostic platform that provides high-quality, cost-effective results in 15 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. 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, nongovernmental organizations, medical professionals, and retail establishments. We continue to seek to expand our commercial distribution channels.
Substantial Doubt as to Going Concern Status
Factors and considerations with respect to our liquidity raised, as of September 30, 2021, substantial doubt as to our ability to continue as a going concern through one year after the date that our condensed consolidated financial statements with respect to the three and nine months ended September 30, 2021, or the Accompanying Financial Statements, are being issued. In July 2021 we received two significant customer purchase orders, or the July Purchase Orders, as described under “—Recent Events—July Purchase Orders” below, and we raised funds through “at-the-market” offerings as described under “—Recent Events—At-the-Market Offerings of Common Stock” below, both of which were intended in part to improve our liquidity position.
These measures and other plans and initiatives have been designed to provide us with adequate liquidity to meet our 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 continue to depend, however, on factors that are beyond our control, or that may not be addressable on terms acceptable to us or at all. We have considered in particular how:
| • | Limitations of our staffing, supply chain and liquidity have impaired, and are expected to continue to impair, our ability to fulfill at least $11.5 million of the July Purchase Order from Bio‑Manguinhos by December 31, 2021, the end of the existing shipment schedule under the order. Please see “—Recent Events—July Purchase Orders” below 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 will not be able to timely fulfill all of the requirements of the July Purchase Order from Bio‑Manguinhos and it is difficult to reliably estimate the extent to which we will be able to timely meet those requirements” and “Because of our liquidity and operational limitations, we may be required to prioritize fulfillment of customer orders, including the July Purchase Orders, which could harm our relationships with customers and our reputation and thereby negatively impact our business and operating results” under “Item 1A. Risk Factors” of Part II of this report. |
| • | Earlier delays in clinical trials, which reflected the impact of the COVID-19 vaccination rollout and the related decline in positivity rates at clinical trials on our clinical plan enrollment levels, and continuing requirements of achievement of regulatory approvals may limit our ability to achieve a portion of the revenue- and cash-generating milestones under a $12.7 million award granted pursuant to our contract dated December 2, 2020 with the Biomedical Advanced Research and Development Authority (part of the U.S. Department of Health and Human Services’ Office of the Assistant Secretary for Preparedness and Response), or BARDA, which contract will, unless extended by BARDA, expire on December 2, 2021. Please see “—Liquidity and Capital Resources” below and “Our ability to receive the amount of grants remaining under our existing contracts with BARDA is limited by operational factors as well as regulatory and other factors outside our control, and we cannot assure you that we will be able to receive all, or a significant portion, of those remaining amounts before the contracts expire” under “Item 1A. Risk Factors” of Part II of this report. |
| • | The ongoing healthcare and economic impacts of the COVID-19 pandemic on the global customer base for our non‑COVID-19 products continue to negatively affect the timing and rate of recovery of our revenues from those products by, for example, decreasing the allocation of funding for HIV testing, thereby continuing to adversely affect our liquidity. |
| • | Although we have entered into agreements to distribute third-party COVID-19 products in the United States, our ability to sell those products could be constrained because of staffing and supply chain limitations affecting the suppliers of those products. |
We further considered how these factors and uncertainties could impact our ability over the next year 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. 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 $40.3 million for the twelve months ending December 31, 2021 to $45.6 million for the twelve months ending September 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 offerings, 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 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 filing 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 for the twelve-month period following the filing 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 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,” 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.
Recent Events
July Purchase Orders
In July 2021 we received the July Purchase Orders, which we had been pursuing for an extended period of time and which consist of the following:
| • | 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. |
| • | 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. |
Our delivery of the full number of tests covered by the July Purchase Orders, and in particular the July Purchase Order from Bio-Manguinhos, has been adversely affected by limitations of our staffing and supply chain that are largely outside of our control. Upon receiving the July Purchase Orders, we launched a broad campaign to recruit and retain manufacturing personnel and, more recently, we have temporarily implemented substantial increases in our hourly pay rates for manufacturing personnel. Our recruiting efforts have not, however, proven sufficient to overcome the tight labor market that has been impacting many U.S. companies, including employers on Long Island, New York, where our manufacturing operations are located. We have not been able to hire the number of manufacturing personnel required to meet our internal plans for delivery of all of the tests contemplated by the July Purchase Orders. Moreover, the overtime demands of seeking to produce the maximum number of tests possible with existing personnel increasingly are challenging our ability to retain manufacturing personnel. While we are seeking to leverage our automated production lines, automation cannot, on the schedule for delivering tests contemplated by the July Purchase Orders, compensate fully for the shortage of manufacturing personnel.
Our delivery of tests covered by the July Purchase Orders has also been negatively affected by limitations on production supplies. The COVID-19 pandemic has disrupted nearly every aspect of the global supply chain, including the manufacturing of some of the key supplies used in our tests. Many suppliers are experiencing shortages of required personnel as the result of the tight labor market and underlying raw material commodities. Because of the number of tests deliverable under the July Purchase Orders and the required timing of the deliveries, we have had to identify sources of supplies on a short timeframe and in a markedly increased quantity. As the result, we have been required to seek to identify new sources of materials to replace or augment our past sources. Moreover, scarcity has caused increases in the cost of some supplies. Given the ongoing labor and supply chain shortages, we expect our ability to manufacture tests covered by the July Purchase Orders will continue through at least the end of 2021, the contractual deadline for delivering tests under the July Purchase Order from Bio-Manguinhos.
During the three months ended September 30, 2021, we delivered tests constituting $5.4 million of the total $28.3 million contemplated by the July Purchase Order from Bio-Manguinhos. While we have established internal plans for delivery of additional tests contemplated by the July Purchase Order from Bio‑Manguinhos, the number of uncertainties related to third parties — including the availability of required personnel and supplies — and other operational factors make it difficult for us to reliably estimate the extent to which we will be able to fulfill the July Purchase Order from Partnership for Supply Chain Management are subject to uncertainties related to third parties — including the availability of required personnel and supplies — and other operational factors similar to those affecting fulfillment of the July Purchase Order from Bio-Manguinhos, which make it difficult for us to accurately estimate the extent to which we will be able to fulfill the July Purchase Order from Partnership for Supply Chain Management on time and at an acceptable cost.
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 will not be able to timely fulfill all of the requirements of the July Purchase Order from Bio-Manguinhos and it is difficult to reliably estimate the extent to which we will be able to timely meet those requirements” under “Item 1A. Risk Factors” of Part II of this report.
At-the-Market Offerings 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 prospectus supplement dated July 19, 2021 that we filed with the SEC, pursuant to Rule 424(b)(5) under the Securities Act of 1933 or 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 note 5 to the Accompanying Financial Statements.
As of the filing date of this report, we have issued and sold pursuant to the ATM Agreement a total of 9,709,328 shares of common stock at a volume-weighted average price of $4.2011 per share for gross proceeds of $40.8 million and net proceeds, after giving effect to placement fees and other transaction costs, of $38.8 million. Additional shares of common stock may be issued and sold pursuant to the ATM Agreement for gross proceeds of up to $19.2 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.
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 be unlawful prior to registration or qualification under the securities laws of any such state or country.
Consolidated Results of Operations
Three Months Ended September 30, 2021 versus Three Months Ended September 30, 2020
The results of operations for the three months ended September 30, 2021 and 2020 were as follows (dollars in thousands):
| | | For the three months ended September 30, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | | | | | |
| TOTAL REVENUES | | $ | 12,058 | | | | 100 | % | | $ | 10,272 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| OPERATING COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
| Cost of product sales | | | 7,903 | | | | 66 | % | | | 7,468 | | | | 73 | % |
| Research and development expenses | | | 3,442 | | | | 29 | % | | | 2,352 | | | | 23 | % |
| Selling, general and administrative expenses | | | 5,947 | | | | 49 | % | | | 5,349 | | | | 52 | % |
| Asset impairment, restructuring, severance and related costs | | | 397 | | | | 3 | % | | | 12 | | | | 0 | % |
| | | | 17,689 | | | | | | | | 15,181 | | | | | |
| | | | | | | | | | | | | | | | | |
| LOSS FROM OPERATIONS | | | (5,631 | ) | | | | | | | (4,909 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| OTHER EXPENSE, NET | | | (735 | ) | | | | | | | (736 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (6,366 | ) | | | (53 | )% | | | (5,645 | ) | | | (55 | )% |
| | | | | | | | | | | | | | | | | |
| Income tax (expense) benefit | | | - | | | | | | | | 105 | | | | | |
| NET LOSS | | $ | (6,366 | ) | | | | | | $ | (5,540 | ) | | | | |
Percentages in the table reflect the percent of total revenues.
Total Revenues
Total revenues during the three months ended September 30, 2021 were $12.1 million, an increase of $1.8 million, or 17.4%, compared to the three months ended September 30, 2020. The increase in total revenues compared to the comparable quarter of 2020 reflected the benefit of government grant income totaling $2.2 million associated with our $12.7 million award from BARDA, offset by a decrease in R&D revenue of $1.4 million from the completion of the related projects; and an increase of $1 million in net product sales reflecting higher sales in Latin America, United States, and Asia, offset by lower sales in the Africa and Europe & Middle East.
Our total revenues during the three months ended September 30, 2020 included $2.7 million that was previously not recognized during the second quarter of 2020 due to the hurdle that required a high degree of confidence that it was probable that a significant reversal in revenue would not have occurred for shipments of the DPP COVID-19 IgM/IgG System outside the United States. After reflecting the revenue recognition timing of those shipments, total revenues during the three months ended September 30, 2021 increased by $4.5 million, or 59.2%, compared to the three months ended September 30, 2020.
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 revenue less cost of product sales, and gross product margin percentage is gross product margin as a percentage of net product sales.
Gross product margin during the three months ended September 30, 2021 increased by $0.5 million or 56.5%.
The following schedule calculates gross product margin (dollars in thousands):
| | | For the three months ended September 30, | | | Favorable/(unfavorable) | |
| | | 2021 | | | 2020 | | | $ Change | | | % Change | |
| Net product sales | | $ | 9,371 | | | $ | 8,406 | | | $ | 965 | | | | 11.5 | % |
| Less: Cost of product sales | | | (7,903 | ) | | | (7,468 | ) | | | (435 | ) | | | 5.8 | % |
| Gross product margin | | $ | 1,468 | | | $ | 938 | | | $ | 530 | | | | 56.5 | % |
| Gross product margin percentage | | | 15.7 | % | | | 11.2 | % | | | 4.51 | % | | | | |
The $0.5 million increase in gross product margin was comprised of (a) $0.4 million from favorable product margins due to higher average selling prices 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 September 30, | | | Favorable/(unfavorable) | |
| | | 2021 | |
| | 2020 | | |
| $ Change | |
| | % Change | |
| Clinical and regulatory affairs | | $ | 1,520 | | | $ | 258 | | | $ | 1,262 | | | $ | (489.3 | )% |
| Other research and development | | | 1,922 | | | | 2,094 | | | | (172 | ) | | | (8.2 | )% |
| Total research and development | | $ | 3,442 | | | $ | 2,352 | | | $ | 1,090 | | | | 46.3 | % |
The $1.1 million increase in research and development costs for the three months ended September 30, 2021 compared to the three months ended September 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 $0.6 million, or 11.2%, increase in selling, general and administrative expense for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 principally reflected increased costs associated with compensation costs related to our expanded U.S. commercial team, commissions, and insurance, offset by a decrease in legal services.
Asset Impairment, Restructuring, Severance and Related Costs
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 September 30, 2021, we incurred $0.4 million related to these restructuring matters. The restructuring costs were concluded following the receipt of the July Purchase Orders as described under “—Recent Events—July Purchase Orders” above and raising funds through “at-the-market” offerings as described under “—Recent Events—At-the-Market Offerings of Common Stock” above, both of which were intended in part to improve our liquidity position.
Other Expense, Net
Other expense, net consists principally of interest expense, net of interest income earned on our deposits. Other expense, net for the three months ended September 30, 2021 was comparable to the corresponding period in 2020 and is associated with interest accruing on long-term debt, of which $20 million (carrying value of $18.6 million) was outstanding at September 30, 2021. For a description of this long-term debt, please see “—Liquidity and Capital Resources—Sources of Funds—Credit Agreement” below.
Nine Months Ended September 30, 2021 versus Nine Months Ended September 30, 2020
The results of operations for the nine months ended September 30, 2021 and 2020 were as follows (dollars in thousands):
| | | For the nine months ending September 30, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | | | | | |
| TOTAL REVENUES | | $ | 27,245 | | | | 100 | % | | $ | 22,243 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| OPERATING COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
| Cost of product sales | | | 15,491 | | | | 57 | % | | | 17,513 | | | | 79 | % |
| Research and development expenses | | | 9,102 | | | | 33 | % | | | 6,233 | | | | 28 | % |
| Selling, general and administrative expenses | | | 18,034 | | | | 66 | % | | | 13,903 | | | | 63 | % |
| Asset impairment, restructuring, severance and related costs | | | 2,441 | | | | 9 | % | | | 1,122 | | | | 5 | % |
| Acquisition | | | - | | | | - | | | | 64 | | | | 0 | % |
| | | | 45,068 | | | | | | | | 38,835 | | | | | |
| | | | | | | | | | | | | | | | | |
| LOSS FROM OPERATIONS | | | (17,823 | ) | | | | | | | (16,592 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| OTHER EXPENSE, NET | | | (2,175 | ) | | | | | | | (2,110 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (19,998 | ) | | | (73 | )% | | | (18,702 | ) | | | (84 | )% |
| | | | | | | | | | | | | | | | | |
| Income tax (expense) benefit | | | 68 | | | | | | | | 320 | | | | | |
| NET LOSS | | $ | (19,930 | ) | | | | | | $ | (18,382 | ) | | | | |
Percentages in the table reflect the percent of total revenues.
Total Revenues
Total revenues during the nine months ended September 30, 2021 were $27.2 million, an increase of $5.0 million, or 22.5%, compared to the nine months ended September 30, 2020. The increase in total revenues compared to the nine months ended September 30, 2020 reflected a $7.8 million increase in government grant income associated with the $12.7 million award from BARDA, offset by a decreases of $2.4 million in R&D revenue from non-governmental programs and $0.6 million 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 newer demand for SURE CHECK 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 nine months ended September 30, 2021 increased by $1.4 million or 356.7%.
The following schedule calculates gross product margin (dollars in thousands):
| | | For the nine months ended September 30, | | | Favorable/(unfavorable) | |
| | | 2021 | | | 2020 | | | $ Change | | | % Change | |
| Net product sales | | $ | 17,327 | | | $ | 17,915 | | | $ | (588 | ) | | | (3.3 | )% |
| Less: Cost of product sales | | | (15,491 | ) | | | (17,513 | ) | | | 2,022 | | | | (11.5 | )% |
| Gross product margin | | $ | 1,836 | | | $ | 402 | | | $ | 1,434 | | | | 356.7 | % |
| Gross product margin percentage | | | 10.6 | % | | | 2.2 | % | | | 8.4 | % | | | | |
The $1.4 million increase in gross product margin principally resulted from favorable product margins due to higher average selling prices.
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 nine months ended September 30, | | | Favorable/(unfavorable) | |
| | | 2021 | | 2020 | | | $ Change | |
| | % Change | |
| Clinical and regulatory affairs | | $ | 3,156 | | | $ | 758 | | | $ | 2,398 | | | $ | 316.4 | % |
| Other research and development | | | 5,946 | | | | 5,475 | | | | 471 | | | | 8.6 | % |
| Total research and development | | $ | 9,102 | | | $ | 6,233 | | | $ | 2,869 | | | | 46.0 | % |
The $2.9 million increase in research and development costs for the nine months ended September 30, 2021 compared to the nine months ended September 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 $4.1 million, or 29.7%, increase in selling, general and administrative expense for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 principally reflected increased costs associated with (a) fees for legal services, (b) compensation related to our expanded U.S. commercial team, (c) insurance; and (d) non-cash equity compensation, 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 $2.4 million during the nine months ended September 30, 2021 as follows:
| • | We recorded an impairment loss of $1.3 million in June 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.
|
| • | 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 nine months ended September 30, 2021, we incurred $1.1 million related to these restructuring matters. The restructuring costs were concluded following the receipt of the July Purchase Orders as described under “—Recent Events—July Purchase Orders” above and raising funds through “at-the-market” offerings as described under “—Recent Events—At-the-Market Offerings of Common Stock” above, both of which were intended in part to improve our liquidity position. |
Other Expense, Net
Other expense, net consists principally of interest expense, net of interest income earned on our deposits, which increased in the nine months ended September 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 $18.6 million) was outstanding at September 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 nine months ended September 30, 2021, we recognized a tax benefit of $0.1 million related to losses generated by our foreign subsidiaries, which offsets the deferred tax liability balances recorded on acquisition date. As of September 30, 2021 and 2020, our U.S. deferred tax assets included a full valuation allowance.
Liquidity and Capital Resources
General
Our cash and cash equivalents totaled $36.0 million at September 30, 2021, an increase of $30.4 million from $5.6 million at June 30, 2021 and an increase of $12.9 million from $23.1 million at December 31, 2020. We are obligated to maintain aggregate unrestricted cash of not less than $3,000,000 at all times under a covenant in the Credit Agreement.
During the first nine months of 2021, we funded our business operations, including capital expenditures and working capital requirements, principally from cash and cash equivalents and issuance of common stock in at-the-market offerings. Our operations used $8.2 million of cash during the three months ended September 30, 2021 and $24.2 million of cash during the nine months ended September 30, 2021. Revenues during the three and nine months ended September 30, 2021 did not meet our expectations, and the shortfall in revenues was one of the principal reasons we issued common stock in the at-the-market offerings during the three months ended September 30, 2021, which provided us with net proceeds of $38.8 million. This increase in cash and cash equivalents was offset in part as the result of (a) market, clinical trial and regulatory complications we faced in seeking to develop and commercialize a portfolio of COVID‑19 test systems during the continuing, but evolving, uncertainty of the COVID‑19 pandemic and (b) significant continuing expenses incurred in connection with pending legal matters (see note 6(f) – Commitments, Contingencies, and Concentrations: Litigation in the Accompanying Financial Statements), delayed achievement of 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. We incurred fees related to these restructuring matters totaling $0.7 million in the three months ended June 30, 2021 and $0.4 million in the three months ended September 30, 2021.
Factors and considerations with respect to our liquidity raised, as of September 30, 2021, substantial doubt as to our ability to continue as a going concern through one year after the date that the Accompanying Financial Statements are being issued. See “—Overview—Substantial Doubt as to Going Concern Status” above.
We have undertaken plans and initiatives, including fulfillment of the July Purchase Orders (see “—Recent Events—July Purchase Orders” above) and fundraising through “at-the-market” offerings (see “—Recent Events—At-the-Market Offerings of Common Stock” above), designed to provide us with adequate liquidity to meet our 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 plans and initiatives is dependent, however, on a number of operational performance factors, such as the effectiveness of our automated manufacturing operations, as well as numerous other factors that are beyond our control or that may not be addressable 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 July Purchase Order from Bio-Manguinhos and other customer orders may be affected by limitations of our staffing, supply chain and liquidity, uncertainties regarding the achievement of milestones and related recognition of revenue under government grants from BARDA, 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 over the next twelve months, which include (a) a covenant requiring minimum total revenues for the twelve months preceding each quarter end, which requirements range from $40.3 million for the twelve months ending December 31, 2021 to $45.6 million for the twelve months ending September 30, 2022 and (b) an obligation requiring the payment of principal installments, commencing with the payment of $300,000 on September 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 offerings, 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 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 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 timely fulfill some of the requirements of the July Purchase Orders 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.
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, accounts payable and inventory balances fluctuate from period to period, which affects our cash flow from operating activities. The amounts of these fluctuations vary depending on cash collections, client mix, raw material lead times, the mix of vendor terms, 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. Our future working capital needs will depend on many factors, including the rate of our business and revenue growth, the availability and cost of human, material and other resources required to build and deliver products in accordance with our existing or future product orders, the timing of our continuing automation of U.S. manufacturing, and the timing of our investment in 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, we 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.
Sources of Funds
Equity and Equity-Related Securities. On July 19, 2021, we entered into the ATM Agreement with 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. Please see “¾Recent Events¾ At-the-Market Offerings of Common Stock.” 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 prospectus 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.
Prior to any sale of shares of common stock under the ATM Agreement, we may 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 any one trading 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 of common stock 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 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 transaction, we 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, we are to pay Craig-Hallum a placement fee of 3.5% of the gross sales price of shares of common stock sold, unless Craig-Hallum acts as principal, in which case we may sell the shares to Craig-Hallum as principal at a price we agree upon with Craig-Hallum. We are obligated to reimburse Craig-Hallum for certain expenses incurred in connection with the ATM Agreement, and we have provided Craig-Hallum with customary indemnification and contribution rights with respect to certain liabilities, including liabilities under the Securities Act and the Securities Exchange Act of 1934.
The offering of shares of common stock pursuant to the ATM Agreement will terminate upon the earliest of (a) the sale of all of the shares registered for purposes of the offering pursuant to the ATM Agreement, (b) our mutual written agreement with Craig-Hallum, (c) written notice from Craig-Hallum, in its sole discretion, to us, and (d) five business days’ prior written notice from us, in our sole discretion, to Craig-Hallum.
To date, we have issued and sold pursuant to the ATM Agreement a total of 9,709,328 shares of common stock at a volume-weighted average price of $4.2011 per share for gross proceeds of $40.8 million and net proceeds, after giving effect to placement fees and other transaction costs, of $38.8 million. Additional shares of common stock may be issued and sold pursuant to the ATM Agreement for gross proceeds of up to $19.2 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.
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 September 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 4% 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 range from $32.0 million to $50.1 million and, for the next year, range from $40.3 million for the twelve months ending December 31, 2021 to $45.6 million for the twelve months ending September 30, 2022. The minimum total 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 understand and evaluate our operating performance, to establish budgets, and to establish operational goals for managing our business. We therefore do not believe that the covenant requirements provide useful information to investors or others in enhancing an understanding of our future prospects. |
| • | Default Provisions. The Credit Agreement provides for customary events of default, including events of default based on non-payment of amounts due under the Credit Agreement, defaults on other debt, misrepresentations, covenant breaches, changes of control, insolvency, bankruptcy and the occurrence of a material adverse effect on 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. |
Research and Development Awards. 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 to assist us in (a) developing, and pursuing 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. Of the total awards available under this contract, we recognized government grant income totaling $8.0 million during the nine months ended September 30, 2021 and have recognized additional government grant income totaling $0.9 million in the fourth quarter of 2021, as of the filing date of this report. Unless extended by BARDA in its discretion, all of the $2.2 million of awards remaining under the contract as of the date of filing this report will expire unless earned by December 2, 2021. The completion of milestones to earn a portion of the remaining awards are outside our control, and we cannot assure you that we will succeed in earning all or any significant portion of the remaining awards by December 2, 2021.
Working Capital. The following table sets forth selected working capital information:
| | | September 30, 2021 | |
| | | (in thousands) | |
| Cash and cash equivalents | | $ | 36,004 | |
| Accounts receivable, net of allowance for doubtful amounts | | | 6,783 | |
| Inventories, net | | | 16,806 | |
| Prepaid expenses and other current assets | | | 1,192 | |
| Total current assets | | | 60,785 | |
| Less: Total current liabilities | | | 11,426 | |
| Working capital | | $ | 49,359 | |
Uses of Funds
Cash Flow Used in Operating Activities. Our operations used $24.2 million of cash during the nine months ended September 30, 2021, primarily due to: a net loss adjusted for non-cash items of $14.0 million; a $5.2 million increase in inventory related to materials and manufacturing costs for COVID-19 systems in anticipation of potential customer orders and regulatory approvals and production activities related to the July Purchase Orders; a $3.3 million increase in accounts receivable increased total revenues, principally from the July Purchase Orders and grant income under a contract with BARDA; a $1.6 million decrease in deferred revenue; and a $0.4 million increase in prepaid expenses and other current assets. Those uses of cash were offset in part by a $0.1 million decrease in deposits and other assets and a $0.1 million increase in accounts payable and other accrued liabilities.
Credit Agreement. Principal installments in the amount of $300,000 are payable under the Credit Agreement 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. 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, as further described “—Sources of Funds—Credit Agreement—Default Provisions” above. In addition, we could determine to prepay from time to time outstanding principal under the Credit Agreement (see “—Sources of Funds—Credit Agreement—Optional Prepayment” above) or to make other payments under the Credit Agreement that may not be then due or otherwise required under the Credit Agreement, although, as of the date of the filing of this report, we do not intend to make any such prepayments or other payments.
Capital Expenditures. Our capital expenditures totaled $1.4 million in the nine months ended September 30, 2021, all of which related to investments in automated manufacturing equipment, facilities, and other fixed assets. As of September 30, 2021, we had capital purchase obligations of $1.5 million related to additional automated manufacturing equipment, with payments expected to come due during 2022 based on vendor performance milestones.
Effects of Inflation
In addition to the impact of increases in minimum wage levels in New York, we have encountered inflation and changing prices that have had a material effect on our business, and we expect that they will continue to materially affect our business in the foreseeable future. Our delivery of the full number of tests covered by the July Purchase Orders, and in particular the July Purchase Order from Bio-Manguinhos, has been adversely affected to date by limitations of our staffing and supply chain that are largely outside of our control. Upon receiving the July Purchase Orders, we launched a broad campaign to recruit and retain manufacturing personnel and, more recently, we temporarily increased pay for manufacturing personnel. Our recruiting efforts have not, however, proven sufficient to overcome the tight labor market that has been impacting many U.S. companies, including employers on Long Island, New York, where our manufacturing operations are located. Because of the number of tests deliverable under the July Purchase Orders and the required timing of the deliveries, we have had to identify sources of supplies on a short timeframe and in a markedly increased quantity. As the result, we have been required to seek to identify new sources of materials to replace or augment our past sources. Moreover, scarcity has caused increases in the cost of some supplies. 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 September 30, 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.
Significant Accounting Policies and Critical Accounting Estimates
There were no significant changes in our critical accounting estimates during the nine months ended September 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 on Form 10-K for the fiscal year ended December 31, 2020, other than those described in the notes to the Accompanying Financial Statements.
Recently Issued Accounting Pronouncements
A discussion of recent accounting pronouncements was included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and is updated in note 2 to the 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 Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that as of September 30, 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 September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
| PART II. | OTHER INFORMATION |
This information is set forth under – Commitments, Contingencies and Concentrations – Litigation – Legal Proceedings” to the Accompanying Financial Statements and is incorporated herein by reference.
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 1 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 Current Report on Form 8-K filed with the SEC on July 19, 2021. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the sections captioned “Item 1A. Risk Factors” in Part 1 of our Quarterly Report on Form 10‑Q for the quarterly period ended March 31, 2021 and “Item 8.01. Other Events—Risk Factors” in our Current Report on Form 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 those sections as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. The risks described in those 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.
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.
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 being issued. Without giving effect to the prospect of raising additional capital pursuant to our at-the-market offerings under the ATM Agreement, 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 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 filing date of this report, when the Accompanying Financial Statements are being issued.
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 continue to expend substantial resources in the short term in connection with the July Purchase Orders (see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Events—July Purchase Orders”), but we may encounter challenges in fulfilling our obligations, and therefore receiving revenue, under those purchase orders. 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 will not be able to timely fulfill all of the requirements of the July Purchase Order from Bio‑Manguinhos and it is difficult to reliably estimate the extent to which we will be able to timely meet those requirements” below. We will also incur costs associated with research and development activity, corporate administration, business development, debt service, marketing and selling of our products, and litigation. In addition, other unanticipated costs may arise.
As of September 30, 2021, we had outstanding indebtedness of $20.0 million under the Credit Agreement. We may face further liquidity challenges if we are unable to meet obligations set forth in the Credit Agreement, including a financial covenant requiring that we achieve 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 declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. We cannot assure you that, in such an event, we would have sufficient assets to pay amounts due under the Credit 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” below.
As a result, we may need to raise capital in one or more debt 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 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.
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 will not be able to timely fulfill all of the requirements of the July Purchase Order from Bio‑Manguinhos and it is difficult to reliably estimate the extent to which we will be able to timely meet those requirements.
In July 2021 we received the July Purchase Orders, which 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—July Purchase Orders” above. Our delivery of the full number of tests covered by each of the July Purchase 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 Purchase Orders, and we expect 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 reliably estimating the extent to which we will be able to fulfill the July Purchase Orders on time and at an acceptable cost, or at all. Our ability to generate revenue from the July Purchase Orders, and the margins we can realize from that revenue, will depend on the availability and cost of human, material and other resources required to build and deliver tests in accordance with the July Purchase Orders.
In anticipation of receipt 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 staffing and other constraints, in producing DPP SARS-CoV-2 Antigen tests and HIV 1/2 STAT-PAK Assays contemplated by the July Purchase Orders. The number of tests to be delivered pursuant to the July Purchase Orders significantly exceeds the capacity of our automated manufacturing lines. We have neither the time nor the resources to increase our automated manufacturing capacity meaningfully during the delivery periods contemplated by the July Purchase Orders.
We therefore are relying upon manual assembly processes to produce a significant portion of the tests deliverable under the July Purchase Orders and other customer orders, which require that we successfully recruit, hire and train a significant number of personnel for employment at our Long Island, New York facilities. Identifying, hiring and retaining assembly line, formulations, production, warehouse, quality control and other personnel for our Long Island facilities at acceptable compensation levels has been challenging in the past, and those circumstances have been exacerbated by the continuing effects of the COVID-19 pandemic, which may discourage potential employees from returning to a physical worksite at compensation levels that are acceptable to us, or at all. Upon receiving the July Purchase Orders, we launched a broad campaign to recruit and retain manufacturing and other personnel and, more recently, we temporarily increased pay for manufacturing personnel. Our recruiting efforts have not, however, proven sufficient to overcome the tight labor market that has been impacting many U.S. companies, including employers on Long Island, and we have not been able to hire the number of manufacturing personnel required to meet our internal plans for delivery of all of the tests contemplated by the July Purchase Orders. Our continued inability to identify and hire sufficient numbers of manufacturing personnel, and to manage turnover of currently existing and newly hired personnel, would continue to materially limit our ability to deliver tests under the July Purchase Orders.
Our delivery of tests covered by the July Purchase Orders has also been negatively affected by limitations on raw materials, components and other supplies. We must obtain additional supplies in order to manufacture tests to meet the requirements of the July Purchase Orders. Some supplies require significant ordering lead time, and some are currently obtained from a sole supplier or a limited group of suppliers. With some of these suppliers, we do not have long term agreements and instead purchase materials, components and other supplies through a purchase order process. The COVID-19 pandemic has disrupted nearly every aspect of the global supply chain, including the manufacturing or delivery of some of the key supplies used in our tests. Many suppliers are experiencing shortages of required personnel as the result of the tight labor market and underlying raw material commodities. Some suppliers have been unable to deliver supplies in the quantity we need or at all. 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. Because of the foregoing limitations, as exacerbated by the quantities and timing of supplies required to timely fulfill the July Purchase Orders, we have been required to seek to identify new sources of supplies to replace or augment our past sources, which has proven difficult to do in a reasonable time period and on commercially reasonable terms, if at all. Moreover, scarcity has caused increases in the cost of some supplies. Our inability to timely obtain required supplies has had an adverse effect on our ability to timely fulfill the July Purchase Orders as well as on our total revenues, cost of sales, related margin and cash flow.
Because of the foregoing factors and considerations, we expect our ability to manufacture tests covered by the July Purchase Order from Bio-Manguinhos will continue to be limited through at least the end of 2021, which is the existing schedule for delivering tests under the order. We therefore will be unable to timely deliver a significant number of the tests required by the July Purchase Order from Bio-Manguinhos, which will impair our ability to achieve desired profit margins and generate cash flow from the order. We currently anticipate that at least $11.5 million of the July Purchase Order from Bio-Manguinhos will not be fulfilled by December 31, 2021, the end of the shipment schedule under the order. Our inability to timely meet the requirements of the July Purchase Order from Bio-Manguinhos could harm our relationship with Bio-Manguinhos and impair our reputation with other customers within the industry, which, in turn, could have a material adverse effect on our business. Moreover, in the event we do not timely deliver tests under such July Purchase Order, Bio-Manguinhos could choose to purchase products from our competitors with whom Bio-Manguinhos already has existing business relationships, which competitors may have greater technical, financial and other resources than we have.
Because of our liquidity and operational limitations, we may be required to prioritize fulfillment of customer orders, including the July Purchase Orders, which could harm our relationships with customers and our reputation and thereby negatively impact our business and operating results.
Our liquidity and operational limitations described under “—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 will not be able to timely fulfill all of the requirements of the July Purchase Order from Bio‑Manguinhos and it is difficult to reliably estimate the extent to which we will be able to timely meet those requirements” above are limiting our ability to timely fulfill not only the July Purchase Orders but also other purchase orders for a range of our products. Our inability to timely meet the requirements of the July Purchase Orders or any other purchase orders could harm our relationships with our customers and impair our reputation within the industry, which, in turn, could have a material adverse effect on our business. To the extent we therefore are required to prioritize purchase orders, or are perceived by customers as prioritizing purchase orders, could further damage our customer relationships and our reputation. As a result, customers, including Bio-Manguinhos and Partnership for Supply Chain Management, could become dissatisfied and cease purchasing our products and instead choose to purchase products from our competitors, which may have greater technical, financial and other resources than we have, which would adversely affect our business, financial condition, results of operations and prospects.
Our ability to receive the amount of grants remaining under our existing contracts with BARDA is limited by operational factors as well as regulatory and other factors outside our control, and we cannot assure you that we will be able to receive all, or a significant portion, of those remaining amounts before the contracts expire.
Through the date of filing of this report, we had recognized government grant income totaling $10.7 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. Unless extended by BARDA in its sole discretion, all of the remaining $2.2 million of awards remaining under the contract as of the date of this report will expire unless earned by December 2, 2021. The completion of milestones to earn a portion of the remaining awards are outside our control, and we cannot assure you that we will succeed in earning all or any significant portion of the remaining awards by December 2, 2021. Any such inability to earn a significant portion of potential grant receipts would adversely affect our business, financial condition, results of operations and prospects.
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 $40.3 million for the twelve months ending December 31, 2021 to $45.6 million for the twelve months ending September 30, 2022 (see note 7 to the Accompanying Financial Statements). 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 December 31, 2021 do not, for example, take into account the challenges we are facing during the last five months of 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 will not be able to timely fulfill all of the requirements of the July Purchase Orders and it is difficult to reliably estimate the extent to which we will be able to timely meet those requirements.”
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 our company and the 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; |
| • | 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. 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.
You may experience future dilution as a result of future equity offerings, exercises of outstanding options and vesting of options and restricted and performance 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. As of the filing date of this report, we have issued and sold pursuant to the ATM Agreement a total of 9,709,328 shares of common stock at a volume-weighted average price of $4.2011 per share for gross proceeds of $40.8 million and net proceeds, after giving effect to placement fees and other transaction costs, of $38.8 million. For additional information about the at-the-market offerings 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 Offerings 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 $19.2 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 at-the-market offerings 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 November 1, 2021, our market capitalization was approximately $70.3 million. Existing stockholders may experience significant dilution in connection with our issuance and sale of up to $19.2 million of additional shares of common stock pursuant to the ATM Agreement. In addition, as of September 30, 2021, 3,051,405 shares of common stock were reserved for future issuance under our 2019 Omnibus Incentive Plan, 1,786,324 shares were subject to outstanding options, and 811,038 shares were subject to outstanding restricted and performance stock units. Stockholders will incur dilution upon vesting of restricted and performance 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.
| Number | | Description |
| | At the Market Offering Agreement, dated July 19, 2021, between Chembio Diagnostics, Inc. and Craig-Hallum Capital Group LLC (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on July 19, 2021) |
| | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 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 | | XBRL Taxonomy Presentation Linkbase Document |
| 104 | | Cover page interactive data file (embedded within the Inline XBRL 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. |
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: November 5, 2021 | By: /s/ Richard L. Eberly |
| | Richard L. Eberly |
| | Chief Executive Officer and President |
| | |
| Date: November 5, 2021 | By: /s / Neil A. Goldman |
| | Neil A. Goldman |
| | Chief Financial Officer and Executive Vice President |
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