CHEMBIO DIAGNOSTICS, INC. - Annual Report: 2019 (Form 10-K)

UNITED STATES

Securities and Exchange Commission

Washington, D.C.  20549

FORM 10-K

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

For the fiscal year ended December 31, 2019

or

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

For the transition period from _______ to ______.

Commission File No. 0-30379

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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.

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 ☐

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 the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of voting and non-voting common equity held by non-affiliates was $106,974,102.

As of  March 4, 2020, the registrant had 17,733,617 shares of common stock outstanding.

Documents Incorporated By Reference

Portions of the registrant’s proxy statement for its 2020 annual meeting of stockholders are incorporated by reference in Part III of this report.

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

 

DPP, SAMPLETAINER, STAT-PAK, STAT-VIEW and SURE CHECK are our registered trademarks. For convenience, these trademarks appear in this prospectus supplement without ^® symbols, but that practice does not mean that we will not assert, to the fullest extent under applicable law, our rights to the trademarks. This report also includes trademarks and service marks owned by other organizations.

 

FORWARD-LOOKING STATEMENTS AND STATISTICAL ESTIMATES

 

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

 

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

 

Forward-looking statements and statistical estimates inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted or expressed in this report. These risks and uncertainties include those described below in “Item 1A. Risk Factors.” Investors are cautioned not to place undue reliance on any forward-looking statements or statistical estimates, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement or statistical estimate, whether as a result of new information, future events or otherwise.

 

PART I

 

ITEM 1.

BUSINESS

 

Overview

 

We are a leading provider of point-of-care diagnostic products for the detection and diagnosis of infectious diseases. We have been expanding our product portfolio based upon our proprietary Dual Path Platform, which we refer to as DPP, which uses a small drop of blood from the fingertip to provide high-quality, cost-effective diagnostic results in approximately 15 minutes. We seek to build additional revenue streams by entering into technology collaborations with leading global healthcare companies to leverage the DPP technology platform.

 

Compared with traditional lateral flow technology, the DPP technology platform provides enhanced sensitivity and specificity, advanced multiplexing capabilities, and, when used with the DPP Micro Reader, quantitative results. Our DPP test for human immunodeficiency virus, or HIV, provides sensitivity of 99.8% and specificity of 100%, and has been approved by the U.S. Food and Drug Administration, or FDA, and cleared as a waived test under the Clinical Laboratory Improvement Amendments of 1988, or CLIA.

 

On November 6, 2018, we completed our acquisition of opTricon GmbH, a Berlin-based developer and manufacturer of handheld analyzers for rapid diagnostic tests, which we believe will enable us to promote DPP tests and DPP Micro Readers more actively across global markets. On November 25, 2019, we completed our acquisition of Orangelife Comercio e Industria Ltda., a Brazilian manufacturer of lateral flow tests for infectious diseases to diversify our market channel penetration in Brazil and support Bio-Manguinos, a major customer.

 

We are pursuing three corporate priorities, the key building blocks to drive growth and operating efficiency: (1) expand our commercialization; (2) advance our research and development pipeline; and (3) prepare for future growth.

 

Industry

 

The DPP technology platform addresses the lateral flow test market, which includes infectious diseases, cardiac markers, cholesterol and lipids, pregnancy and fertility, and drugs of abuse. Based on our review of third-party reports and other information, we estimate that the market for lateral flow tests will increase from $5.5 billion in 2017 to $8.2 billion in 2022, representing a compound annual growth rate of 8.2%.

 

Infectious disease tests constitute the largest and fastest growing, segment of the lateral flow test market. We currently are targeting lateral flow test solutions for infectious diseases: sexually transmitted disease and mosquito-borne disease. The market for lateral flow infectious disease tests is being 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. Based on our review of third-party reports and other information, we estimate that the market for lateral flow infectious disease tests will increase from $1.4 billion in 2017 to $2.3 billion in 2022, representing a compound annual growth rate of 10.7%.

 

Products

 

Our point-of-care infectious disease portfolio is comprised of multiple commercial products, each serving unique customer requirements. The key advantages of our products, which are performed with a tiny drop of blood from the fingertip and provide results in approximately 15 minutes, include:

 

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enhanced sensitivity and specificity;

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advanced multiplexing; and

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quantitative results, when used with DPP Micro Reader.

 

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

 

 

Organic growth in our core infectious disease business is being driven by:

 

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growth in the overall market for lateral flow infectious disease tests, which we estimate will increase at a compound annual growth rate of 10.7% through 2022 (see “–Industry” above);

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our increased market penetration in existing markets and channels, including in the United States, Latin America, Africa and Europe;

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our registration of existing and new products in unchartered countries and regions, such as selected countries in Latin America and Southeast Asia;

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our entry into new market segments, such as international HIV Self-Testing; and

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advances in our product pipeline in infectious disease with key products including a multiplex test for HIV and syphilis in the U.S. market and tests for dengue, zika and chikungunya.

 

We market and sell both stand-alone and multiplex tests for sexually transmitted infectious diseases, such as HIV and syphilis. HIV and syphilis continue to be major global public health issues. According to WHO estimates:

 

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HIV has claimed more than 35 million lives, including 770,000 in 2018. Approximately 37.9 million people were living with HIV at the end of 2018, and 1.7 million were newly infected during 2018.

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There were 18.0 million prevalent cases of syphilis as of 2012, and 5.6 million new infections were estimated to occur annually.

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Elimination of mother-to-child transmission, or MTCT, of both HIV and syphilis is a global health priority. In 2013, 1.9 million pregnant women were infected with syphilis worldwide. Congenital syphilis contributes significantly to infant mortality, accounting for 305,000 annual perinatal deaths worldwide in 2013. Globally, more than 1.4 million pregnant women were infected with HIV as of 2015, and MTCT of HIV is estimated to have resulted in over 150,000 infant cases in 2015.

 

We are seeking to address the global concerns related to HIV and syphilis co-infection through the development of a novel, multiplex test for both HIV and syphilis. We have developed a DPP HIV-Syphilis multiplex test and received regulatory approvals covering a number of international markets, including Brazil, Europe, Malaysia and Mexico. In the United States we completed a DPP HIV-Syphilis clinical trial but in February 2020 received a “not approvable” letter from the FDA with respect to our Premarket Approval, or PMA, application on our DPP HIV-Syphilis multiplex test for commercial use in the United States. The FDA has confirmed that, of the items that had been open for review in the PMA application, the syphilis arm of the study was acceptable, as were the results as they relate to the inclusion of pregnant women. The only remaining item requested of us was to repeat the reproducibility study, as one of the sites in the trial reported greater variability compared to the other sites. We have initiated the reproducibility study required by the FDA and, in parallel, accelerated the studies for a CLIA waiver, which can be submitted upon FDA approval of the PMA application. We believe we continue to be well-positioned to be the first company to introduce a multiplex rapid test for HIV and syphilis in the United States.

We also market and sell tests for selected fever and tropical diseases such as Chagas, ebola, leishmaniasis and Zika. The market for lateral flow mosquito-borne diseases includes established markets for disease such as dengue and malaria, which WHO estimates together account for more than 600 million annual infections worldwide. There are also a number of emerging markets for lateral flow tests for infectious diseases such as burkholderia, chikungunya, lassa, leptospirosis, Marburg, rickettsia and Zika. We are developing tests, using the DPP platform, to detect all of the aforementioned fever and tropical diseases, as stand-alone or multiplex tests.

 

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

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

 

 

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1	Agência Nacional de Vigilância Sanitária (Brazil)

2	Emergency Use Authorization

 

Collaborations

 

We are building additional revenue streams by leveraging our patented DPP technology and scientific expertise through collaborations. Leading global healthcare organizations have chosen to collaborate with us based on our deep scientific expertise with our proven DPP technology platform and capabilities, our successful record of developing DPP tests with a diverse set of collaborators including global commercial companies, governments and non-governmental organizations, and our extensive experience in obtaining regulatory approvals in the United States (FDA), Brazil (ANVISA), the European Union (CE mark) and Mexico (Comisión Federal para la Protección contra Riesgos Sanitarios, or COFEPRIS) as well as from WHO (Prequalification, or PQ).

 

 

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3	For use in pharmaceutical research

 

By leveraging our DPP technology platform, we are creating opportunities to expand into new markets such as cancer diagnostics, concussion and traumatic brain injury, and veterinary and we are broadening the application of our technology from point-of-care diagnostics to include companion diagnostics. Research and development costs related to the collaborations are fully funded by our collaborators.

 

Sales Channels

 

Our products are sold globally, both directly and through distributors, to hospitals and clinics, physician offices, clinical laboratories, public health organizations, government agencies and consumers. Historically we marketed and sold our products only into a handful of countries and regions. In recent years we have hired sales executives to begin building our own channels in key markets such as the United States, Europe, Latin America, Africa and Southeast Asia. With sales growth as an underlying objective, we are focused on increasing sales in existing geographies, expanding sales into new geographies, and broadening sales coverage in key markets.

 

Automation of U.S. Manufacturing

 

We are automating our U.S. manufacturing processes and expanding our manufacturing capacity. During 2018, we took delivery of our first automated manufacturing line. This automated manufacturing line provided DPP test production for Brazil and will allow assembly of various configurations of DPP tests. The automated line has an annual capacity of between five and ten million tests, depending on the test configuration, and uses vision-guided, robotic operation to improve inspection and quality control. During 2019, we took delivery of our second and third manufacturing lines that together, following commissioning and regulatory approvals, will support our other product platforms. As we transition from manual to automated assembly, we believe the reduced variable costs will improve product gross margins.

 

DPP Technology & Development

 

Our commercially available products employ either our patented DPP technology or traditional lateral flow technology. We believe products developed using our DPP technology can provide superior diagnostic performance compared with products that utilize traditional lateral flow technology.

 

We are executing our strategy to leverage DPP intellectual property, as well as our scientific and operational expertise, to create new collaborations where we will serve as an exclusive development and manufacturing partner. Examples of such collaborations include the following:

 

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In January 2015, we entered into an agreement with the Concussion Science Group (CSG) Division of Perseus Science Group LLC to develop a point-of-care diagnostic test for traumatic brain injury, including sports-related concussions, utilizing both our DPP and optical analyzer technologies.

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In October 2017, we signed a biomarker development project agreement with AstraZeneca, utilizing both our DPP and optical analyzer technologies.

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In April 2018, we entered into a collaboration agreement with LumiraDx to develop new point-of-care diagnostic tests for infectious diseases. Under terms of the agreement, we receive funding from LumiraDx, subject to satisfying certain milestones, to develop certain new point-of-care infectious disease tests. Following the regulatory approval and commercialization of tests in accordance with this agreement, Chembio will both sell reagents to, and receive royalty payments from, LumiraDx on sales of all products developed through this collaboration.

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In November 2018, we acquired opTricon (Berlin, Germany), a leading developer of handheld optical analyzers rapid diagnostic tests.

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In July 2019, we entered into a collaboration agreement with Shire Human Genetic Therapies, Inc., a wholly owned subsidiary of Takeda Pharmaceutical Company Limited, to develop a novel point-of-care diagnostic test to detect an undisclosed biomarker.

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In November 2019, we acquired Orangelife Comercio e Industria Ltda. (Rio de Janeiro, Brazil), a privately held manufacturer of lateral flow test for infectious diseases, to expand our market penetration and support Bio-Manguinhos, a major customer.

Competition

 

Many of our competitors are significantly larger and have greater financial, research, manufacturing, and marketing resources. Important competitive factors include product quality, analytical performance, ease of use, price, customer service and reputation. Industry competition is based on these and the following additional factors:

 

 

We believe our scientific capabilities and proprietary know-how relating to our patented DPP technology and lateral flow technology are very strong, particularly for the development and manufacture of tests for the detection of antibodies to infectious diseases, and other diseases.

 

Our ability to develop and market other products is in large measure dependent on our having additional resources and/or collaborative relationships.  Some of our product development efforts have been funded on a project or milestone basis.  We believe that our proprietary know-how relating to our patented DPP technology has been instrumental in our obtaining the collaborations we have and that we continue to pursue.  We believe that our patent protection enhances our ability to both develop more profitable, collaborative relationships and expand licensing revenue. However, there are a number of competitive technologies used and/or seeking to be used by others in point-of-care settings.

 

Although we have no specific knowledge of any other competitors’ products that could render our products obsolete, if we fail to maintain and enhance our competitive position or fail to introduce new products and product features, our customers may decide to use the products developed by our competitors, which could result in a loss of revenues and cash flow.

 

Employees

 

As of December 31, 2019, we had 324 full-time equivalent employees, of whom 35 were in administration, 230 were in manufacturing, 42 were in research and development, and 17 were in sales and marketing and customer service. Of these employees, approximately 256 were located in the United States, 30 were located in Malaysia, 19 were located in Germany and 19 were located in Brazil.

 

 

We have never had a work stoppage, and none of our employees are represented by a labor organization or subject to any collective bargaining arrangements. We consider our employee relations to be good.

 

Governmental Regulation

 

Certain of our activities are subject to regulatory oversight by the FDA under provisions of the Federal Food, Drug, and Cosmetic Act and regulations thereunder, including regulations governing the development, marketing, labeling, promotion, manufacturing, and export of diagnostic products. Our clinical laboratory customers are subject to oversight by Centers for Medicare and Medicaid Services, or CMS, pursuant to CLIA, as well as agencies in various states. Failure to comply with applicable requirements can lead to sanctions, including withdrawal of products from the market, recalls, refusal to authorize government contracts, product seizures, civil money penalties, injunctions, and criminal prosecution.

 

FDA Approval/Clearance Requirements

 

Unless an exemption applies, each medical device that we market or wish to market in the United States must receive 510(k) clearance or Premarket Approval, or PMA. Medical devices that receive 510(k) clearance are “cleared” by the FDA to market, distribute, and sell in the United States. Medical devices that obtain a PMA by the FDA are “approved” to market, distribute and sell in the United States. We cannot be certain that 510(k) clearance or PMA approval will ever be obtained for any products that have not already obtained 510(k) clearance or PMA approval. Descriptions of the PMA and 510(k) clearance processes are provided below.

 

The FDA decides whether a device line must undergo either the 510(k) clearance or PMA based on statutory criteria that utilize a risk-based classification system. PMA is the FDA process of scientific and regulatory review to evaluate the safety and effectiveness of Class III medical devices and, in many cases, Class II medical devices. Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury. The FDA uses these criteria to decide whether a PMA or a 510(k) is appropriate, including the level of risk that the agency perceives is associated with the device and a determination by the agency of whether the product is a type of device that is similar to devices that are already legally marketed. Devices deemed to pose relatively less risk are placed in either Class I or II. In many cases, the FDA requires the manufacturer to submit a 510(k) requesting clearance (also referred to as a premarket notification), unless an exemption applies. The 510(k) must demonstrate that the manufacturer’s proposed device is “substantially equivalent” in intended use and in safety and effectiveness to a legally marketed predicate device. A “predicate device” is a pre-existing medical device to which equivalence can be drawn, that is either in Class I or Class II or is a Class III device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for submission of a PMA application.

 

Device classification depends on the device’s intended use and its indications for use. In addition, classification is risk-based, that is, the risk the device poses to the patient and/or the user is a major factor in determining the class to which it is assigned. Class I includes devices with the lowest risk and Class III includes those with the greatest risk.

 

Class I devices are those for which safety and effectiveness can be assured by adherence to the FDA’s general regulatory controls for medical devices, or the General Controls, which include compliance with the applicable portions of the FDA’s quality system regulations, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) process described below.

 

Class II devices are subject to the FDA’s General Controls, and any other special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) process. Pursuant to the Medical Device User Fee and Modernization Act of 2002, unless a specific exemption applies, 510(k) submissions are subject to user fees. Certain Class II devices are exempt from this premarket review process.

 

Class III includes devices with the greatest risk. Devices in this class must meet all of the requirements in Classes I and II. In addition, Class III devices cannot be marketed until they receive Premarket Approval.

 

The safety and effectiveness of Class III devices cannot be assured solely by the General Controls and the other requirements described above. These devices require formal clinical studies to demonstrate safety and effectiveness. Under Medical Device User Fee and Modernization Act of 2002, PMA applications (and supplemental premarket approval applications) are subject to significantly higher user fees than 510(k) applications, and they also require considerably more time and resources.

 

Rapid HIV tests intended for diagnostic use are regulated as Class III devices. Responsibility for assuring the safety and effectiveness of these tests lies within the Center for Biologics Evaluation and Research’s Office of Blood Research and Review, with oversight by the Blood Products Advisory Committee. Approved rapid HIV tests must meet the regulations in the 21 CFR 800 series subparts, under the investigational device exemption, or IDE and PMA pathways.

 

Premarket Approval Pathway

 

We manufacture, market and distribute three rapid HIV tests in the United States. Our HIV 1/2 STAT-PAK Assay, SURE CHECK HIV 1/2 Assay, and DPP HIV 1/2 Assay all have received FDA PMA approval. A PMA application must be supported by extensive data including, but not limited to, analytical, preclinical, clinical trials, manufacturing, statutory preapproval inspections, and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. Before a PMA is submitted, a manufacturer must apply for an IDE. If the device presents a “significant risk,” as defined by the FDA, to human health, the FDA requires the device sponsor to file an IDE application with the FDA and obtain IDE approval prior to initiation of enrollment of human subjects for clinical trials. The IDE provides the manufacturer with a legal pathway to perform clinical trials on human subjects where without the IDE, only approved medical devices may be used on human subjects.

 

The IDE application must be supported by appropriate data, such as analytical, animal and laboratory testing results, manufacturing information, and an Investigational Review Board, or IRB, approved protocol showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. If the clinical trial design is deemed to have “non-significant risk,” the clinical trial may be eligible for “abbreviated” IDE requirements. In some instances, clinical trials for in vitro diagnostic medical devices may be exempt from the more burdensome IDE requirements if certain labeling requirements are met.

 

A clinical trial may be suspended by either the FDA or the Investigational Review Board at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the study. Even if a study is completed, clinical testing results may not demonstrate the safety and efficacy of the device, or they may be equivocal or otherwise insufficient to obtain approval of the product being tested. After the clinical trials have been completed, if at all, and the clinical trial data and results are collected and organized, a manufacturer may complete a PMA application.

 

After a PMA application is sufficiently complete, the FDA will accept the application and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the “accepted application,” although, generally, review of the application can take between one and three years, but it may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The preapproval inspections conducted by the FDA include an evaluation of the manufacturing facility to ensure compliance with the FDA’s quality systems regulations or QSR, as well as inspections of the clinical trial sites by the Bioresearch Monitoring group to evaluate compliance with good clinical practice and human subject protections. New PMA applications or PMA supplements are required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s indication for use, manufacturing process, labeling and design. Significant changes to an approved PMA require a 180-day supplement, whereas less substantive changes may utilize a 30-day notice, or a 135-day supplement. Premarket approval supplements often require submission of the same type of information as a premarket approval application, except that the supplement is limited to information needed to support any changes from the device covered by the original premarket approval application, and it may not require as extensive clinical data or the convening of an advisory panel.

 

Our HIV 1/2 STAT-PAK Assay PMA application number BP050009/0 and our SURE CHECK 1/2 HIV Assay PMA application number BP050010/0 were approved by the FDA in May 2006. Our DPP HIV 1/2 Assay PMA application number BP120032/0 was approved by the FDA in December 2012.

 

510(k) Clearance Pathway

 

Clinical Laboratory Improvement Amendments of 1988

 

A manufacturer of a test categorized as moderately complex may request that categorization of the test be waived through a CLIA Waiver by Application, or CW, submission to the FDA. When a test is categorized as waived, it may be performed by laboratories with a Certificate of Waiver, such as a physician’s office outreach setting. In a CW submission, the manufacturer provides evidence to the FDA that a test meets the CLIA statutory criteria for waiver CLIA, a walk-in clinic or an emergency room provides CMS authority over all laboratory testing, except research that is performed on humans in the United States. The Division of Laboratory Services, within the Survey and Certification Group under the CMS, has the responsibility for implementing the CLIA program.

 

The CLIA program is designed to establish quality laboratory testing by ensuring the accuracy, reliability and timeliness of patient test results. Under CLIA, a laboratory is a facility that does laboratory testing on specimens derived from humans and used to provide information for the diagnosis, prevention or treatment of disease, or impairment of, or assessment of health. Under the CLIA program, unless waived, laboratories must be certified by the government, satisfy governmental quality and personnel standards, undergo proficiency testing, be subject to inspections and pay fees. We have received a CLIA waiver for all of our lateral flow rapid HIV tests that we market in the United States. Specifically, the CLIA waiver was granted by the FDA for HIV 1/2 STAT-PAK in November 2006,for SURE CHECK HIV 1/2 in October 2007, and for DPP HIV 1/2 in October 2014.

 

Pervasive and Continuing FDA Regulation

 

A host of regulatory requirements apply to our approved devices, including: the quality system regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures; the Medical Reporting Regulations, which require manufacturers to report to the FDA specified types of adverse events involving their products; labeling regulations; and the FDA’s general prohibition against promoting products for unapproved or “off-label” uses. Some Class II devices are subject to special controls-such as performance standards, post-market surveillance, patient registries, and FDA guidelines-that do not apply to Class I devices.

 

The regulatory requirements that apply to our approved products classified as medical devices include:

 

 

Our Medford, New York facility is currently registered as an establishment with the FDA. We and any third-party manufacturers are subject to announced and unannounced inspections by the FDA to determine our compliance with QSR and other regulations.

 

21st Century Cures Act

 

The 21st Century Cures Act, enacted in December 2016, contains several sections specific to medical device innovations. We believe that implementation of the 21st Century Cures Act may have a positive impact on its businesses by facilitating innovation and/or reducing the regulatory burden imposed on medical device manufacturers.

 

Government Regulation of Medical Devices for Animal Subjects

 

We currently offer two veterinary devices in the United States: DPP VetTB Assay for Cervids and DPP VetTB Assay for Elephants. Diagnostic tests for animal health infectious diseases, including our veterinary devices for the prevention and/or treatment of animal disease, are regulated in the U.S. by the Center for Veterinary Biologics within the U.S. Department of Agriculture Animal and Plant Health Inspection Service, or APHIS, under the Virus, Serum, and Toxin Act of 1913. As a requirement, our veterinary devices were approved by APHIS before they could be sold in the U.S.

 

The APHIS regulatory approval process involves the submission of product performance data and manufacturing documentation. Following regulatory approval to market a product, APHIS requires that each lot of product be submitted for review before release to customers. In addition, APHIS requires special approval to market products where test results are used in part for government-mandated disease management programs.

 

Environmental Laws

 

We believe that we are in compliance in all material respects with all foreign, federal, state, and local environmental regulations applicable to our manufacturing facilities. The cost of ongoing compliance with such regulations does not have a material effect on our operations.

 

Intellectual Property

 

Intellectual Property Strategy

 

Our intellectual property strategy is to:  (1) build our own intellectual property portfolio around our DPP technology and optical analyzers; (2) pursue licenses, trade secrets and know-how within the area of rapid point-of-care testing; and, (3) develop and acquire proprietary positions to certain reagents.

 

DPP Intellectual Property

 

We have obtained patent coverage on our DPP technology, including numerous patents in the United States, China, Malaysia, Eurasia, Mexico, Singapore, Japan, Australia, Indonesia, Korea and the U.K.  Additional patent applications on our DPP technology are pending in the United States, as well as in foreign countries such as Brazil, Canada, the European Union, India, Israel, and South Africa.

 

DPP technology provides us with freedom to operate, which enables us to develop tests with better performance and capabilities compared with tests built on traditional lateral flow platforms.  These advantages have allowed us to enter into multiple technology collaborations based upon DPP technology, which we believe will provide new manufacturing and marketing opportunities. We have filed additional patent applications that we believe will strengthen the DPP intellectual property and have also filed for patent protection for certain other point-of-care technologies or applications thereof.

 

We have also obtained patent coverage on our optical-based analyzer technology in the United States, with patents pending in several foreign countries.

 

Trademarks

We have filed and obtained trademarks for our products, including DPP, SURE CHECK, STAT-VIEW, and STAT-PAK, and NEXT GENERATION DPP, as well as for the SampleTainer and DPP Micro Reader, which are used with certain DPP products.  Our trademarks have been obtained in the United States and certain other countries around the world.

 

Trade Secrets and Know-How

 

We have developed a substantial body of trade secrets and know-how relating to the development and manufacture of lateral flow and DPP-based diagnostic tests, including the sourcing and optimization of materials for such tests, and methods to maximize sensitivity, speed-to-result, specificity, stability and reproducibility of our tests.  We possess proprietary know-how to develop tests for multiple conditions using colored particles.  Our formulations enable long shelf lives of our rapid HIV and other tests, providing us with an important competitive advantage.

 

Lateral Flow Technology and Reagent Licenses

 

We seek licenses and/or redesigns of products that we believe to be in our best interests.  Because of the costs and other negative consequences of time-consuming patent litigation, we often attempt to obtain a license on reasonable terms.

 

The peptides used in our rapid HIV tests were licensed to us by one or more third parties. We also have licensed the antigens used in other tests including our Syphilis, Tuberculosis, Leptospirosis, Leishmaniasis and Chagas tests, and we may enter into other license agreements.  In prior years, we concluded license agreements related to intellectual property rights owned by the United States associated with HIV-1 and a sub-license agreement for HIV-2 with Bio-Rad Laboratories N.A., the exclusive licensee of the Pasteur Institute’s HIV-2 intellectual property estate.

 

Available Information

 

We are required to file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are also available free of charge on our website at www.chembio.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.

 

Investors should note that we currently announce material information to our investors and others using filings with the SEC, press releases, public conference calls, webcasts or our website (www.chembio.com), including news and announcements regarding our financial performance, key personnel, our brands and our business strategy. Information that we post on our corporate website could be deemed material to investors. We encourage investors to review the information we post on these channels. We may from time to time update the list of channels we will use to communicate information that could be deemed material and will post information about any such change on www.chembio.com. The information on our website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of our other filings with the SEC.

 

Corporate Information

 

Our principal executive offices are located at 555 Wireless Boulevard, Hauppauge, New York 11788. Our telephone number is (631) 924-1135. Our website address is www.chembio.com. The information contained in, or accessible through, our corporate website does not constitute part of this report.

 

ITEM 1A.

RISK FACTORS

 

You should carefully consider each of the following risk factors and all of the other information provided in this Form 10-K in considering whether to make or continue to hold an investment in our Common Stock. The risks described below are those we currently believe may materially affect us. An investment in our Company involves a high degree of risk, and should be considered only by persons who can afford the loss of their entire investment.  Although we believe that these risks are the most important for you to consider, you should read this section in conjunction with our financial statements, the notes to those financial statements and our management’s discussion and analysis of financial condition and results of operations included in our periodic reports and incorporated into this Form 10-K by reference.

 

Risks Related to Our Business

 

Important competitive factors for our products include price, quality, performance, ease of use, and customer service. A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented.

 

More generally, the point-of-care diagnostics industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services.  As new technologies become introduced into the point-of-care diagnostic testing market, we may be required to commit considerable additional efforts, time and resources to enhance our current product portfolio or develop new products.  We may not have the available time and resources to accomplish this, and many of our competitors have substantially greater financial and other resources to invest in technological improvements.  We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers, which would materially harm our operating results.

 

Although we own DPP patents, lateral flow technology is still a competitive platform to DPP, and lateral flow technology has a lower cost of manufacture than DPP products. Although the DPP platform has shown improved sensitivity as compared with conventional lateral flow platforms in a number of studies, several factors go into the development and performance attributes of products.  Therefore the ability of our products to successfully compete will depend on several other factors, including our having a patented rapid test platform technology that differentiates DPP from lateral flow as well as from other diagnostic platform technologies.

 

There can be no assurance that our DPP patents or our products incorporating those patents will not be challenged at some time in the future.

 

Our Competitors may Develop and Commercialize More Effective or Successful Products, and Our Research, Development and Commercialization Efforts may not Succeed.

 

We regularly commit substantial resources to research and development and the commercialization of our new or enhanced products. The research and development process usually takes a long time from inception to commercial launch. During each stage of this process there is a substantial risk that we will not achieve our goals in a timely fashion, or at all, and we may have to abandon a new or enhanced product in which we have invested substantial time and money. We expect to continue to incur significant costs related to our research and development activities.

 

Our products require significant development and investment prior to commercialization, including testing to demonstrate the products’ performance capabilities, cost-effectiveness or other benefits. We must obtain regulatory approval before most products may be sold and additional development efforts on these products may be required before the products will be reviewed. However, regulatory authorities may not approve these products for commercial sale or may substantially delay or condition such approval. There may be little or no market for the product and entry into or development of new markets for our products may require an investment of substantial resources even if all applicable regulatory approvals are obtained. Furthermore, we may spend a significant amount of money on advertising or other activities and still fail to develop a market for the product. The success of our efforts may be affected by our ability to manufacture products in a cost-effective manner, whether we can obtain necessary intellectual property rights and protection and our ability to obtain reimbursement authorizations in the markets where the product will be sold. Therefore, if we fail to develop and gain commercial acceptance for our products, or if competitors develop more effective products or a greater number of successful new products, customers may decide not to purchase our products.

 

Our Products may not be Able to Compete with New Diagnostic Products or Existing Products Developed by Well-Established Competitors, which would Negatively Affect Our Business.

 

The diagnostic industry is focused on the testing of biological specimens in a laboratory or at the point-of-care and is highly competitive and rapidly changing.  Important competitive factors for our products include price, quality, performance, ease of use, and customer service.

 

A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented.

 

Some of our principal competitors may have considerably greater financial, technical and marketing resources than we do. Several companies produce diagnostic tests that compete directly with our testing product line, including Abbott (Alere), OraSure Technologies and Trinity Biotech. Some competitors offer broader product lines and may have greater name recognition than we have. These and other companies have or may have products incorporating molecular or other advanced technologies that over time could directly compete with our testing product line. We also face competition from certain of our distributors or former customers that have created or may decide to create, their own products to compete with ours.

 

As new products incorporating new technologies enter the market, our products may become obsolete or a competitor’s products may be more effective or more effectively marketed and sold. If our competitors’ products take market share from our products through more effective marketing or competitive pricing, our revenues, margins and operating results could be adversely affected. In addition, our revenues and operating results could be negatively impacted if some of our customers internally develop or acquire their own sample collection devices and use those devices in place of our products in order to reduce costs.

 

Our Future Revenues and Operating Results may be Negatively Affected by Ongoing Consolidation in the Healthcare Industry.

 

There has been a significant amount of consolidation in the healthcare industry. This consolidation has increased the competition to provide goods and services to customers. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. Due to ongoing consolidation, there could be additional pressure on the prices of our products.

 

The Company may not successfully manage the transition associated with the appointment of a new chief executive officer, which could have an adverse impact on the Company.

 

On January 9, 2020, we announced that John J. Sperzel III had notified the board of directors of his resignation as our Chief Executive Officer and President and one of our directors. On the same day, we announced that we had appointed Gail S. Page, one of our directors, to serve as our Interim Chief Executive Officer. On March 12, 2020, we announced that we had appointed Richard Eberly as our Chief Executive Officer, effective as of March 16, 2020.

 

The effectiveness of our new Chief Executive Officer, and our senior leadership team generally, following these transitions and any further transition as a result of these changes, could have a significant impact on our results of operations. Management transition is often difficult and inherently causes some loss of institutional knowledge, which could negatively affect our results of operations and financial condition. Our ability to execute our business strategies may be adversely affected by the uncertainty associated with these transitions.

 

Our Continued Growth Depends on Retaining Our Current Key Employees and Attracting Additional Qualified Personnel, and We may not be Able to do so.

 

Our success depends to a large extent upon the skills and experience of our executive officers, sales, marketing, operations and scientific staff. We may not be able to attract or retain qualified employees due to the intense competition for qualified personnel among medical products businesses and academic and other research institutions, as well as to geographic considerations, our ability to offer competitive compensation and benefits, and other reasons.

 

If we are not able to attract and retain the necessary qualified personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products to meet the demands of our customers and strategic partners in a timely fashion, or to support internal research and development programs.

 

We have entered into employment contracts with our Interim Chief Executive Officer, Gail S. Page; our incoming Chief Executive Officer, Richard Eberly, our Chief Science & Technology Officer, Javan Esfandiari, and our Chief Financial Officer, Neil Goldman. Due to the specific knowledge and experience of these executives regarding the industry, technology and market generally and to our company specifically, the loss of the services of any one of these executives could have a material adverse effect on us. We have not obtained a key man insurance policy on any officer other than Mr. Esfandiari.

 

We may not generate the expected benefits of our acquisitions of opTricon GmbH or Orangelife Comercio e Industria Ltda. and the integration of the acquisitions could disrupt our ongoing business, distract our management and increase our expenses.

 

We acquired opTricon GmbH, or opTricon, and Orangelife Comercio e Industria Ltda., or Orangelife, in November 2018 and November 2019, respectively, with the expectation that the acquisition will result in various benefits, including securing global commercial rights and reducing cost of goods. Achieving the anticipated benefits of either acquisition is subject to a number of uncertainties, including whether our business and the businesses of opTricon or Orangelife can be integrated in an efficient and effective manner. We cannot assure you that we will be able to accurately forecast the performance or ultimate impact of either the opTricon acquisition or the Orangelife acquisition.

 

The integration processes may take longer than anticipated and result in the loss of valuable employees, the incurrence of additional and unforeseen expenses, the disruption of our ongoing business, processes and systems, or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the acquisitions. There may be increased risk due to integrating financial reporting and internal control systems. The integration processes are subject to a number of uncertainties, and no assurance can be given that the anticipated benefits, expense savings and synergies will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could adversely affect our future business, financial condition, operating results and prospects.

 

We have incurred and will continue to incur non-recurring expenses in connection with the opTricon acquisition and the Orangelife acquisition, including legal, accounting and other expenses. Additional unanticipated costs may be incurred following consummation of the opTricon acquisition or the Orangelife acquisition in the course of the integration of the respective businesses into our business. We cannot be certain that the realization of efficiencies related to the integration of the two businesses will offset the transaction and integration costs in the near term, or at all, or any losses from undiscovered liabilities not covered by an indemnification from the sellers of opTricon or Orangelife.

 

We may not Generate the Expected Benefits of Future Acquisitions or Investments, and they could Disrupt Our Ongoing Business, Distract Our Management, Increase Our Expenses and Negatively Affect Our Business.

 

As a way for us to grow our business, we may pursue strategic acquisitions or investments. These activities, and their impact on our business, are subject to many risks, including the following: (i) the benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new businesses or markets, general economic conditions and increased competition; (ii) we may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products and/or technology into our business; (iii) we may not be able to accurately forecast the performance or ultimate impact of an acquired business; and (iv) an acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business.

 

Third-Party Reimbursement Policies and Potential Cost Constraints could Negatively Affect Our Business.

 

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

 

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

 

To the Extent that We are Unable to Collect Our Outstanding Accounts Receivable, Our Operating Results could be Materially Harmed.

 

There may be circumstances and timing that require us to accept payment terms, including delayed payment terms, from distributors or customers, which, if not satisfied, could cause financial losses.

 

We generally accept payment terms which require us to ship product before the contract price has been paid fully, and there also are circumstances pursuant to which we may accept further delayed payment terms pursuant to which we may continue to deliver product.  To the extent that these circumstances result in significant accounts receivables and those accounts receivables are not paid on a timely basis, or are not paid at all, especially if concentrated in one or two customers, we could suffer financial losses.

 

Ongoing Changes in Healthcare Regulation could Negatively Affect Our Revenues, Business and Financial Condition.

 

There have been several proposed changes in the United States at the federal and state level for comprehensive reforms regarding the payment for, the availability of and reimbursement for healthcare services. These proposals have ranged from fundamentally changing federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care or the Affordable Care Act, the Federal healthcare reform law enacted in 2010.

 

Healthcare reform initiatives will continue to be proposed, and may reduce healthcare related funding in an effort. It is impossible to predict the ultimate content and timing of any healthcare reform legislation and its resulting impact on us. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase our costs or otherwise negatively effect on our financial condition and results of operations.

 

In April 2017, the European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals and replaces the European Union Medical Devices Directive and the Active Implantable Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the European Economic Area, which we refer to as the EEA, member States, the regulations would be directly applicable, i.e., without the need for adoption of EEA member State laws implementing them, in all EEA member States and are intended to eliminate current differences in the regulation of medical devices among EEA member States. The Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and ensure a high level of safety and health while supporting innovation. The Medical Devices Regulation will, however, only become fully applicable three years after publication (in May 2020). Once applicable, the Medical Devices Regulation will, among other things:

 

 

Once applicable, the Medical Devices Regulation may impose increased compliance obligations for us to access the EU market.

 

We Believe Our Success Depends in Part on the Continued Funding of, and Our Ability to Participate in, Large Testing Programs in the U.S. and Worldwide, the Funding of which may be Reduced or Discontinued or Otherwise be Unavailable to Us.

 

We believe it to be in our best interests to meaningfully participate in large testing programs.  Moreover many of these programs are funded by governments and other donors, and there can be no assurance that funding will not be reduced or completely discontinued.  Participation in these programs also requires alignment and engagement with the many other participants in these programs, including WHO, CDC, the U.S. Agency for International Development, foreign governments and their agencies, non-governmental organizations, and HIV service organizations.  If we are unsuccessful in our efforts to participate in these programs, our operating results could be materially harmed.

 

In December 2013 President Obama signed into law the PEPFAR Stewardship and Oversight Act, which is the most recent reauthorization of PEPFAR. However, unlike the 2008 PEPFAR authorization, which authorized approximately $45 billion in funding, the new law did not authorize a specific dollar amount for funding.

 

Developing Testing Guidelines could Negatively Affect Sales of Our Products.

 

Government agencies may issue diagnostic testing guidelines or recommendations, which can alter the usage of our HIV testing products. New laws or guidelines, or changes to existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied, could impact the degree to which our testing products are used. These developments could affect the frequency of testing, the number of people tested and whether the testing products are used broadly for screening large populations or in a more limited capacity. These factors could in turn affect the level of sales of our products and our results of operations.

 

Legislative and Other Regulatory Changes could have an Effect on Our Business.

 

The current U.S. Presidential Administration has promised to repeal and replace the Affordable Care Act, expressed concerns with respect to existing trade agreements, and has indicated a desire to make other regulatory changes during his administration. Changes in regulatory or economic conditions or in the laws and policies governing foreign trade, taxes, manufacturing, and development in the United States could impact our business. Economic and regulatory changes could also affect foreign currency exchange rates which, in turn, could affect our reported financial results and our competitiveness on a worldwide basis.

 

Developments Related to the U.K.’s Referendum On Membership in the E.U. Could Adversely Affect Us.

 

On June 23, 2016, the United Kingdom voted in favor of leaving the European Union, or E.U.. On January 24, 2020, the U.K. and the E.U. entered into a withdrawal agreement pursuant to which the U.K. formally left the E.U. on January 31, 2020, but will, for a transition period ending on December 31, 2020, maintain access to the E.U. single market and to the global trade deals negotiated by the E.U. on behalf of its members and remain subject to E.U. law. The ultimate impact of the “leave” vote will depend on the terms that are negotiated in relation to the U.K.’s future relationship with the E.U. “Brexit” could impair our ability to transact business in the U.K. and E.U. countries. Brexit has already and could continue to contribute to instability in the global financial markets. The long-term effects of Brexit will depend in part on any new trade agreements the U.K. makes to retain access to E.U. markets following the U.K.’s withdrawal transition period from the E.U. Negotiations of a trade agreement may be unsuccessful, and the U.K. may not reach agreement with the E.U. on the future terms of the U.K.’s relationship with the E.U.

 

Without an agreement, there will be a period of considerable uncertainty particularly in relation to the financial and banking markets and the regulation of our industry, including the regulatory approval process.

 

We expect that Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replicate or replace. If the U.K. were to significantly alter its regulations affecting the pharmaceutical industry, we could face significant new costs relating to the development, manufacture, and marketing of our current and future products. It may also be time-consuming and expensive for us to alter our internal operations in order to comply with any new regulations.

 

Among other outcomes, Brexit could disrupt the free movement of goods, services and people between the U.K. and the E.U., and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in the U.K. and the E.U. In addition, changes to U.K. immigration policy as a result of Brexit could adversely affect our ability to retain talent for our European operations. Given the lack of comparable precedent, it is unclear what financial, trade, regulatory, and legal implications the final withdrawal of the U.K. from the E.U. would have and how such withdrawal would affect us. Any of these effects, and others we cannot anticipate, could negatively affect our business and financial condition.

 

We could be Exposed to Liability if We Experience Security Breaches or Other Disruptions, which could Harm Our Reputation and Business.

 

We may be subject to cyber-attacks whereby computer hackers may attempt to access our computer systems or our third party IT service provider’s systems and, if successful, misappropriate personal or confidential information. In addition, a contractor or other third party with whom we do business may attempt to circumvent our security measures or obtain such information, and may purposefully or inadvertently cause a breach involving sensitive information. We will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, but cyber-attacks are becoming more sophisticated and frequent and the techniques used in such attacks change rapidly. Even though we take cyber-security measures that are continuously reviewed and updated, our information technology networks and infrastructure may still be vulnerable due to sophisticated attacks by hackers or breaches.

 

Even the most well protected IT networks, systems, and facilities remain potentially vulnerable because the techniques used in security breaches are continually evolving and generally are not recognized until launched against a target and, in fact, may not be detected. Any such compromise of our or our third party’s IT service providers’ data security and access, public disclosure, or loss of personal or confidential business information, could result in legal claims proceedings, liability under laws to protect, privacy of personal information, and regulatory penalties, disrupt our operations, require significant management attention and resources to remedy any damages that result, damage our reputation and customers willingness to transact business with us, any of which could adversely affect our business.

 

Our Ability to Efficiently Operate Our Business is Reliant on Information Technology, and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology could Harm Our Business.

 

We rely heavily on complex information technology systems across our operations and on the internet, including for management of inventory, invoices, purchase orders, shipping, interactions with our third-party logistics provider, revenue and expense accounting, consumer call support, online business, and various other processes and transactions. Our ability to effectively manage our business, coordinate the production, distribution and sale of our products, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the reliability and capacity of these systems and the internet.

 

If any of the foregoing systems fails to operate effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales and reduced efficiency of our operations. Significant expenditures could be required to fix any such problem.

 

If there is an Increase in Demand for Our Products, it could Require Us to Expend Considerable Resources or Harm Our Customer Relationships if We are Unable to Meet that Demand.

 

If there are significant or unexpected increases in the demand for our products, we may not be able to meet that demand without expending additional capital resources. This would increase our capital costs, which could negatively affect our earnings in the short term. In addition, new manufacturing equipment or facilities may require FDA, WHO, and other regulatory approvals before they can be used to manufacture our products. To the extent we are unable to obtain or are delayed in obtaining such approvals, our ability to meet the demand for our products could be adversely affected. Furthermore, our suppliers may be unable or unwilling to expend the necessary capital resources or otherwise expand their capacity, which could negatively affect our business.

 

Our business could be negatively affected if we or our suppliers are unable to develop necessary manufacturing capabilities in a timely manner. If we fail to increase production volumes in a cost effective manner or if we experience lower than anticipated yields or production problems as a result of changes that we or our suppliers make in our manufacturing processes to meet increased demand, we could experience shipment delays or interruptions and increased manufacturing costs, which could also have a material adverse effect on our revenues and profitability.

 

If there are unexpected increases in demand for our products, we may be required to obtain additional raw materials in order to manufacture products to meet the increase in demand. However, some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. It is also possible that one or more of our suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits.

 

		Year Ended December 31,
		2019								2018
TOTAL REVENUES		$	34,464,032				100	%		$	34,581,440				100	%
COSTS AND EXPENSES:
Cost of product sales			22,394,317				65	%			22,599,432				65	%
Research and development expenses			8,538,416				25	%			8,526,256				26	%
Selling, general and administrative expenses			16,138,424				47	%			11,100,775				33	%
Acquisition costs			721,465				2	%			337,645				1	%
			47,792,622				139	%			42,564,108				25	%
LOSS FROM OPERATIONS			(13,328,590	)			(39	)%			(7,982,668	)			(23	)%
OTHER (LOSS)/INCOME			(846,831	)			(2	)%			49,498				0	%
LOSS BEFORE INCOME TAXES			(14,175,421	)			(41	)%			(7,933,170	)			(23	)%
Income tax benefit			(500,292	)			(2	)%			(67,521	)			0	%
NET LOSS		$	(13,675,129	)			(39	)%		$	(7,865,649	)			(23	)%

		For the years ended December 31								Favorable/ (unfavorable)				% Change
		2019				2018
		(in thousands)
Net product sales		$	28,845			$	27,913			$	932				3.3	%
Less: Cost of product sales			(22,394	)			(22,599	)			205				(0.9	%)
Gross product margin		$	6,451			$	5,314			$	1,137				21.4	%
Gross product margin %			22.4	%			19.0	%

		For the years ended December 31								Favorable/ (unfavorable)				% Change
		2019				2018
		(in thousands)
Clinical and regulatory affairs		$	1,516			$	1,307			$	(209	)			(16.0	)%
Other research and development			7,022				7,219				197				2.7	%
Total research and development		$	8,538			$	8,526			$	(12	)			(0.1	)%

		December 31, 2019
		(in thousands)
Cash and cash equivalents		$	18,271
Accounts receivable, net			3,661
Inventories, net			9,598
Prepaid expenses and other current assets			693
Total current assets			32,223
Less: Total current liabilities			(6,442	)
Working capital		$	25,781

	CHEMBIO DIAGNOSTICS, INC.
March 13, 2020	By	/s/ Gail S. Page
		Gail S. Page
		Interim Chief Executive Officer

Signatures		Title		Date
/s/ Gail S. Page		Interim Chief Executive Officer and Director		March 13, 2020
Gail S. Page		(Principal Executive Officer)
/s/ Neil A. Goldman		Executive Vice President and Chief Financial Officer		March 13, 2020
Neil A. Goldman		(Principal Financial & Accounting Officer)
/s/ Katherine L. Davis		Chair of the Board		March 13, 2020
Katherine L. Davis
/s/ Mary Lake Polan		Director		March 13, 2020
Mary Lake Polan
/s/ John G. Potthoff		Director		March 13, 2020
John G. Potthoff

		Page(s)
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Financial Statements:
	Balance Sheets as of December 31, 2019 and 2018	F-2
	Statements of Operations for the years ended December 31, 2019 and 2018	F-3
	Statements of Comprehensive Loss for the years ended December 31, 2019 and 2018	F-4
	Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019 and 2018	F-5
	Statements of Cash Flows for the years ended December 31, 2019 and 2018	F-6
	Notes to Consolidated Financial Statements	F-7 - F-30

		December 31, 2019				December 31, 2018
- ASSETS -
CURRENT ASSETS:
Cash and cash equivalents		$	18,271,352			$	12,524,551
Accounts receivable, net of allowance for doubtful accounts of $62,000 and $42,000 at December 31, 2019 and 2018, respectively			3,661,325				7,373,971
Inventories, net			9,598,030				7,851,222
Prepaid expenses and other current assets			693,013				702,010
TOTAL CURRENT ASSETS			32,223,720				28,451,754
FIXED ASSETS:
Property, plant and equipment, net			5,933,569				2,873,920
Finance lease right-of-use assets, net			210,350				–
OTHER ASSETS:
Operating right-of-use assets, net			7,030,744				–
Intangible assets, net			3,914,352				3,884,831
Goodwill			5,872,690				4,983,127
Deposits and other assets			543,539				717,551
TOTAL ASSETS		$	55,728,964			$	40,911,183
- LIABILITIES AND STOCKHOLDERS’ EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued liabilities		$	5,526,243			$	5,888,681
Deferred revenue			125,000				422,905
Note payable			180,249				207,694
Finance lease liabilities			41,894				–
Operating lease liabilities			568,294				–
TOTAL CURRENT LIABILITIES			6,441,680				6,519,280
OTHER LIABILITIES:
Long-term operating lease liabilities			6,969,603				–
Long-term finance lease liabilities			171,953				–
Note payable			–				171,821
Long-term debt net of debt discount and issuance costs			17,644,149				–
Deferred tax liability			466,326				892,308
TOTAL LIABILITIES			31,693,711				7,583,409
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY:
Preferred stock – 10,000,000 shares authorized, none outstanding			–				–
Common stock - $.01 par value; 100,000,000 shares authorized, 17,733,617 and 17,166,459 shares issued and outstanding at December 31, 2019 and 2018, respectively			177,335				171,664
Additional paid-in capital			95,433,077				90,953,788
Accumulated deficit			(71,585,003	)			(57,909,874	)
Accumulated other comprehensive income			9,844				112,196
TOTAL STOCKHOLDERS’ EQUITY			24,035,253				33,327,774
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	55,728,964			$	40,911,183

		For the years ended
		December 31, 2019				December 31, 2018
REVENUES:
Net product sales		$	28,844,997			$	27,913,209
R&D and grant revenue			4,680,282				5,719,458
License and royalty revenue			938,753				948,773
TOTAL REVENUES			34,464,032				34,581,440
COSTS AND EXPENSES:
Cost of product sales			22,394,317				22,599,432
Research and development expenses			8,538,416				8,526,256
Selling, general and administrative expenses			16,138,424				11,100,775
Acquisition costs			721,465				337,645
			47,792,622				42,564,108
LOSS FROM OPERATIONS			(13,328,590	)			(7,982,668	)
OTHER (EXPENSE) INCOME:
Interest (expense) income, net			(846,831	)			49,498
LOSS BEFORE INCOME TAX BENEFIT			(14,175,421	)			(7,933,170	)
Income tax benefit			(500,292	)			(67,521	)
NET LOSS		$	(13,675,129	)		$	(7,865,649	)
Basic loss per share		$	(0.81	)		$	(0.54	)
Diluted loss per share		$	(0.81	)		$	(0.54	)
Weighted average number of shares outstanding, basic			16,954,142				14,432,505
Weighted average number of shares outstanding, diluted			16,954,142				14,432,505

		For the years ended
		December 31, 2019				December 31, 2018
Net loss		$	(13,675,129	)		$	(7,865,649	)
Other comprehensive loss:
Foreign currency translation adjustments			(102,352	)			(66,752	)
COMPREHENSIVE LOSS		$	(13,777,481	)		$	(7,932,401	)

		Common Stock								Additional Paid-in-Capital Amount				Accumulated Deficit Amount				AOCI Amount				Total Amount
		Shares				Amount
Balance at December 31, 2017			12,318,570			$	123,185			$	62,821,288			$	(50,044,225	)		$	178,948			$	13,079,196
Common Stock:
New stock from offerings			4,509,760				45,098				27,431,162				–				–				27,476,260
Restricted stock issued			266,839				2,668				(2,668	)			–				–				–
Restricted stock compensation			–				–				281,249				–				–				281,249
Options:
Exercised			71,290				713				71,201				–				–				71,914
Stock option compensation			–				–				351,556				–				–				351,556
Comprehensive loss			–				–				–				–				(66,752	)			(66,752	)
Net loss			–				–				–				(7,865,649	)			–				(7,865,649	)
Balance at December 31, 2018			17,166,459			$	171,664			$	90,953,788			$	(57,909,874	)		$	112,196			$	33,327,774
Common Stock:
Restricted stock issued			381,908				3,819				(128,081	)			–				–				(124,262	)
Restricted stock compensation			–				–				1,394,812				–				–				1,394,812
Issuance of common stock for business acquired			153,707				1,537				441,754				–				–				443,291
Options:
Exercised			31,543				315				32,171				–				–				32,486
Stock option compensation			–				–				261,088				–				–				261,088
Warrants and Other:
Warrant on Term Debt			–				–				1,196,093				–				–				1,196,093
Contingent Earnout for business acquired			–				–				1,281,452				–				–				1,281,452
Comprehensive loss			–				–				–				–				(102,352	)			(102,352	)
Net loss			–				–				–				(13,675,129	)			–				(13,675,129	)
Balance at December 31, 2019			17,733,617			$	177,335			$	95,433,077			$	(71,585,003	)		$	9,844			$	24,035,253

		December 31, 2019				December 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers and grants		$	37,930,172			$	29,804,273
Cash paid to suppliers and employees			(45,655,562	)			(41,624,299	)
Cash paid for operating and finance leases			(640,844	)			–
Interest and taxes, net			(689,272	)			38,585
Net cash used in operating activities			(9,055,506	)			(11,781,441	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired			(100,000	)			(5,491,204	)
Acquisition of and deposits on fixed assets			(3,502,540	)			(1,467,192	)
Patent Application Costs			(297,006	)			–
Working capital adjustments related to business combination			145,760				–
Net cash used in investing activities			(3,753,786	)			(6,958,396	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from option exercises			32,486				71,914
Principal payments for finance leases			(19,875	)			–
Payments on debt issuance costs			(186,313	)			–
Payments on note payable			(181,822	)			(64,481	)
Proceeds from issuance of long-term debt, net			18,850,000				–
Proceeds from sale of common stock, net			–				27,476,260
Net cash provided by financing activities			18,494,476				27,483,693
Effect of exchange rate changes on cash			61,617				(9,607	)
INCREASE IN CASH AND CASH EQUIVALENTS			5,746,801				8,734,249
Cash and cash equivalents - beginning of the period			12,524,551				3,790,302
Cash and cash equivalents - end of the period		$	18,271,352			$	12,524,551
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Net Loss		$	(13,675,129	)		$	(7,865,649	)
Adjustments:
Depreciation and amortization			1,916,194				902,505
Share based compensation			1,655,900				632,805
Benefit from deferred tax liability			(513,715	)			(78,432	)
Provision for doubtful accounts			20,000				–
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable			3,764,045				(5,150,072	)
Inventories			(1,457,612	)			(3,077,104	)
Prepaid expenses and other current assets			64,355				(118,293	)
Deposits and other assets			(90,624	)			–
Accounts payable and accrued liabilities			(441,015	)			2,599,894
Deferred revenue			(297,905	)			372,905
Net cash used in operating activities		$	(9,055,506	)		$	(11,781,441	)
Supplemental disclosures for non-cash investing and financing activities:
Deposits on manufacturing equipment transferred to fixed assets		$	430,000			$	257,455
Deposits and other assets transferred to intangible assets			–				118,899
Seller-financed equipment purchases			–				326,110
Issuance of common stock for net assets of business acquired			443,291				–
Contingent liability earnout			1,225,000				–

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

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

		Amount
Net current assets		$	404,204
Property, plant and equipment			125,000
Goodwill			3,383,112
Deferred tax liability			(681,112	)
Other intangible assets (estimated useful life):
Developed technology (7 years)			1,900,000
Customer contracts / relationships (10 years)			360,000
Total consideration		$	5,491,204

		Proforma
		December 31, 2018
Total revenues		$	36,614,995
Net loss		$	(8,394,074	)
Net loss per common share		$	(0.58	)
Diluted net loss per common share		$	(0.58	)

		Exchange Transactions				Non-Exchange Transactions				Total
Net product sales		$	28,844,997			$	–			$	28,844,997
R&D, milestone and grant revenue			3,321,031				1,359,251				4,680,282
License and royalty revenue			938,753				–				938,753
		$	33,104,781			$	1,359,251			$	34,464,032

		Total
Africa		$	7,564,360
Asia			888,800
Europe & Middle East			6,498,995
Latin America			11,808,768
United States			7,703,109
		$	34,464,032

		Exchange Transactions				Non-Exchange Transactions				Total
Net product sales		$	27,913,209			$	–			$	27,913,209
R&D, milestone and grant revenue			2,687,210				3,032,248				5,719,458
License and royalty revenue			948,773				–				948,773
		$	34,581,440			$	3,032,248			$	34,581,440

		Total
Africa		$	8,838,632
Asia			1,404,982
Europe & Middle East			4,895,273
Latin America			12,546,083
United States			6,896,470
		$	34,581,440

Beginning balance January 1, 2019		$	4,983,127
Acquisition of Orangelife			986,058
Chembio Diagnostics GmbH measurement period adjustment			(99,648	)
Changes in foreign currency exchange rate			3,153
Balance at December 31, 2019		$	5,872,690

		Weighted Average Remaining Life				December 31, 2019												December 31, 2018
						Cost				Accumulated Amortization				Net Book Value				Cost				Accumulated Amortization				Net Book Value
Intellectual property			6			$	1,418,681			$	299,232			$	1,119,449			$	1,089,688			$	173,633			$	916,055
Developed technology			6				1,922,682				266,550				1,656,132				1,910,315				–				1,910,315
Customer contracts/relationships			7				1,325,521				270,902				1,054,619				1,121,600				151,929				969,671
Trade names			8				114,946				30,794				84,152				108,521				19,731				88,790
						$	4,781,830			$	867,478			$	3,914,352			$	4,230,124			$	345,293			$	3,884,831

		December 31
		2019				2018
Raw Materials		$	2,901,319			$	2,803,677
Work in Process			793,343				263,043
Finished Goods			5,903,368				4,784,502
		$	9,598,030			$	7,851,222

		December 31
		2019				2018
Machinery and Equipment		$	7,955,511			$	6,070,137
Furniture and Fixtures			21,477				35,287
Computer Equipment			416,359				435,348
Leasehold Improvements			3,038,469				2,334,512
Enterprise Business Systems			1,830,925				462,420
Less: Accumulated Depreciation and Amortization			(7,329,173	)			(6,463,784	)
		$	5,933,569			$	2,873,920

		December 31
		2019				2018
Accounts Payable - suppliers		$	3,144,098			$	3,622,765
Accrued Commissions & Royalties			931,760				867,344
Accrued Payroll			231,753				48,867
Accrued Vacation			410,199				264,789
Accrued Bonuses			215,000				494,318
Accrued Expenses - Other			593,433				590,598
		$	5,526,243			$	5,888,681

		Year Ending December 31,
		2019				2018
Current
Federal		$	–			$	–
State			9,790				10,911
Foreign			3,633				–
Total current (benefit) provision			13,423				10,911
Deferred
Federal			–				–
State			–				–
Foreign			(513,715	)			(78,435	)
Total deferred (benefit) provision			(513,715	)			(78,435	)
Total (benefit) provision		$	(500,292	)		$	(67,521	)

		Year Ending December 31,
		2019				2018
Federal income tax at statutory rates			21.00	%			21.00	%
State income taxes, net of federal benefit			(0.05	)%			(0.10	)%
Nondeductible expenses			(1.00	)%			(1.58	)%
Foreign rate differential			0.45	%			0.36	%
Change in valuation allowance			(17.51	)%			(18.44	)%
Other			0.64	%			(0.39	)%
Income tax benefit			3.53	%			0.85	%

		2019				2018
Inventory reserves		$	196,193			$	204,206
Accrued expenses			105,323				175,168
Net operating loss carry-forwards			10,079,317				7,122,576
Research and development credit			1,679,495				1,696,870
Stock-based compensation			581,053				215,797
Lease obligations			1,646,584				–
Depreciation			44,993				139,362
Total deferred tax assets			14,332,958				9,553,979
Right-of-use assets			(1,538,129	)			–
Intangibles			(921,807	)			(968,849	)
Total deferred tax liabilities			(2,459,936	)			(968,849	)
Net deferred tax assets before valuation allowance			11,873,022				8,585,130
Less valuation allowances			(12,339,348	)			(9,477,438	)
Net noncurrent deferred tax liabilities		$	(466,326	)		$	(892,308	)

		2019				2018
Expected term (in years)			n/a				4.96
Expected volatility			n/a				39.91	%
Expected dividend yield			n/a				n/a
Risk-free interest rate			n/a				2.70	%

		Number of Shares				Weighted Average Exercise Price per Share			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2017			810,670			$	5.18		3.69 years		$	2,477,853
Granted			93,750				9.80
Exercised			144,947				4.83					523,327
Forfeited/expired/cancelled			47,505				8.82
Outstanding at December 31, 2018			711,968			$	5.62		3.33 years		$	687,364
Exercisable at December 31, 2018			396,799			$	4.70		2.66 years		$	568,956
Outstanding at December 31, 2018			711,968			$	5.62		3.33 years		$	687,364
Granted			–			$	0.00					–
Exercised			54,343			$	3.60					172,242
Forfeited/expired/cancelled			15,000			$	5.68					–
Outstanding  at December 31, 2019			642,625			$	5.79		2.57 years		$	285,925
Exercisable at December 31, 2019			493,958			$	5.22		2.20 years		$	285,925

		Stock Options Outstanding																Stock Options Exercisable
Range of Exercise Prices		Shares Outstanding				Average Remaining Contract Life (Year)				Weighted Average Exercise Price				Aggregate Intrinsic Value				Shares Exercisable				Weighted Average Exercise Price				Aggregate Intrinsic Value
1 to 2.79999			–				–			$	–			$	–				–			$	–			$	–
2.8 to 4.59999			250,000				1.20				3.42				285,925				250,000				3.42				285,925
4.6 to 6.39999			137,875				2.44				5.87				–				87,125				5.89				–
6.4 to 8.19999			207,875				4.05				7.31				–				138,083				7.22				–
8.2 to 12			46,875				3.60				11.45				–				18,750				11.45				–
Total			642,625				2.57			$	5.79			$	285,925				493,958			$	5.22			$	285,925

		Number of Shares & Units				Weighted Average Grant Date Fair Value
Unvested at December 31, 2018			287,564			$	9.65
Granted			375,000				5.80
Vested			(116,578	)			9.65
Forfeited/expired/cancelled			–				–
Unvested at December 31, 2019			545,986				7.47

		Year Ending December 31,
		2019				2018
Africa		$	7,564,360			$	8,838,632
Asia			888,800				1,404,982
Europe & Middle East			3,781,761				2,208,063
Latin America			11,808,767				12,546,083
United States			4,801,309				2,915,449
		$	28,844,997			$	27,913,209

		2019				2018
Asia		$	393,299			$	466,185
Europe & Middle East			165,029				123,752
Latin America			60,527				–
United States			5,314,715				2,283,983
		$	5,933,569			$	2,873,920

2020		$	365,000
2021			365,000

		Year Ended December 31, 2019
Operating lease expense		$	1,655,573
Finance lease cost
Amortization of right-of-use assets		$	23,372
Interest on lease liabilities			7,892
Total finance lease expense		$	31,265

		Year Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases		$	632,952
Operating cash flows for finance leases			7,892
Financing cash flows for finance leases			19,875
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		$	7,030,744
Finance leases			210,350

		December 31, 2019
Operating Leases
Operating lease right-of-use assets		$	7,030,744
			–
Current portion of operating lease liability			568,294
Operating lease liabilities			6,969,603
Total operating lease liabilities		$	7,537,897
Finance Leases
Finance lease right of use asset		$	233,722
Accumulated depreciation			(23,372	)
Finance lease right of use asset, net		$	210,350
Current portion of finance lease liability			41,894
Finance lease liability			171,953
Total finance lease liabilities		$	213,847

Weighted Average Remaining Lease Term
Operating leases		9.3 years
Finance leases		4.8 years
Weighted Average Discount Rate
Operating leases			8.67	%
Finance leases			7.00	%

		Operating Leases				Finance Leases
2020		$	1,205,161			$	55,536
2021			1,209,787				55,536
2022			1,057,757				55,536
2023			1,026,272				55,536
2024			1,018,875				27,767
Thereafter			5,773,887				–
Total lease payments		$	11,291,739			$	249,911
Less: imputed interest			(3,753,842	)			(36,064	)
Total		$	7,537,897			$	213,847

2019		$	384,308
2020			88,576
2021			–
		$	472,884

		For the years ended																Accounts Receivable
		December 31, 2019								December 31, 2018								December 31, 2019				December 31, 2018
		Net Sales				% of Net Sales				Net Sales				% of Net Sales
Customer 1		$	11,263,573				39	%		$	11,333,767				33	%		$	941,962			$	3,499,340
Customer 2			5,782,543				20	%			4,346,640				13	%			16,033				1,033,824

For the years ended

Accounts Payable

December 31, 2019

December 31, 2018

December 31, 2019

December 31, 2018

Purchases

% of Purc.

Purchases

% of Purc.

Vendor 1

*

*

1,646,614

16

%

*

164,312

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