| 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, or the accompanying financial statements, 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 Part II, Item 1A. “Risk Factors" of this report for a discussion of factors that could cause our actual results to differ materially from our expectations.
We develop and commercialize point-of-care diagnostic 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.
Our board of directors has initiated a review of strategic alternatives, including a potential sale or merger transaction, and of our financing strategy. We have retained Craig-Hallum Capital Group LLC as our financial advisor to assist with the strategic review. We have not set a timetable for completion of the strategic review process, and there can be no assurance that the process will result in a transaction at this time or at all. Even if a sale, merger or financing transaction is consummated, it may not return any value to holders of our common stock. Regardless of whether we execute a sale, merger or financing transaction, the adverse pressures that we have experienced may continue or intensify, and we will likely continue to face all of the risks we currently face, including the risk that we may not be able to continue as a going concern.
Going Concern Considerations
The Company continued to experience market, clinical trial and regulatory complications in seeking to develop and commercialize a portfolio of COVID-19 test systems during the continuing, but evolving, uncertainty resulting from COVID‑19. For the three and nine months ended September 30, 2022, the Company also continued to incur significant expenses in connection with pending legal matters (see Note 6 – Commitments, Contingencies, and Concentrations: Litigation).
The Company performed an assessment to determine whether there were conditions or events that, considered in the aggregate, raised substantial doubt about the Company’s ability to continue as a going concern within one year after the date the accompanying unaudited condensed consolidated financial statements are being issued. Initially, this assessment did not consider the potential mitigating effect of management’s plans that had not been fully implemented. Because, as described below, substantial doubt was determined to exist as the result of this initial assessment, management then assessed the mitigating effect of its plans to determine if it is probable that the plans (1) would be effectively implemented within one year after the date the accompanying unaudited condensed consolidated financial statements are issued and (2) when implemented, would mitigate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern.
The Company achieved significant revenue growth in recent years while profitability has not been at levels as expected. It has taken steps including investments in automation to mitigate headwinds such as labor availability, volatile capacity planning and implementation of operational efficiency targets to proactively monitor production with the overarching goal of profitable growth. The Company undertook measures to increase its total revenues and improve its liquidity position by continuing to develop the Global Competitiveness Program. The main pillars of the Global Competitiveness Program include the following:
| • | Focus on higher margin business in growth markets |
| • | Lower manufacturing costs |
| • | Reduce infrastructure costs |
| • | Strategic review of non-core businesses and assets |
In addition, the Company will continue to focus on regulatory approvals for its DPP SARS-CoV-2 Antigen test system, DPP Respiratory Antigen Panel, and DPP HIV-Syphilis test system. These measures and other plans and initiatives have been designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date the accompanying unaudited condensed consolidated financial statements are being issued. The Company’s execution of its plans continue to depend, however, on factors and uncertainties that are beyond the Company’s control, or that may not be addressable on terms acceptable to the Company or at all. The Company considered in particular how:
| • | The ongoing healthcare and economic impacts of COVID-19 on the global customer base for the Company’s non‑COVID-19 products continue to negatively affect the timing and rate of recovery of the Company’s revenues from those products. |
| • | Although the Company has entered into agreements to distribute third-party COVID-19 products in the United States, its ability to sell those products could be constrained because of staffing and supply chain limitations affecting the suppliers of those products. |
The Company further considered how these factors and uncertainties could impact its ability over the next year to meet the obligations specified in the Credit Agreement with the Lender (as defined in Note 7 – Long-Term Debt). Those obligations include covenants requiring: i) minimum cash balance of $3.0 million and ii) minimum total revenue amounts for the twelve months preceding each quarter end. For the next three quarters, the minimum total revenue requirements range from $47.4 million for the twelve months ending December 31, 2022 to $50.1 million for the twelve months ending June 30, 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. In such an event, there can be no assurance that the Company would have sufficient liquidity to fund payment of the amounts that would be due under the Credit Agreement or that, if such liquidity were not available, the Company 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. The Company’s 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 its operations, could have a material adverse effect on its business, prospects, results of operations, liquidity and financial condition.
Accordingly, management determined the Company could not be certain that the Company’s plans and initiatives would be effectively implemented within one year after the date on which the accompanying unaudited condensed consolidated financial statements are being issued. Without giving effect to the prospect of raising additional capital, increasing product revenue in the near future or executing other mitigating plans, many of which are beyond the Company’s control, it is unlikely that the Company will be able to generate sufficient cash flows to meet its required financial obligations, including its debt service and other obligations due to third parties. The existence of these conditions raises substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the date on which the accompanying unaudited condensed consolidated financial statements are being issued.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date the accompanying unaudited condensed consolidated financial statements are issued. As such, the accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.
Consolidated Results of Operations
Three Months Ended September 30, 2022 versus Three Months Ended September 30, 2021
The results of operations for the three months ended were as follows (dollars in thousands):
| | | September 30, 2022 | | | September 30, 2021 | |
| TOTAL REVENUES | | $ | 11,200 | | | | 100 | % | | $ | 12,058 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| OPERATING COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
| Cost of product sales | | | 9,659 | | | | 86 | % | | | 7,903 | | | | 66 | % |
| Research and development expenses | | | 1,871 | | | | 17 | % | | | 3,442 | | | | 29 | % |
| Selling, general and administrative expenses | | | 5,551 | | | | 50 | % | | | 5,947 | | | | 49 | % |
| Impairment, restructuring, severance and related costs | | | 110 | | | | 1 | % | | | 397 | | | | 3 | % |
| TOTAL OPERATING COSTS AND EXPENSES | | | 17,191 | | | | | | | | 17,689 | | | | | |
| | | | | | | | | | | | | | | | | |
| LOSS FROM OPERATIONS | | | (5,991 | ) | | | | | | | (5,631 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| OTHER (EXPENSE) INCOME, NET | | | (708 | ) | | | | | | | (735 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (6,699 | ) | | | (60 | )% | | | (6,366 | ) | | | (53 | )% |
| | | | | | | | | | | | | | | | | |
| Income tax (expense) benefit | | | - | | | | | | | | - | | | | | |
| | | | | | | | | | | | | | | | | |
| NET LOSS | | $ | (6,699 | ) | | | | | | $ | (6,366 | ) | | | | |
Percentages in the table reflect the percent of total revenues.
Total Revenues
Total revenues during the quarter ended September 30, 2022 were $11.2 million, a decrease of $0.9 million, or 7%, compared to the quarter ended September 30, 2021. The decrease in total revenues is primarily due to lower sales in Latin America.
Gross Product Margin
Cost of product sales is primarily composed of material, labor, manufacturing overhead, depreciation, amortization, 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 sales.
Gross product margin decreased by $0.3 million, or 19% compared to the quarter ended September 30, 2021. The following schedule calculates gross product margin (dollars in thousands):
| | | For the three months ended September 30 | | | Favorable/(unfavorable) | |
| | | 2022 | | | 2021 | | | $ Change | | | % Change | |
| Net product sales | | $ | 10,844 | | | $ | 9,371 | | | $ | 1,473 | | | | 16 | % |
| Less: Cost of product sales | | | (9,659 | ) | | | (7,903 | ) | | | (1,756 | ) | | | 22 | % |
| Gross product margin | | $ | 1,185 | | | $ | 1,468 | | | $ | (283 | ) | | | (19 | )% |
| Gross product margin percentage | | | 11 | % | | | 16 | % | | | | | | | | |
The $0.3 million decrease in gross product margin was comprised of (a) $0.5 million from unfavorable product margins and the impact of fixed manufacturing overhead, and (b) $0.2 million from favorable product sales volume.
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) | |
| | | 2022 | | | 2021 | | | $ Change | | | % Change | |
| Clinical and regulatory affairs | | $ | 391 | | | $ | 1,520 | | | $ | (1,129 | ) | | $ | (74 | )% |
| Other research and development | | | 1,480 | | | | 1,922 | | | | (442 | ) | | | (23 | )% |
| Total research and development | | $ | 1,871 | | | $ | 3,442 | | | $ | (1,571 | ) | | | (46 | )% |
The decrease in total research and development costs for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily associated with work 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 the Biomedical Advanced Research and Development Authority, or BARDA (part of the U.S. Department of Health and Human Services’ Office of the Assistant Secretary for Preparedness and Response). Total research and development cost incurred for the three months ended September 30, 2022 were primarily related to ongoing projects in our new product pipeline.
Selling, General and Administrative Expense
Selling, general and administrative expense includes administrative expenses, sales and marketing costs (including commissions), and other corporate items.
The $0.4 million, or 7%, decrease in selling, general and administrative expense for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 is principally due to lower compensation costs and professional fees.
Impairment, restructuring, severance and related costs
During the three months ended September 30, 2022, $0.1million in impairment, restructuring, severance and related costs were recorded. For the three months ended September 30, 2021, $0.4 million was incurred, which was related to restructuring matters.
Other Income (Expense), net
Other income (expense), net, consists principally of interest expense on our long-term debt under the Credit Agreement on September 3, 2019, of which $20 million (carrying value of $19.0 million) was outstanding at September 30, 2022. For a description of Credit Agreement, please see “Liquidity and Capital Resources—Sources of Funds—Credit Agreement” below.
Nine Months Ended September 30, 2022 versus Nine Months Ended September 30, 2021
The results of operations for the nine months ended September 30, 2022 and 2021 were as follows (dollars in thousands):
| | | September 30, 2022 | | | September 30, 2021 | |
| TOTAL REVENUES | | $ | 39,178 | | | | 100 | % | | $ | 27,245 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| OPERATING COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
| Cost of product sales | | | 32,969 | | | | 84 | % | | | 15,491 | | | | 57 | % |
| Research and development expenses | | | 5,567 | | | | 14 | % | | | 9,102 | | | | 33 | % |
| Selling, general and administrative expenses | | | 17,748 | | | | 45 | % | | | 18,034 | | | | 66 | % |
| Impairment, restructuring, severance and related costs | | | 3,153 | | | | 8 | % | | | 2,441 | | | | 9 | % |
| TOTAL OPERATING COSTS AND EXPENSES | | | 59,437 | | | | | | | | 45,068 | | | | | |
| | | | �� | | | | | | | | | | | | | |
| LOSS FROM OPERATIONS | | | (20,259 | ) | | | | | | | (17,823 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| OTHER (EXPENSE) INCOME, NET | | | (2,170 | ) | | | | | | | (2,175 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (22,429 | ) | | | (57 | )% | | | (19,998 | ) | | | (73 | )% |
| | | | | | | | | | | | | | | | | |
| Income tax benefit | | | (7 | ) | | | | | | | 68 | | | | | |
| NET LOSS | | $ | (22,436 | ) | | | | | | $ | (19,930 | ) | | | | |
Percentages in the table reflect the percent of total revenues.
Total Revenues
Total revenues during the nine months ended September 30, 2022 were $39.2 million, an increase of $11.9 million, or 44% compared to the nine months ended September 30, 2021. The increase in total net revenues was composed of the following:
| ● | $20.9 million net increase in product sales, reflecting gains in the U.S., Latin America, and Africa, offset by lower sales in Europe and the Middle East. Higher sales in Latin America were primarily due to Bio-Manguinhos for DPP SARS-CoV 2 Antigen tests. |
| ● | $9.0 million, or 99%, decrease in R&D, grant and license and royalty revenues were primarily associated with the completion of work 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. |
Gross Product Margin
Cost of product sales is primarily composed of material, labor, manufacturing overhead, depreciation, amortization, 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 sales.
Gross product margin increased by $3.4 million, or 187%, compared to the first nine months ended of 2022. The following schedule calculates gross product margin (dollars in thousands):
| | | For the nine months ended | | | Favorable/(unfavorable) | |
| | | September 30, 2022 | | | September 30, 2021 | | | $ Change | | | % Change | |
| Net product sales | | $ | 38,230 | | | $ | 17,327 | | | $ | 20,903 | | | | 121 | % |
| Less: Cost of product sales | | | (32,969 | ) | | | (15,491 | ) | | | (17,478 | ) | | | 113 | % |
| Gross product margin | | $ | 5,261 | | | $ | 1,836 | | | $ | 3,425 | | | | 187 | % |
| Gross product margin percentage | | | 14 | % | | | 11 | % | | | | | | | | |
The $3.4 million increase in gross product margin was composed of the following:
| ● | $2.2 million favorable product sales volume as described above, together with |
| ● | $1.2 million from favorable product margins related to the impact of geographic mix on average selling price. |
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 | | | Favorable/(unfavorable) | |
| | September 30, 2022 | | | September 30, 2021 | | | $ Change | | | % Change | |
| Clinical and regulatory affairs | | $ | 1,229 | | | $ | 3,156 | | | $ | (1,927 | ) | | | (61 | )% |
| Other research and development | | | 4,338 | | | | 5,946 | | | | (1,608 | ) | | | (27 | )% |
| Total Research and Development | | $ | 5,567 | | | $ | 9,102 | | | $ | (3,535 | ) | | | (39 | )% |
The decrease in total research and development costs for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily associated with the end of the BARDA contract in late 2021. Total research and development cost incurred for the nine months ended September 30, 2022 were primarily related to ongoing projects in our new product pipeline.
Selling, General and Administrative Expense
Selling, general and administrative expense includes administrative expenses, sales and marketing costs (including commissions), and other corporate items.
The $0.3 million, or 2%, decrease in selling, general and administrative expenses for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 is principally due to lower professional fees.
Impairment, restructuring, severance and related costs
Impairment, restructuring, severance and related costs include an impairment loss of $3.0 million during the first quarter of 2022 as a result of an impairment of goodwill due to the substantial decrease in our share price at March 31, 2022. The low price per share value at March 31, 2022 caused our book value to exceed our fair value. During the third quarter of 2022, $0.1 million of severance cost was recorded. For the nine months ended September 30, 2021, $2.4 million was incurred, of which $1.3 million was related to the write-off of intangible assets, net leasehold improvements, and net right-of-use assets for leases associated with our Malaysian operations, and $1.1 million was related to restructuring matters.
Other (Expense) Income, net
Other income (expense), net consists principally of interest expense on our long-term debt under the Credit Agreement on September 3, 2019, of which $20 million (carrying value of $19.0 million) was outstanding at September 30, 2022. For a description of Credit Agreement, please see “Liquidity and Capital Resources—Sources of Funds—Credit Agreement” below
Liquidity and Capital Resources
Our cash and cash equivalents totaled $21.1 million at September 30, 2022. We are obligated to maintain aggregate unrestricted cash of not less than $3.0 million at all times under a covenant in the Credit Agreement.
During the nine months ended September 30, 2022, we funded our business operations, including capital expenditures and working capital requirements, principally from cash and cash equivalents, using $7.7 million of cash.
Factors and considerations with respect to our liquidity raised 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 “Going Concern Considerations” above.
We have considered how the uncertainties around the delivery of the full number of tests covered by customer orders may be affected by limitations of our staffing, supply chain and liquidity 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 $47.4 million for the twelve months ending December 31, 2022 to $50.1 million for the twelve months ending June 30, 2023 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 or to otherwise generate cash 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.
We cannot be certain that our plans and initiatives would be effectively implemented within one year after the filing date of this report, when the accompanying financial statements are being issued. Without giving effect to the prospect of raising additional capital pursuant to our at-the-market offering or likewise, 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.
Please see note 2 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” under Part II, Item 1A, “Risk Factors” of this report 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 Part I, Item 1A, “Risk Factors” of our 2021 Form 10-K.
On April 5, 2022, we received notification from the Listing Qualifications Department of The Nasdaq Stock Market, or Nasdaq, stating that the Company did not comply with the minimum $1.00 bid price requirement for continued listing set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). In accordance with Nasdaq listing rules, the Company was afforded 180 calendar days (until October 3, 2022) to regain compliance with the Bid Price Requirement. On October 4, 2022, the Company received written notice from Nasdaq stating that, although the Company had not regained compliance with the Bid Price Requirement by October 3, 2022, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company is eligible for an additional 180 calendar day period, or until April 3, 2023, to regain compliance with the Bid Price Requirement. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during this additional 180-day period, all as described in more detail in the Current Reports on Form 8-K filed with the SEC on April 7, 2022 and October 4, 2022. The closing price of our common stock was $0.42 on October 5, 2022. There can be no assurance that we will be able to regain compliance with the Bid Price Requirement. Our inability to regain compliance with the Bid Price Requirement would, and the existence of the pending deficiency letter could, materially impair our ability to raise capital. Moreover, if we were unable to regain compliance with the Bid Price Requirement, our common stock would likely then trade only in the over-the-counter market and the market liquidity of our common stock could be adversely affected and its market price could decrease. If our common stock were to trade on the over-the-counter market, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and we could face significant material adverse consequences, including: a limited availability of market quotations for our securities; reduced liquidity with respect to our securities; a determination that our shares are a “penny stock,” which will require brokers trading in our securities to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our securities; a reduced amount of news and analyst coverage; and a decreased ability to issue additional securities or obtain additional financing in the future. These factors could result in lower prices and larger spreads in the bid and ask prices for our common stock and would substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us.
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. As of September 30, 2022, 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.
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 financing, 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
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 (i) for general working capital purposes and other permitted corporate purposes, (ii) to refinance certain of our existing indebtedness and (iii) to pay fees, costs and expenses incurred in connection with the Credit Agreement, including the Lender’s closing cost amount of $550,000, which was netted from the proceeds, and a financing fee of $600,000 (3.0% of gross proceeds) payable to Craig-Hallum Capital Group LLC, 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, 2022, the interest rate was 11.32%. |
| • | Scheduled Repayment. No principal repayments were due prior to September 30, 2022. Chembio did not elect to prepay principal as described under “—Optional Prepayment” below and an event of default as described under “—Default Provisions” below did not occur. 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 10% through September 3, 2020, 8% from September 4, 2020 through September 3, 2021, and 4% from September 4, 2021 through September 3, 2022. No premium will be due with respect to any prepayment made on or after September 4, 2022. |
| • | Guarantees. 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, guarantees, 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 (i) we maintain aggregate unrestricted cash of not less than $3,000,000 at all times and (ii) we achieve specified minimum rolling four-quarter (“last twelve month”) total revenue amounts as of September 30, 2019 and the last day of each calendar quarter thereafter. For the next year, the minimum total revenue requirements range from $47.4 million for the twelve months ending December 31, 2022, and $50.1 million for the twelve months ending June 30, 2023. The minimum total revenue amounts 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. |
Equity and Equity-Related Securities. On July 19, 2021, we and Craig‑Hallum Capital Group LLC, or Craig-Hallum, 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. 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.
We are currently subject to General Instruction I.B.6 to Form S-3, or the Baby Shelf Rule, and the amount of funds we can raise through primary public offerings of securities in any twelve-month period using our existing registration statement on Form S-3 is limited to one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates.
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.
As of the filing date of this report, we have issued and sold pursuant to the ATM Agreement a total of 14,859,595 shares of common stock at a volume-weighted average price of $3.03 per share for gross proceeds of $45.0 million and net proceeds, after giving effect to placement fees and other transaction costs, of $42.7 million. Additional shares of common stock may be issued and sold pursuant to the ATM Agreement, 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. Furthermore, any such sales shall be subject to the Baby Shelf Rule.
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 were available from BARDA to assist us in (a) developing, and pursuing an EUA from the FDA for, the DPP Respiratory Antigen 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, $12.5 million was recognized in prior periods and no government grant income was recognized during the nine months ended September 30, 2022. The completion of milestones to earn the remaining awards are outside our control, and contingent to the EUA approval by the FDA.
Working Capital. The following table sets forth selected working capital information:
| | | September 30, 2022 | |
| | | (in thousands) | |
| Cash and cash equivalents | | $ | 21,055 | |
| Accounts receivable, net of allowance for doubtful amounts | | | 5,253 | |
| Inventories, net | | | 8,465 | |
| Prepaid expenses and other current assets | | | 12,510 | |
| Total current assets | | | 47,283 | |
| Less: Total current liabilities | | | (38,624 | ) |
| Working capital | | $ | 8,659 | |
Our cash and cash equivalents at September 30, 2022, were held for working capital purposes. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends. We have not entered into, and do not expect to enter into, investments for trading or speculative purposes. Our accounts receivable and inventory balances fluctuate from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, raw material lead times, the mix of vendor terms, and the timing of shipment of our products and the invoicing of our research and development activities.
Uses of Funds
Cash Flow Used in Operating Activities. Our operations used $9.9 million of cash during the nine months ended September 30, 2022, primarily due to the net loss which was offset by changes in the principal working capital accounts and impairment.
Capital Expenditures. Our capital expenditures totaled $1.5 million in the nine months ended September 30, 2022 compared to $1.4 million in prior year period, which were primarily attributable to investments in automated manufacturing equipment, facilities, and other fixed assets.
As of September 30, 2022 we have capital purchase obligations of $0.3 million related to additional automated manufacturing equipment with payments expected to come due during 2022 based on vendor performance milestones.
Significant Accounting Policies and Critical Accounting Estimates
There were no significant changes in our accounting policies or critical accounting estimates during the three months ended September 30, 2022 to augment the significant accounting policies or critical accounting estimates disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K, other than those described in the notes to the condensed consolidated financial statements included elsewhere in this report.
Recently Issued Accounting Pronouncements
A discussion of recent accounting pronouncements was included in our 2021 Form 10-K and is updated in Note 2 to the condensed consolidated financial statements included elsewhere in this report.
| ITEM 3. | 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, 2022 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, 2022, 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 “Note 6 – Commitments, Contingencies And Concentrations – Litigation” to the Consolidated Financial Statements of this report is incorporated herein by reference.
Except as set forth below, there have been no material changes to the risk factors described in the sections captioned “Risk Factors,” in our 2021 Form 10-K and updated in our Quarterly Reports on Form 10-Q for the quarter ended March 31, 2022 and June 30, 2022, as filed with the SEC on May 5, 2022 and August 5, 2022, respectively. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the sections “Risk Factors” in our 2021 Form 10‑K and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, which could materially affect our business, financial condition, or future results. The risks described in our 2021 Form 10-K, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022 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.
Risks Related to Our Business and Our Industry
Our near term success is highly dependent on the success of the our DPP platform, and we cannot be certain that we will succeed in developing one or more of those systems or that, if we do, they will attain market acceptance or be successfully commercialized in the United States or elsewhere.
We do not currently have an Emergency Use Authorization, or EUA, from the U.S. Food and Drug Administration, or FDA, for any of the COVID-19 Diagnostic Test Systems or for our DPP Respiratory Panel. We also do not have a CLIA waiver from the FDA for our DPP HIV-Syphilis test system. Market and regulatory requirements continue to change at a rapid pace. There can be no assurance that, if we make a submission of any future EUA or CLIA waiver application, we will meet the requirements of the prioritization guidance in effect at the time of the submission or otherwise be successful in obtaining either (1) an EUA that would permit us to offer and sell the DPP SARS-CoV-2 Antigen test system or DPP Respiratory Panel in the United States or (2) a CLIA waiver for our DPP HIV-Syphilis test.
Even if we are able to obtain any such EUA or CLIA waiver, our product may not gain broad market acceptance among physicians, healthcare payers, patients, and the medical community. We cannot guarantee market acceptance of our product, and have somewhat limited information on which to estimate our anticipated level of sales. Our products will require healthcare providers and doctors to accept and adopt our technology. Our industry is susceptible to rapid technological developments and there can be no assurance that we will be able to match any new technological advances. Acceptance and use of any products we market will depend upon a number of factors including:
| • | perceptions by members of the health care community, including physicians, about the safety and effectiveness of our products; |
| • | limitation on use or warnings required by the FDA or other global regulators in our product labeling; |
| • | the cost of our products relative to competing products; |
| • | convenience and ease of administration; |
| • | potential advantages of alternative diagnostic and treatment methods; |
| • | availability of reimbursement for our products from government or other healthcare payers; |
| • | effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any; and |
| • | the ability of our diagnostic solutions to address different variants. |
In addition, with respect to any EUA we obtain, the FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, even if we obtain an EUA, we cannot predict how long such EUA would remain in place. Such revocation could materially adversely impact our business in a variety of ways, including if the relevant product is not yet approved by the FDA under a traditional approval pathway and if we have invested in the supply chain to provide any of our products under an EUA, and would require us to obtain a 510(k) or other marketing authorization from the FDA. If the FDA revokes a previously issued EUA prior to us having received regulatory approval to commercialize our DPP SARS-CoV-2 Antigen test system or DPP Respiratory Panel through a traditional approval pathway, we would be required to cease our commercialization efforts in the United States, which would substantially and negatively impact our business.
The failure of these products to find market acceptance would substantially harm our business and would adversely affect our revenue. If the DPP SARS-CoV-2 Antigen test system, DPP Respiratory Panel or DPP HIV-Syphilis test are not as successfully commercialized as expected, we may not be able to generate sufficient revenue to become profitable. Any failure of one of these products to be successfully commercialized in the United States may have a material adverse effect on our business, operating result financial condition and cash flows, and could result in a substantial decline in the price of our common stock. In addition, the production and widely administered use of efficacious vaccines for COVID-19 may reduce the demand for diagnostic tests and, as a result, the COVID-19 diagnostic testing market may not develop or substantially grow. Our future success is substantially dependent on the manner in which the market for diagnostic testing develops and grows. If the market develops in a manner that does not facilitate demand for our products, or fails to develop or grow in the manner in which we expect or at all, our business, financial condition, results of operations and cash flows may be negatively affected.
Clinical trials necessary to support a future test kit submission will be expensive and may require the enrollment of large numbers of subjects, and suitable subjects may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new test kits and will adversely affect our business, operating results and prospects.
Some of our programs are supported by government grant awards, and our inability to obtain additional grant awards in the future or to derive all of the funding potentially available under those awards could delay our development and introduction of products.
We have received funding under grant award programs funded by governmental agencies such as BARDA. To fund a portion of our future research and development programs, we may apply for additional grant funding from these or similar governmental agencies. Funding by these governmental agencies may, however, be significantly reduced or eliminated in the future for a number of reasons. For example, some programs are subject to a yearly appropriations process in Congress. We may not receive full funding under current or future grants because of budgeting constraints of the agency administering the program or unsatisfactory progress on the study being funded.
In addition, some or all of the funding available under grant awards, including our $3.2 million contract from the CDC for development and clinical validation of a DPP Syphilis Screen & Confirm Assay, may be conditioned upon our successfully meeting specified milestones or other conditions, and there can be no assurance that those milestones or conditions will be met. For example, in December 2020 we were awarded the Second Grant pursuant to a contract from BARDA that included funding milestones related to our development and pursuit of an EUA for a DPP Respiratory Antigen Panel and our submission for 510(k) clearance from the FDA for the DPP SARS CoV 2 Antigen System.
There can be no assurance that we will receive any future grant awards from any government agencies or that, if a grant award is obtained, we will receive the full amount potentially available under the grant award. Our inability to obtain future grant awards, or to earn the full amount available under those awards, could delay the development of our product candidates and the introduction of new products.
Our U.S. government contracts require compliance with numerous laws and increase our risk and liability.
We are currently receiving funding from the U.S. government related to the DPP SARS-CoV-2 Antigen System, the DPP Respiratory Antigen Panel and DPP Syphilis Screen & Confirm Assay, and our growth strategy may target sales to U.S. government entities. As a condition to our U.S. government funding and potential product sales to the U.S. government, we must comply with laws and regulations relating to the award, administration and performance of U.S. government contracts. A violation of these specific laws and regulations, as well as others, could result in the imposition of fines and penalties or the termination of our U.S. government contracts and could harm our reputation and cause our business to suffer.
U.S. government contracts typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and additional risks to us as compared to competitors that do not rely on government contracts. As a U.S. government contractor, we are subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which purely private sector companies are not. The results of any such actions could adversely impact our business and have an adverse effect on our consolidated financial performance.
Stockholder litigation could negatively impact our business, operating results and financial condition.
We may incur additional costs in connection with the defense or settlement of existing and any future stockholder litigation, including the securities class-action and stockholder derivative lawsuits that have been brought against us. See “Part II, Item 1. Legal Proceedings” above and the information set forth under “Note 6 - Commitments, Contingencies And Concentrations - Litigation” to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding certain existing lawsuits. These lawsuits or other future litigation may adversely affect the ability of our technical and management personnel, and our directors, to perform their normal responsibilities. We could incur significant costs in connection with any such litigation, including costs associated with the indemnification of obligations to our directors, officers and other employees, as well as to third parties such as underwriters of our public offerings. We have engaged in settlement discussions with respect to our putative stockholder securities class action litigation and putative stockholder derivative litigation. (See “Note 6 - Commitments, Contingencies And Concentrations - Litigation” above). We expect to continue working toward resolving these matters, but there can be no assurance that we will be able to do so, or that we will be able to do so on the terms currently being discussed.
We face risks related to an ongoing SEC investigation.
The SEC is conducting a non-public, fact-finding investigation relating to the May 2020 Offering and to the FDA’s revocation in June 2020 of an EUA for the DPP COVID-19 IgM/IgG system that was issued in April 2020. We received subpoenas from the SEC in July 2020 and April 2021 seeking the production of documents in connection with this investigation. In addition, the SEC delivered subpoenas in April 2021 to five of our employees (including our three executive officers, who consist of our Chief Executive Officer and President, our Executive Vice President and Chief Financial Officer, and our Executive Vice President and Chief Scientific and Technology Officer). An additional subpoena was issued in June 2021 to our former Interim Chief Executive Officer and Executive Chair. Each subpoena requested the production of documents relating to the same matters as are the subject of the subpoenas we received. One current employee, our Chief Executive Officer, also received a testimonial subpoena from the SEC. We and the six individuals are cooperating fully in the SEC’s investigation and expect to continue to do so. The SEC’s investigation is ongoing, and there can be no assurance that we will be able to agree on a resolution with the SEC or that the terms of any such resolution will be favorable to us. We are unable to predict what the timing or outcome of the SEC investigation will be or what, if any, consequences the SEC investigation may have with respect to our company or the six individuals mentioned above. The SEC investigation could result in considerable legal expenses, divert management’s attention from other business concerns and harm our business. If the SEC were to determine that legal violations occurred, we could be required to pay significant civil penalties or other amounts, and remedies or conditions could be imposed as part of any resolution. We can provide no assurances as to the outcome of the SEC investigation.
Risks Related to Our Products
Industry adoption of alternative technology to our COVID-19 Diagnostic Test Systems could negatively impact our ability to compete successfully.
As of August 30, 2022, the FDA has authorized 439 COVID-19 Diagnostic tests and sample collection devices, 85 were for serology tests, 302 were for molecular tests and sample collection devices, 51 were for antigen tests and one diagnostic breath test. Customers or the industry as a whole could adopt alternative technologies for testing, including molecular point of care testing, which could result in lower demand for our antigen test. Various advances in the treatment and monitoring of patients could cause lower demand for the COVID-19 Diagnostic Test Systems, including our revised DPP SARS CoV 2 Antigen System or for antigen testing for COVID-19 as a whole.
Risks Related to Regulations
Our inability to respond to changes in regulatory requirements could adversely affect our business.
We believe that our existing products and procedures are in material compliance with all applicable FDA regulations, ISO requirements, and other applicable regulatory requirements, but the regulations regarding the manufacture and sale of our products and QSR, ISO and other requirements may be unclear and are subject to change. Newly promulgated regulations could require changes to our products, necessitate additional clinical trials or procedures, or make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory authorities also have the ability to change the requirements for obtaining product approval and/or impose new or additional requirements as part of the approval process. These changes or new or additional requirements may occur after the completion of substantial clinical work and other costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain approvals and sell our products. In addition, the FDA may revoke an Emergency Use Authorization under which our products are sold, where it is determined that the underlying health emergency no longer exists or warrants such authorization. Such revocation would preclude the sale of our affected products unless and until a further regulatory approval or authorization is obtained. For example, For example, on June 16, 2020, the FDA revoked the EUA it had granted for the DPP COVID‑19 IgM/IgG System based in part on performance criteria identified after the Emergency Use Authorization was granted on April 14, 2020, and since that time we expended resources to design the new COVID-19 Diagnostic Test Systems, including the DPP Respiratory Antigen Panel. We cannot anticipate or predict the effect, if any, that these types of changes might have on our business, financial condition or results of operations.
Financial, Economic and Financing Risks
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─Going Concern Considerations” and “─Liquidity and Capital Resources,” 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 may encounter challenges in fulfilling our obligations, and therefore receiving revenue, under those purchase orders. 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, 2022, our loan balance, net of unamortized discounts and debt issuance costs, of $19.0 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.
As a result, we may need to raise capital in one or more debt or equity offerings to fund our operations and obligations, including under the ATM Agreement. 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 effects of COVID-19 have significantly disrupted world financial markets and negatively impacted U.S. market conditions, and they 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. Moreover, on April 5, 2022, we received a deficiency letter from the Listing Qualifications Department of The Nasdaq Stock Market notifying us that, because the bid price for shares of our common stock had closed below the $1.00 per share minimum Bid Price Requirement for thirty consecutive business days, our common stock may be subject to delisting by as early as October 3, 2022 if we have been unable to regain compliance with the Bid Price Requirements or to qualify for an additional period to regain compliance by such date, all as described in more detail in the Current Report on Form 8-K we filed with the SEC on April 7, 2022. On October 4, 2022, we received written notice from Nasdaq stating that, although we had not regained compliance with the Bid Price Requirement by October 3, 2022, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), we are eligible for an additional 180 calendar day period, or until April 3, 2023, to regain compliance with the Bid Price Requirement. There can be no assurance that we will be able to regain compliance with the Bid Price Requirement. Our inability to regain compliance with the Bid Price Requirement would, and the existence of the pending deficiency letter could, materially impair our ability to raise capital.
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.
Additionally, we are currently subject to the Baby Shelf Rule and the amount of funds we can raise through primary public offerings of securities in any 12-month period using our registration statement on Form S-3 is limited to one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates. We will be limited by the Baby Shelf Rule until such time, if any, as our public float exceeds $75 million.
Our failure to meet the minimum bid price for continued listing on the Nasdaq Capital Market could adversely affect our ability to publicly or privately sell equity securities and the liquidity of our common stock
On April 5, 2022, we received notification from the Listing Qualifications Department of The Nasdaq Stock Market, or Nasdaq, stating that the Company did not comply with the minimum $1.00 bid price requirement for continued listing set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). In accordance with Nasdaq listing rules, the Company was afforded 180 calendar days (until October 3, 2022) to regain compliance with the Bid Price Requirement. On October 4, 2022, the Company received written notice from Nasdaq stating that, although the Company had not regained compliance with the Bid Price Requirement by October 3, 2022, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company is eligible for an additional 180 calendar day period, or until April 3, 2023, to regain compliance with the Bid Price Requirement. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during this additional 180-day period, all as described in more detail in the Current Reports on Form 8-K filed with the SEC on April 7, 2022 and October 4, 2022. The closing price of our common stock was $0.42 on October 5, 2022. There can be no assurance that we will be able to regain compliance with the Bid Price Requirement. Our inability to regain compliance with the Bid Price Requirement would, and the existence of the pending deficiency letter could, materially impair our ability to raise capital. Moreover, if we were unable to regain compliance with the Bid Price Requirement, our common stock would likely then trade only in the over-the-counter market and the market liquidity of our common stock could be adversely affected and its market price could decrease. If our common stock were to trade on the over-the-counter market, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and we could face significant material adverse consequences, including: a limited availability of market quotations for our securities; reduced liquidity with respect to our securities; a determination that our shares are a “penny stock,” which will require brokers trading in our securities to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our securities; a reduced amount of news and analyst coverage; and a decreased ability to issue additional securities or obtain additional financing in the future. These factors could result in lower prices and larger spreads in the bid and ask prices for our common stock and would substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us.
There can be no assurance that our review of strategic alternatives and our financing strategy will result in a transaction satisfactory to holders of our common stock or any change at all.
Our board of directors has initiated a review of strategic alternatives, including a potential sale or merger transaction, and of our financing strategy. We have retained Craig-Hallum Capital Group LLC as our financial advisor to assist with the strategic review. We have not set a timetable for completion of the strategic review process, and there can be no assurance that the process will result in a transaction at this time or at all. Even if a sale, merger or financing transaction is consummated, it may not return any value to holders of our common stock. Regardless of whether we execute a sale, merger or financing transaction, the adverse pressures that we have experienced may continue or intensify, and we will likely continue to face all of the risks we currently face, including the risk that we may not be able to continue as a going concern. See “—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.”
The pursuit of strategic alternatives or financing transactions may consume a substantial portion of the time and attention of our 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 14,859,595 shares of common stock at a volume-weighted average price of $3.03 per share for gross proceeds of $45.0 million and net proceeds, after giving effect to placement fees and other transaction costs, of $42.7 million. For additional information about the at-the-market offerings pursuant to the ATM Agreement, see “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
In order to raise additional capital, we may seek to offer pursuant to the ATM Agreement additional shares of common stock for up to $15.0 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 September 30, 2022, our market capitalization was approximately $12.6 million. Existing stockholders may experience significant dilution in connection with our issuance and sale of up to $15.0 million of additional shares of common stock pursuant to the ATM Agreement. In addition, as of September 30, 2022, 87,672 shares of common stock were reserved for future issuance under our 2019 Omnibus Incentive Plan, 3,674,971 shares were subject to outstanding options, and 1,723,384 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.
| Number | | Description |
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| | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| | 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 |
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| 101.INS | | XBRL Instance Document |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | | XBRL Taxonomy Definition Linkbase Document |
| 101.LAB | | XBRL Taxonomy Label Linkbase Document |
| 101.PRE | | XBRL Taxonomy Presentation Linkbase Document |
| 104 | | Cover page interactive data file (embedded within the XBRL document) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Chembio Diagnostics, Inc. |
| | |
| Date: November 3, 2022 | By: /s/ Richard L. Eberly |
| | Richard L Eberly |
| | Chief Executive Officer and President |
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| Date: November 3, 2022 | By: /s / Lawrence J. Steenvoorden |
| | Lawrence J. Steenvoorden |
| | Chief Financial Officer and Executive Vice President |
