CHEMBIO DIAGNOSTICS, INC. - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10 - Q

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

 

For the quarterly period ended June 30, 2018

 

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

 

For the transition period from: ______ to ________

(Commission File Number)

(Exact name of registrant as specified in its charter)

3661 Horseblock Road

(Address of principal executive offices including zip code)

(631) 924-1135

(Registrant’s telephone number, including area code)

(Former Name or Former Address, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes ☐ No ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of August 2, 2018, the Registrant had 14,173,620 shares outstanding of its $.01 par value common stock.

 

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Quarterly Report on FORM 10-Q

For The Quarterly Period Ended

June 30, 2018

Table of Contents

Chembio Diagnostics, Inc.

 

		Page
Part I. FINANCIAL INFORMATION:
	Item 1. Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017	3
	Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2018 and 2017	4
	Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and six months ended June 30, 2018 and 2017	5
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2018 and 2017	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
	Item 4. Controls and Procedures	24
Part II. OTHER INFORMATION:
	Item 1. Legal Proceedings	25
	Item 1A. Risk Factors	25
	Item 6. Exhibits	26
SIGNATURES		28
EXHIBITS

 

PART I

Item 1.

FINANCIAL STATEMENTS

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF

See accompanying notes to condensed consolidated financial statements

 

 

		For the three months ended								For the six months ended
		June 30, 2018				June 30, 2017				June 30, 2018				June 30, 2017
REVENUES:
Net product sales		$	6,857,861			$	2,892,942			$	13,256,088			$	8,320,314
License and royalty revenue			276,526				227,635				478,457				327,689
R&D, milestone and grant revenue			1,585,939				994,237				2,702,913				1,791,977
TOTAL REVENUES			8,720,326				4,114,814				16,437,458				10,439,980
COSTS AND EXPENSES:
Cost of product sales			5,935,428				2,203,843				10,053,207				5,423,057
Research and development expenses			1,991,412				1,982,426				3,838,514				4,228,998
Selling, general and administrative expenses			2,547,216				2,109,360				4,953,785				4,597,696
			10,474,056				6,295,629				18,845,506				14,249,751
LOSS FROM OPERATIONS			(1,753,730	)			(2,180,815	)			(2,408,048	)			(3,809,771	)
OTHER INCOME:
Interest income, net			25,355				7,722				27,330				21,104
LOSS BEFORE INCOME TAXES			(1,728,375	)			(2,173,093	)			(2,380,718	)			(3,788,667	)
Income tax provision			-				-				-				-
NET LOSS		$	(1,728,375	)		$	(2,173,093	)		$	(2,380,718	)		$	(3,788,667	)
Basic loss per share		$	(0.12	)		$	(0.18	)		$	(0.17	)		$	(0.31	)
Diluted loss per share		$	(0.12	)		$	(0.18	)		$	(0.17	)		$	(0.31	)
Weighted average number of shares outstanding, basic			14,165,343				12,299,122				13,718,776				12,284,979
Weighted average number of shares outstanding, diluted			14,165,343				12,299,122				13,718,776				12,284,979

 

See accompanying notes to condensed consolidated financial statements

 

 

See accompanying notes to condensed consolidated financial statements

 

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED

(Unaudited)

 

See accompanying notes to condensed consolidated financial statements

 

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(UNAUDITED)

NOTE 1 — DESCRIPTION OF BUSINESS:

Chembio Diagnostics, Inc. and its subsidiaries (collectively, the “Company” or “Chembio”) develop, manufacture, and commercialize point-of-care (POC) diagnostic tests that are used to detect or monitor diseases. The Company’s product development efforts are focused on our patented DPP^® technology, a novel point-of-care diagnostic platform that offers certain customer advantages as compared to traditional lateral flow technology. POC tests, by providing prompt and early diagnosis, can reduce patient stays, lower overall costs, improve therapeutic interventions and improve patient outcomes.  POC tests can also prevent needless hospital admissions, simplify testing procedures, avoid delays from central lab batching, and eliminate the need for return visits.

Our product commercialization and product development efforts are focused in three areas: sexually transmitted disease, tropical & fever disease, and technology collaborations. In sexually transmitted disease, we are commercializing tests for HIV and Syphilis. In tropical and fever disease, we are commercializing a test for Zika virus, and developing tests for malaria, dengue virus, chikungunya virus, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi, individually or as part of fever panel tests. Through technology collaborations, we are developing tests for a specific form of cancer, concussion, bovine tuberculosis, and for an undisclosed biomarker, the latter in collaboration with global biopharmaceutical company AstraZeneca.

Large and growing markets have been established for these kinds of tests, initially in high prevalence regions where they are critical for large scale prevention and treatment programs. Our product development is focused on areas where the availability of rapid, POC screening, diagnostic, or confirmatory results can improve health outcomes.  More generally, we believe there is and will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the point of care.

Our products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally, under our STAT PAK^®, SURE CHECK^®, STAT-VIEW^® or DPP^® registered trademarks, or under the private labels of our marketing partners.

The Company routinely enters into arrangements with governmental and non-governmental organizations for the funding of certain research and development efforts.

NOTE 2 — ACQUISITION:

On January 9, 2017, pursuant to a stock purchase agreement (the “Stock Purchase Agreement”), the Company acquired all of the outstanding common stock of RVR Diagnostics Sdn Bhd, (“RVR”), a privately-held Malaysia-based manufacturing company focused on assembly and sales of rapid medical POC assays, for $3,083,000.  The Company acquired RVR, which subsequently changed its name to Chembio Diagnostics Malaysia Sdn Bhd (“CDM”), to have a better presence in Asia, access to lower cost, shorter approval time of in-country regulatory approvals, and a lower cost assembly operation.

Total consideration was: (i) a cash payment of $1,400,000, of which $550,000 was paid as a deposit in December 2016; (ii) 269,236 shares of Chembio’s common stock, with a value at closing of $1,683,000, of which 7,277 shares were held back to satisfy certain potential claims under the Stock Purchase Agreement and became issuable to the sellers on the one-year anniversary of the closing; and, a contingent $148,000 milestone payment based on the achievement of performance goals related to sales by CDM during the 12 months ended December 31, 2017. The performance goals were not achieved and the related $148,000 accrual was reversed during the fourth quarter of 2017 and recognized in selling, general, and administrative expenses associated with the change in fair value.

As a result of the consideration paid exceeding the fair value of the net assets acquired, goodwill in the amount of $1,651,361 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. In addition, the Company recorded $1,800,000 in intangible assets associated with the addition of CDM’s intellectual property, customer base and distribution channels, trade names, order backlog, industry reputation, and management talent and workforce.

 

The acquisition was accounted for using the purchase method of accounting.  The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of January 9, 2017:

 

 

The Company calculated the fair value of the fixed assets based on the net book value of CDM as that approximates fair value. The intellectual property, customer contracts and trade names were based on discounted cash flows using management estimates. The order backlog was based on an order that CDM had at the closing, that was shipped in the first quarter of 2017, and valued at an estimated net income.

 

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

a)

Basis of Presentation:

The preceding (a) condensed consolidated balance sheet as of December 31, 2017, which has been derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements as of June 30, 2018 and for the three and six-month periods ended June 30, 2018 and 2017, respectively, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for fair presentation. The interim financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, previously filed with the SEC on March 8, 2018.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s condensed consolidated financial position as of June 30, 2018, its condensed consolidated results of operations for the three and six-month periods ended June 30, 2018 and 2017, respectively, and its condensed consolidated cash flows for the six-month periods ended June 30, 2018 and 2017, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

b)

Revenue Recognition:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with customers, ASU 2014-09, Revenue from Contracts with Customers. The intent of the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is for a company to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and in certain circumstances, allowing estimates of variable consideration to be recognized before contingencies are resolved. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.

The new revenue standards became effective for the Company on January 1, 2018 and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change our revenue recognition as our revenues continue to be recognized when the customer takes control of our product.  As we did not identify any material accounting changes that impacted the amount of reported revenues with respect to our product revenue, license and royalty revenue, and R&D, milestone and grant revenues, no adjustment to retained earnings was required upon adoption.

 

We adopted the standards to contracts that were not completed at the date of initial application (January 1, 2018).

 

Under the new revenue standards, we recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

Product Revenues

Revenues from product sales are recognized when the customer obtains control of our product, which occurs at a point in time, typically upon tendering to the customer. We expense incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial.

Freight and distribution activities on products are performed after the customer obtains control of the goods. The Company has made an accounting policy election to account for shipping and handling activities that occur either when or after goods are tendered to the customer as a fulfillment activity, and therefore recognizes freight and distribution expenses in Cost of Product Sales.

Reserves for Discounts and Allowances

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

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

Royalty Revenues

We receive royalty revenues on sales by our licensees of  products covered under patents that we own. We do not have future performance obligations under these license arrangements. We record these revenues based on estimates of the sales that occurred during the relevant period as a component of license and royalty revenues. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical royalties that have been paid to us, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. Historically, adjustments have not been material when compared to actual amounts paid by licensees.

R&D, milestone and grant revenue

All such contracts are evaluated under the five-step model described above. For certain contracts that represent grants where the funder does not meet the definition of a customer, the Company recognizes revenue when earned. Such contracts are further described under Disaggregation of Revenue, below. Grants are invoiced and revenue is recognized after expenses are incurred as that is the depiction of the timing of the transfer of services. Performance obligations generally follow the major phases of product development processes: design feasibility & planning, product development & design optimization, design verification, design validation & process validation, and pivotal studies.

The Company follows the recognition of revenue under the milestone method for certain collaborative research projects defining milestones at the inception of the agreement.

Disaggregation of Revenue

In August 2016, the Company was awarded a grant of $5.9 million from BARDA, which is part of the U.S. Department of Health and Human Resources to develop a rapid Zika virus assay. The Company earned $0.8 million and $1.2 million during the three and six-months ended June 30, 2018, respectively as R&D, milestone and grant revenue in the Consolidated Statements of Operations.

In September 2016, the Company was awarded a $0.7 million contract from the USDA to develop a Bovid TB assay. The Company earned $0.1 million and $0.1 million during the three and six-months ended June 30, 2018, respectively as R&D, milestone and grant revenue in the Consolidated Statements of Operations.

 

The following table disaggregates Total Revenues for the three and six-months ended June 30, 2018:

 

Contract Liabilities

Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as (or when) we perform under the contract.  At December 31, 2017, we reported $50,000 in deferred revenue of which $50,000 was earned and recognized as R&D, milestone and grant revenue during the six-months ended June 30, 2018, respectively.

 

c)

Inventories

 

Inventories consist of the following at:

 

Inventories are stated at the lower of cost and net realizable value. There were reserves against inventory of approximately $130,000 and $195,000 as of June 30, 2018 and December 31, 2017, respectively.

 

d)

Loss Per Share:

Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share for the three and six-month periods ended June 30, 2018 and 2017 reflects the potential dilution from the exercise or conversion of other securities into common stock, if dilutive.

There were 683,829 and 674,795 weighted-average number of options outstanding as of June 30, 2018 and 2017, respectively, that were not included in the calculation of diluted per common share equivalent for the three months ended June 30, 2018 and 2017 respectively, because the effect would have been anti-dilutive. There were 707,880 and 677,592 weighted-average number of options outstanding as of June 30, 2018 and 2017, respectively, that were not included in the calculation of diluted per common share equivalent for the six months ended June 30, 2018 and 2017 respectively, because the effect would have been anti-dilutive.

 

e)

Stock Incentive Plan:

Effective June 3, 2008, the Company’s stockholders voted to approve the 2008 Stock Incentive Plan (“SIP”), with 625,000 shares of Common Stock available to be issued. At the Annual Stockholder meeting on September 22, 2011, the Company’s stockholders voted to approve an increase to the shares of Common Stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, the Compensation Committee of the Company’s Board has the discretion to select the persons to whom awards are to be granted. Awards can be stock options, restricted stock and/or restricted stock units ("Equity Award Units"). The awards vest at such times and under such conditions as determined by the Compensation Committee. As of June 30, 2018, there were 510,631 options exercised, 94,132 options outstanding and 145,237 Equity Award Units still available to be issued under the SIP.

Effective June 19, 2014, the Company’s stockholders voted to approve the 2014 Stock Incentive Plan (“SIP14”), with 800,000 shares of Common Stock available to be issued. Under the terms of the SIP14, the Compensation Committee of the Company’s Board has the discretion to select the persons to whom awards are to be granted. Awards can be in the form of Equity Award Units. The awards vest at such times and under such conditions as determined by the Compensation Committee. As of June 30, 2018, there were 60,066 options exercised, 364,093 options outstanding and 375,841 Equity Award Units still available to be issued under the SIP14.

Stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations was classified as the following approximate amounts:

 

		For the three months ended								For the six months ended
		June 30, 2018				June 30, 2017				June 30, 2018				June 30, 2017
Cost of product sales		$	5,800			$	12,800			$	14,000			$	21,400
Research and development expenses			3,600				12,100				15,500				65,200
Selling, general and administrative expenses			117,700				48,800				194,800				123,000
		$	127,100			$	73,700			$	224,300			$	209,600

 

The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based on the Company’s historical experience with similar type options.

 

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

 

The following table provides stock option activity for the six months ended June 30, 2018:

The following table summarizes information about stock options outstanding at June 30, 2018:

As of June 30, 2018, there was $678,237 of net unrecognized compensation cost related to stock options that are not vested, which is expected to be recognized over a weighted average period of approximately 2.55 years. The total fair value of shares vested during the six-month periods ended June 30, 2018 and 2017 was $319,549 and $302,712, respectively.

f)

Geographic Information and Economic Dependency

 

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

 

g)

Fair Value of Financial Instruments:

The carrying value for cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair value of the Company’s note payable approximates the recorded value as the rate is based upon the current rates offered to the Company for similar financial instruments.

h)

Accounts Payable and Accrued Liabilities:

Accounts payable and accrued liabilities consist of:

i)

Goodwill and Intangible Assets:

Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired in our acquisition of CDM in January 2017. Goodwill is not amortized but rather is tested annually as of the first day of the fiscal fourth quarter for impairment or more frequently if we believe that indicators of impairment exist. We make a qualitative evaluation about the likelihood of goodwill impairment, which is based on a number of applicable factors. If we conclude that it is more likely than not that the carrying value of the applicable reporting unit is greater than its fair value, then we would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.

 

There was no impairment recorded for the six months ended June 30, 2018. Following is a table that reflects changes in Goodwill:

In addition, the Company recorded certain intangible assets as part of the CDM acquisition as follows:

Amortization expense for the three months ended June 30, 2018 and 2017 was approximately $45,000 and $52,000, respectively. Amortization expense for the six months ended June 30, 2018 and 2017 was approximately $90,000 and $292,000, respectively.

 

j)

Taxes:

 

 

 

 

NOTE 4 — RIGHTS AGREEMENT:

In March 2016, the Company entered into a Rights Agreement dated as of March 8, 2016 (the “Rights Agreement”) between the Company and Action Stock Transfer Corp., as Rights Agent. Pursuant to the Rights Agreement, the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, $0.01 par value (the “Common Stock”), of the Company. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2016, and the Rights were distributed to the Company’s shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.

 

Rights Initially Not Exercisable. The Rights are not exercisable until a Distribution Date, which is defined below. Until a Right is exercised, the holder thereof, in his capacity as a holder of Rights, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.

Separation and Distribution of Rights. The Rights will be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding shares of the Common Stock (the “Shares Acquisition Date”) or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 20% or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the “Distribution Date”).

NOTE 5 — STOCKHOLDERS’ EQUITY:

During the first quarter of 2018, options to purchase 119,947 shares of the Company’s common stock were exercised on a cashless basis into 60,372 shares of common stock at an exercise price of $4.71 by the option holder surrendering options and shares of common stock already owned as payment of the exercise price.

 

During the second quarter of 2018, options to purchase 25,000 shares of the Company’s common stock were exercised on a cashless basis into 10,918 shares of common stock at an exercise price of $5.07 by the option holder surrendering options and shares of common stock already owned as payment of the exercise price.

On February 13, 2018, the Company closed on an underwritten registered public offering of 1,783,760 shares of its common stock at a public offering price of $6.75 per share for gross proceeds of approximately $12.0 million. The net proceeds, after underwriting discounts and commissions, were $10.9 million. The net proceeds are intended for business expansion and working capital, including product development; operational expansion or improvements, such as new automated equipment and a facilities update; clinical trials and other related activities; and, sales and marketing.

During the first quarter of 2017, options to purchase 10,969 shares of the Company’s common stock were exercised on a cashless basis into 3,039 shares of common stock at an exercise price of $4.00 by the option holder surrendering options and shares of common stock already owned.

 

NOTE 6 — COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS:

a)

Economic Dependency:

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

 

		For the three months ended																For the six months ended																Accounts Receivable as of
		June 30, 2018								June 30, 2017								June 30, 2018								June 30, 2017								June 30, 2018				Dec. 31, 2017
		Sales				% of Sales				Sales				% of Sales				Sales				% of Sales				Sales				% of Sales
Customer 1		$	3,217,387				47	%		$	956,207				33	%		$	5,627,145				42	%		$	2,895,794				35	%		$	3,051,052			$	*
Customer 2			1,460,630				21	%			*				*				1,460,630				11	%			*				*				1,460,630				*
Customer 3			*				*				*				*				*				*				1,326,171				16	%			*				*
Customer 4			*				*				399,482				14	%			*				*				754,408				9	%			*				*

 

In the table above, an asterisk (*) indicates that product sales to the customer did not exceed 10% for the period indicated.

Sales include product sales only, while accounts receivable reflects the total due from the customer, including freight.

 

The following table discloses purchases the Company made from each vendor that sold to the Company in excess of 10% of the Company’s total purchases for the periods indicated:

 

In the table above, an asterisk (*) indicates that purchases from the vendor did not exceed 10% for the period indicated. Two asterisks (**) indicates that the balance due to the vendor was classified as a Note payable.

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

b)

Governmental Regulation:

All of the Company’s existing and proposed diagnostic products are regulated by the United States Food and Drug Administration, United States Department of Agriculture, certain U.S., state and local agencies, and/or comparable regulatory bodies in other countries. Most aspects of development, production, and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing, and record keeping, are subject to regulatory review. After marketing approval has been granted, Chembio must continue to comply with governmental regulations. Failure to comply with these regulations can result in significant penalties.

c)

Employment Contracts:

The Company has multi-year contracts with two key employees that call for salaries presently aggregating $770,000 per year. The contracts expire in March 2019 and March 2020. The following table is a schedule of future minimum salary commitments as of June 30, 2018:

d)

Pension Plan:

The Company has a 401(k) plan established for its employees whereby it matches 40% of the first 5% (or 2% of salary) that an employee contributes to the plan. Matching contribution expenses totaled $46,000 and $45,900 for the six months ended June 30, 2018 and 2017, respectively.

 

NOTE 7 — NOTE PAYABLE:

In September 2017, the Company entered into an agreement with an equipment vendor to purchase automated assembly equipment for approximately $660,000. The Company paid interest at an annual rate of 12% prior to delivery. Thirty days after delivery, the Company began making monthly payments of principal and interest of approximately $20,150, at an annual rate of 12% over a twenty-four-month period.

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including exhibits that are being filed as part of this report, as well as other statements made by Chembio Diagnostics, Inc. (“Chembio”, the “Company”, “we”, “us”, and “our”), contain “forward-looking statements” that include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.

These forward-looking statements include such things as: investment objectives and the Company’s ability to make investments in a timely manner on acceptable terms; references to future success of the Company’s products; the Company’s business strategy; estimated future capital expenditures; sales of the Company’s products; competitive strengths and goals; and, other similar matters.

These forward-looking statements reflect the Company’s current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside the Company’s control that may cause actual results to differ materially from those projected. Such factors include, but are not limited to, those referenced in this Report under Item 1A entitled “Risk Factors”, matters described elsewhere in this Report, and the following: ability to market and sell products, whether through our internal, direct sales force or third parties; ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements; ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements; ability to effectively resolve warning letters, audit observations and other findings or comments from the FDA or other regulatory entities; changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for our products; impact of replacing distributors; inventory levels at distributors and other customers; ability of the Company to achieve its financial and strategic objectives and continue to increase its revenues; ability to identify, complete, integrate and realize the full benefits of future acquisitions; impact of competitors, competing products and technology changes; reduction or deferral of public funding available to customers; competition from new or better technology or lower cost products; ability to develop, commercialize and market new products; market acceptance of our products; changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers for Disease Control and Prevention and other agencies; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product distribution channels; reliance on sole supply sources for critical products and components; availability of related products produced by third parties or products required for use of our products; ability to maintain sustained profitability; volatility of the Company’s stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of litigation relating to patents and other intellectual property; availability of licenses to patents or other technology; obstacles to international marketing and manufacturing of products; ability to sell products internationally, including the impact of changes in international funding sources and testing algorithms; adverse movements in foreign currency exchange rates; loss or impairment of sources of capital; ability to attract and retain qualified personnel; exposure to product liability and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to obtain needed raw materials and components; the impact of terrorist attacks and civil unrest; changes in laws or regulations;  global and regional economic conditions, including conditions affecting the credit markets, such as those resulting from the United Kingdom referendum held on June 23, 2016 in which United Kingdom voters approved an exit from the European Union; and general political, business and market conditions.

Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, these are only assumptions, and forward-looking statements should not be read as a guarantee of future performance or results and will probably not be accurate indications of when such performance or results will be achieved. Investors are cautioned that forward-looking statements may not be reliable and speak only as of the date they are made and that, except as required by law, the Company undertakes no obligation to update these forward-looking statements to reflect any future events or circumstances. All subsequent written or oral forward-looking statements attributable to the Company or to individuals acting on its behalf are expressly qualified in their entirety by this section.

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information to securities analysts unless and until we have made it publicly available. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk.

The Company does not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, has no material derivative risk to report under this Item. As of June 30, 2018, the Company did not have any foreign currency exchange contracts nor purchase currency options to hedge local currency cash flows.

We are exposed to market risks from changes in currency exchange rates and certain commodity prices. All sales from our U.S. subsidiary, regardless of the customer location, are denominated in U.S. dollars. Sales denominated in foreign currencies are associated with a portion of the sales from our subsidiary, Chembio Diagnostics Malaysia, and comprised approximately 5% of our total revenues for the six months ended June 30, 2018.

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 (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that as of June 30, 2018 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 chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the three months ended June 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.  We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation.  There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest that is adverse to our interest.

ITEM 1A.

RISK FACTORS

The following are updated risk factors to be included in Item 1A., entitled “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2017:

 

ITEM 6.

EXHIBITS

EXHIBITS INDEX

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

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