CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
(Unaudited)
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Cash received from customers and grants
|
|
$
|
8,920,921
|
|
|
$
|
8,176,364
|
|
Cash paid to suppliers and employees
|
|
|
(14,398,812
|
)
|
|
|
(12,036,793
|
)
|
Interest received
|
|
|
21,104
|
|
|
|
3,874
|
|
Net cash used in operating activities
|
|
|
(5,456,787
|
)
|
|
|
(3,856,555
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payment for net assets of business acquired
|
|
|
(850,000
|
)
|
|
|
-
|
|
Acquisition of and deposits on fixed assets
|
|
|
(555,894
|
)
|
|
|
(85,877
|
)
|
Net cash used in investing activities
|
|
|
(1,405,894
|
)
|
|
|
(85,877
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
5,370
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(6,862,681
|
)
|
|
|
(3,937,062
|
)
|
Cash and cash equivalents - beginning of the period
|
|
|
10,554,464
|
|
|
|
5,376,931
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of the period
|
|
$
|
3,691,783
|
|
|
$
|
1,439,869
|
|
|
|
|
|
|
|
|
|
|
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(3,788,667
|
)
|
|
$
|
(8,651,072
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
773,566
|
|
|
|
580,159
|
|
Deferred taxes
|
|
|
-
|
|
|
|
5,800,818
|
|
Share based compensation
|
|
|
209,609
|
|
|
|
146,265
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,287,898
|
)
|
|
|
(2,156,582
|
)
|
Inventories
|
|
|
(1,658,763
|
)
|
|
|
96,206
|
|
Prepaid expenses and other current assets
|
|
|
(25,043
|
)
|
|
|
(46,226
|
)
|
Deposits and other assets
|
|
|
8,729
|
|
|
|
1,505
|
|
Accounts payable and accrued liabilities
|
|
|
542,841
|
|
|
|
(93,070
|
)
|
Customer deposits and deferred revenue
|
|
|
(231,161
|
)
|
|
|
465,442
|
|
Net cash used in operating activities
|
|
$
|
(5,456,787
|
)
|
|
$
|
(3,856,555
|
)
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures for non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Deposits on manufacturing equipment transferred to fixed assets
|
|
$
|
174,399
|
|
|
$
|
43,590
|
|
Accrual of contingent earn-out
|
|
|
148,000
|
|
|
|
-
|
|
Issuance of common stock for net assets of business acquired
|
|
|
1,682,725
|
|
|
|
-
|
|
See accompanying notes to condensed consolidated financial statements
NOTE 1 — DESCRIPTION OF BUSINESS:
Chembio Diagnostics, Inc. (the "Company" or "Chembio") and its wholly-owned subsidiaries, Chembio Diagnostic Systems Inc., and RVR Diagnostics Sdn Bhd ("RVR"), develop, manufacture, and market rapid diagnostic tests that detect infectious diseases. The Company's main lateral flow products are three rapid tests for the detection of HIV antibodies in whole blood, serum and plasma samples, two of which were approved by the FDA in 2006; the third is sold for export only. In addition, the Company has several products based on its patented Dual Path Platform (DPP®) technology, including a HIV test approved by the FDA in 2013 and CLIA-Waived in 2014. Lateral Flow Rapid HIV tests represented 39% of the Company's product revenues in the first six months of 2017. The Company's products based on its DPP® platform represented approximately 41% of the Company's product revenues in the first six months of 2017. The Company also has other rapid tests and components that together represented approximately 20% of product sales in the first six months of 2017. The Company's products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally. Chembio's products are sold under the Company's STAT PAK®, SURE CHECK®, STAT-VIEW® or DPP® registered trademarks, or under the private labels of its marketing partners. All of the Company's products that are currently being developed are based on its patented DPP®, which is a unique diagnostic point-of-care platform that has certain advantages over lateral flow technology.
NOTE 2 — ACQUISITION OF RVR DIAGNOSTICS SDN BHD:
On January 9, 2017, pursuant to a stock purchase agreement (the "Stock Purchase Agreement), the Company acquired all of the outstanding common stock of RVR Diagnostics Sdn Bhd, a Malaysia corporation ("RVR"), for $3,231,000, utilizing some of the proceeds from the funds raised by the Company in August 2016, the issuance of Chembio's common stock, and a contingent consideration, as described below, related to RVR reaching a milestone based on revenues that was valued at $148,000. RVR is a privately-held Malaysia based manufacturing company focused on assembly and sales of rapid medical assays. The Company acquired RVR to have a better presence in Asia, access to lower cost, shorter approval time of in-country regulatory approvals, and a lower cost assembly operation.
Pursuant to the Stock Purchase Agreement, the Company acquired all of the issued and outstanding common stock and other equity interests of RVR for (i) a cash payment of $1,400,000, of which $
550,000
was paid as a deposit in December 2016 and (ii) 269,236 shares of Chembio's common stock, with a value at closing of $1,683,000, of which 7,277 shares are being held back to satisfy certain potential claims under the Stock Purchase Agreement and will become issuable to the sellers, if at all, on the one-year anniversary of the closing.
In addition, the Stock Purchase Agreement provides that the sellers may become entitled to receive certain milestone payments based on the achievement of performance goals related to sales by RVR during the 12 months ending December 31, 2017. RVR's actual sales during that period will be used to determine the "Milestone Proration Amount," which is a fraction that (i) the numerator of which is the positive amount, if any, by which actual sales for calendar year 2017 are greater than $2,250,000, up to a maximum overage of $250,000, and (ii) the denominator of which is $250,000. Based on the actual sales achieved by RVR, the Sellers will be entitled to receive (i) a cash milestone payment equal to $100,000 multiplied by the Milestone Proration Amount, for a maximum cash milestone payment of $100,000, and (ii) a stock milestone payment equal to 21,830 shares of Chembio common stock multiplied by the Milestone Proration Amount, with a maximum stock milestone payment of 21,830 shares of Chembio common stock. As of March 31, 2017 the Company accrued $148,000 for the milestone. This amount is the estimated value of the common stock of $85,000 based on the assumption of reaching the milestone of 74.5% and discounted by 15%, as well as the cash portion of the milestone payment valued at $63,000. There was no change in the fair value of this contingent milestone payment through June 30, 2017.
As a result of the consideration paid exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $1,503,361 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. In addition, the Company recorded $1,800,000 in intangible assets, which results largely from the addition of RVR's intellectual property, customer base and distribution channels, trade names, order backlog, industry reputation, and management talent and workforce.
Our Condensed Consolidated Statements of Operations for the six months ended June 30, 2017 include $25,000 of transaction costs related to the RVR acquisition, which are reflected as general and administrative expenses.
The acquisition was accounted for using the purchase method of accounting. The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of January 9, 2017:
|
|
PRELIMINARY
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
235,141
|
|
Goodwill
|
|
|
1,503,361
|
|
Deferred tax liability
|
|
|
(307,636
|
)
|
Other intangible assets (estimated useful life):
|
|
|
|
|
Intellectual property (approximate 10 year weighted average)
|
|
|
800,000
|
|
Customer contracts / relationships (approximate 10 year weighted average)
|
|
|
700,000
|
|
Order backlog (3 months)
|
|
|
200,134
|
|
Trade names (approximate 11 year weighted average)
|
|
|
100,000
|
|
Total consideration *
|
|
$
|
3,231,000
|
|
* Total consideration includes the $1,400,000 paid in cash, $1,683,000 in shares of common stock and $148,000 in contingent consideration.
The Company calculated the fair value of the fixed assets based on the net book value of RVR as those approximate fair value. The intellectual property, customer contracts and trade names were based on assumption by discounted cash flow using management estimates. The order backlog was based on an order that RVR had at the closing, which was shipped in the first quarter of 2017, and valued at an estimated net income.
As indicated, the allocation of the purchase price and estimated useful lives of property, plant and equipment, intangible assets and deferred tax liability shown above is preliminary, pending final completion of valuations. Upon completion of this analysis, an adjustment may be required to goodwill.
For the period from January 10, 2017 to June 30, 2017, net sales and loss before income taxes from the acquisition was approximately $1,423,000 and $(150,000), respectively, which have been included in the Condensed Consolidated Statement of Operations for the six months ended June 30, 2017. The following represents unaudited pro forma operating results as if the operations of RVR had been included in the Company's Condensed Consolidated Statements of Operations as of January 1, 2016:
Proforma table
|
|
For the six months ended June 30, 2016
|
|
Total revenues
|
|
$
|
10,158,295
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,643,841
|
)
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(.90
|
)
|
|
|
|
|
|
Diluted net loss per common share
|
|
$
|
(.90
|
)
|
The pro forma financial information includes business combination accounting effects from the acquisition including amortization charges from acquired intangible assets of approximately $292,000. The unaudited pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2016.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|
a)
|
Basis of Presentation:
|
The preceding (a) condensed consolidated balance sheet as of December 31, 2016, which has been derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements as of June 30, 2017 and for the three and six-month periods ended June 30, 2017 and 2016, respectively, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for fair presentation. The interim financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, previously filed with the SEC.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company's condensed consolidated financial position as of June 30, 2017, its condensed consolidated results of operations for the three and six-month periods ended June 30, 2017 and 2016, respectively, and its condensed consolidated cash flows for the six-month periods ended June 30, 2017 and 2016, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
The Company recognizes revenue for product sales in accordance with ASC 605, which provides that revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.
For certain contracts, the Company recognizes revenue from non-milestone payments and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned. Deferred revenues not earned were $161,356 and $392,517 as of June 30, 2017 and December 31, 2016, respectively.
The Company follows Financial Accounting Standards Board ("FASB") authoritative guidance ("guidance") prospectively for the recognition of revenue under the milestone method. The Company applies the milestone method of revenue recognition for certain collaborative research projects defining milestones at the inception of the agreement.
Inventories
consist of the following at:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Raw materials
|
|
$
|
2,134,288
|
|
|
$
|
1,824,248
|
|
Work in process
|
|
|
532,417
|
|
|
|
535,320
|
|
Finished goods
|
|
|
2,327,246
|
|
|
|
975,620
|
|
|
|
$
|
4,993,951
|
|
|
$
|
3,335,188
|
|
Inventories are stated net of reserves of approximately $245,000 as of June 30, 2017 and December 31, 2016.
Basic earnings per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution from the exercise or conversion of other securities into common stock, but only if dilutive. The following securities, presented on a common share equivalent basis for the three- and six-month periods ended June 30, 2017 and 2016, have been included in the earnings per share computations:
|
For the three months ended
|
|
For the six months ended
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
Basic
|
|
12,299,122
|
|
|
9,667,543
|
|
|
12,284,979
|
|
|
9,649,612
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
12,299,122
|
|
|
9,667,543
|
|
|
12,284,979
|
|
|
9,649,612
|
As there were losses for the three and six months ended June 30, 2017 and 2016, no common share equivalents are included in the diluted per share computations.
There were 674,795 and 667,995 weighted-average number of options outstanding as of June 30, 2017 and 2016, respectively, that were not included in the calculation of diluted per common share equivalent for the three months ended June 30, 2017 and 2016 respectively, because the effect would have been anti-dilutive. There were 674,795 and 708,514 weighted-average number of options outstanding as of June 30, 2017 and 2016, respectively, that were not included in the calculation of diluted per common share equivalent for the six months ended June 30, 2017 and 2016, respectively, because the effect would have been anti-dilutive.
|
e)
|
Employee Stock Option Plans and Share-Based Compensation:
|
Effective June 3, 2008, the Company's stockholders voted to approve the 2008 Stock Incentive Plan ("SIP"), initially with 625,000 shares of Common Stock available to be issued. At the Annual Stockholder meeting on September 22, 2011, the Company's stockholders voted to approve an increase to the shares of Common Stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted and the number of shares of common stock to be covered by each grant. Awards can be incentive stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee at the time of the initial stock option grant. As of June 30, 2017, there were 470,724 options exercised and 264,177 options outstanding under the SIP.
Effective June 19, 2014, the Company's stockholders voted to approve the 2014 Stock Incentive Plan ("2014-SIP"), with 800,000 shares of Common Stock available to be issued. Under the terms of the 2014-SIP, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted and the number of shares of common stock to be covered by each grant. Awards can be incentive stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee at the time of the initial stock option grant. As of June 30, 2017, there were 12,000 options exercised, 203,750 options outstanding and 584,250 options or shares still available to be issued under the 2014-SIP.
There were 86,000 and 106,875 stock options granted during the six months ended June 30, 2017 and 2016, respectively. The weighted average estimated fair value, at their respective dates of grant, of stock options granted in the six months ended June 30, 2017 and June 30, 2016, was $2.27 and $2.77 per share, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon the historical volatility of our stock. The expected term is based on historical information.
The assumptions made in calculating the fair values of options granted during the periods indicated are as follows:
|
For the three months ended
|
|
For the six months ended
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
Expected term (in years)
|
n/a
|
|
4.5
|
|
5.0
|
|
4.5 to 5.0
|
Expected volatility
|
n/a
|
|
43.00%
|
|
44.18%
|
|
43.00% to 48.66%
|
Expected dividend yield
|
n/a
|
|
0%
|
|
0%
|
|
0%
|
Risk-free interest rate
|
n/a
|
|
0.90%
|
|
1.58%
|
|
0.90% to 0.97%
|
The Company's results for the three-month periods ended June 30, 2017 and 2016 include share-based compensation expense, consisting solely of stock options, totaling $73,700 and $92,700, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within cost of product sales ($12,800 and none), research and development ($12,100 and $27,300, respectively) and selling, general and administrative expenses ($48,800 and $65,400, respectively). The results for the six-month periods ended June 30, 2017 and 2016 include share-based compensation expense, consisting solely of stock options, totaling approximately $209,600 and $146,200, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within cost of product sales ($21,400 and none), research and development ($65,200 and $34,700, respectively) and selling, general and administrative expenses ($123,000 and $111,500, respectively). An operating expense, resulting in income tax benefit, has been recognized in the statement of operations for share-based compensation arrangements.
Stock option compensation expense for the three and six months ended June 30, 2017 and 2016 is based on the estimated fair value, at the date of issuance, of options outstanding, which is being amortized on a straight-line basis over the requisite service period for each vesting portion of the award. Accordingly, for stock options that vested immediately, the estimated fair value was expensed immediately.
The following table provides stock option activity for the six months ended June 30, 2017:
Stock Options
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price per Share
|
|
Weighted Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2016
|
|
|
600,549
|
|
|
$
|
4.55
|
|
3.43 years
|
|
$
|
1,463,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
86,000
|
|
|
|
5.72
|
|
|
|
|
|
|
Exercised
|
|
|
10,969
|
|
|
|
4.00
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
785
|
|
|
|
5.56
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
674,795
|
|
|
$
|
4.70
|
|
3.28 years
|
|
$
|
1,089,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2017
|
|
|
383,920
|
|
|
$
|
4.29
|
|
2.76 years
|
|
$
|
727,568
|
|
As of June 30, 2017, there was $357,109 of net unrecognized compensation cost related to stock options that have not vested, which is expected to be recognized over a weighted average period of approximately 2.17 years. The total fair value of stock options vested during the six-month periods ended June 30, 2017 and 2016 was $128,125 and $206,701, respectively.
|
f)
|
Geographic Information:
|
U.S. GAAP establishes standards for the manner in which business enterprises report information about operating segments in financial statements and requires that those enterprises report selected information. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The table below represents product revenues for different geographic regions.
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Africa
|
|
$
|
493,852
|
|
|
$
|
395,231
|
|
|
$
|
862,679
|
|
|
$
|
713,989
|
|
Asia
|
|
|
92,596
|
|
|
|
88,984
|
|
|
|
1,513,018
|
|
|
|
64,005
|
|
Europe
|
|
|
599,435
|
|
|
|
205,667
|
|
|
|
1,040,160
|
|
|
|
123,096
|
|
North America
|
|
|
672,765
|
|
|
|
667,165
|
|
|
|
1,760,104
|
|
|
|
2,389,024
|
|
South America
|
|
|
1,034,294
|
|
|
|
677,025
|
|
|
|
3,144,353
|
|
|
|
4,660,977
|
|
|
|
$
|
2,892,942
|
|
|
$
|
2,034,072
|
|
|
$
|
8,320,314
|
|
|
$
|
7,951,091
|
|
|
g)
|
Accounts Payable and Accrued Liabilities:
|
Accounts payable and accrued liabilities consist of:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Accounts payable – suppliers
|
|
$
|
1,823,896
|
|
|
$
|
1,437,290
|
|
Accrued commissions
|
|
|
498,974
|
|
|
|
221,982
|
|
Accrued royalties / license fees
|
|
|
389,705
|
|
|
|
352,660
|
|
Accrued payroll
|
|
|
198,507
|
|
|
|
167,575
|
|
Accrued vacation
|
|
|
312,431
|
|
|
|
289,587
|
|
Accrued bonuses
|
|
|
-
|
|
|
|
282,500
|
|
Accrued expenses – other
|
|
|
477,923
|
|
|
|
261,539
|
|
TOTAL
|
|
$
|
3,701,436
|
|
|
$
|
3,013,133
|
|
h) Goodwill and Intangible Assets:
Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired in our acquisition of RVR in January 2017. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then we would not be required to perform the two-step quantitative impairment test. Otherwise, performing the two-step impairment test is necessary. The first step of the two-step quantitative impairment test involves comparing the fair values of the applicable reporting unit with its aggregate carrying value, including goodwill. If the carrying value of a reporting unit exceeds the reporting unit's fair value, we perform the second step of the test to determine the amount of the impairment loss, if any. The second step involves measuring any impairment by comparing the implied fair values of the affected reporting unit's goodwill and intangible assets with the respective carrying values.
If actual future results are not consistent with management's estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the fiscal first quarter, or sooner if a triggering event occurs. As of June 30, 2017, we believe no indicators of impairment exist.
Goodwill
|
Beginning balance 1/1/17
|
|
$
|
-
|
|
|
|
|
Acquisition of RVR
|
|
|
1,503,361
|
|
|
|
|
Changes in foreign currency exchange rate
|
|
|
67,743
|
|
|
|
|
Balance at 6/30/17
|
|
$
|
1,571,104
|
In addition, the Company recorded certain intangible assets as part of the RVR acquisition which are as follows as of June 30, 2017.
Cost
|
|
|
Accumulated Amortization
|
|
|
June 30, 2017
|
Intellectual property
|
|
$
|
836,049
|
|
$
|
41,802
|
|
$
|
794,247
|
Customer Contracts/relationships
|
|
|
731,543
|
|
|
36,577
|
|
|
694,966
|
Order Backlog
|
|
|
209,152
|
|
|
209,152
|
|
|
-
|
Trade names
|
|
|
104,506
|
|
|
4,751
|
|
|
99,755
|
|
|
$
|
1,881,250
|
|
$
|
(292,282)
|
|
$
|
1,588,968
|
Amortization expenses for the six months ended June 30, 2017 was approximately $292,000.
|
i)
|
Recent Accounting Pronouncements Affecting the Company:
|
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under accounting principles generally accepted in the United States ("U.S. GAAP"). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2018. The Company has conducted a preliminary analysis of its sales contracts which are based on the shipment of goods to the customer, and currently this new accounting standard will not have a material impact on its consolidated financial statements for its sales contracts. The Company has conducted a preliminary analysis of its current R&D contracts which are currently based on an "as expenses are incurred" basis, and currently this new accounting standard will not have a material impact on its consolidated financial statements for current R&D contracts.
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under the new guidance. This guidance will be effective for Chembio beginning in 2018, with early adoption permitted. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, which amends the ASC and creates Topic 842, Leases. Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous US GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted.
We are in the initial stages of evaluating the effect of the standard on our financial statements and will continue to evaluate.
While not yet in a position to assess the full impact of the application of the new standard, the Company expects that the impact of recording the lease liabilities and the corresponding right-to-use assets will have a significant impact on its total assets and liabilities with a minimal impact on equity.
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will change certain aspects of accounting for share-based payments to employees. ASU 2016-09 is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2016. The Company adopted the provisions of ASU 2016-09 on January 1, 2017. The Company evaluated this standard and the adoption of it did not have a material impact on its consolidated financial statement.
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04
Intangibles - Goodwill and Other (Topic 350)
which would eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, the amount of an impairment charge would be recognized if the carrying amount of a reporting unit is greater than its fair value. ASU 2017-04 is effective for public companies for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the provisions of ASU 2017-04.
NOTE 4 — COLLABORATIVE RESEARCH AND DEVELOPMENT ARRANGEMENTS:
|
a)
|
Brain Injury agreement:
|
In January 2015, the Company entered into a technology development agreement with Perseus Science Group LLC for $946,000 and a follow-on agreement in December 2016 for $350,000. The Company earned $233,000 and $188,000 for the six-month periods ended June 30, 2017 and 2016, respectively, from this agreement. The Company earned $1,000,000 from this grant from inception through June 30, 2017.
In April 2016, the Company was awarded a grant from the Bill & Melinda Gates Foundation for $678,000. The Company earned $159,000 for the six-month period ended June 30, 2017 from this agreement. The Company earned $678,000 from this grant from inception through June 30, 2017.
|
c)
|
Fever Panel agreement:
|
In October 2015, the Company entered into a technology development agreement with the Paul G. Allen Ebola Program for $2,118,000 and a follow-on agreement in February 2016 for $550,000. The Company earned none and $1,560,000 for the six-month periods ended June 30, 2017 and 2016, respectively, from this agreement. The Company earned $2,668,000 from this grant from inception through June 30, 2017.
In August 2016, the Company was awarded a grant for $5,934,000 from BARDA, which is part of the U.S. Department of Health And Human Resources. The Company earned $880,000 for the six-month period ended June 30, 2017 from this agreement. The Company earned $1,353,000 from this grant from inception through June 30, 2017.
In September 2016, the Company entered into a Phase II agreement with the USDA for an additional $600,000 to develop a Bovid TB assay. The Phase I agreement was for $100,000. Revenue for these agreements are being recognized under a proportional performance method. The Company earned $169,000 for the six-month period ended June 30, 2017 from these agreements. The Company earned $290,000 from these agreements from inception through June 30, 2017.
In March 2017, the Company entered into a technology development agreement with FIND for $999,000. The Company earned $339,000 for the six-month period ended June 30, 2017 from this agreement. The Company earned $339,000 from this grant from inception through June 30, 2017.
NOTE 5 — RIGHTS AGREEMENT:
In March 2016, the Company entered into a Rights Agreement dated as of March 8, 2016 (the "Rights Agreement") between the Company and Action Stock Transfer Corp., as Rights Agent. Pursuant to the Rights Agreement, the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, $0.01 par value (the "Common Stock"), of the Company. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2016, and the Rights were distributed to the Company's shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable.
The Rights are not exercisable until a Distribution Date, which is defined below. Until a Right is exercised, the holder thereof, in his capacity as a holder of Rights, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights
. The Rights will be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur
of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date") or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 20% or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date").
NOTE 6 — COMMON STOCK, WARRANTS AND OPTIONS:
During the second quarter of 2017, no options were granted or exercised.
During the first quarter of 2017, options to purchase 10,969 shares of the Company's common stock were exercised on a cashless basis into 3,039 shares of common stock at an exercise price of $4.00 by surrendering options and shares of common stock already owned.
The Company completed the
acquisition of RVR Diagnostics Sdn Bhd (RVR) on January 9, 2017
.
Pursuant to the Stock Purchase Agreement, the Company acquired all of the issued and outstanding common stock and other equity interests of RVR from the sellers for (i) a cash payment of $1,400,000, (ii) contingent consideration of $148,000 and (iii) 269,236 shares of the Company's common stock, of which 7,277 shares are being held back to satisfy certain potential claims under the Stock Purchase Agreement and will become issuable to the Sellers, if at all, on the one-year anniversary of the closing. The closing price of our common stock on January 9, 2017 was $6.25.
The Company entered into an employment agreement, effective as of March 13, 2017 (the "CEO Employment Agreement"), with John Sperzel to serve as the Company's Chief Executive Officer, for an additional term of three years through March 13, 2020. Pursuant to the Employment Agreement, the Company issued to Mr. Sperzel incentive and non-qualified stock options to purchase 20,000 shares of the Company's common stock. These options vest on the third anniversary or March 31, 2020. The exercise price for these options was equal to the volume weighted trading price for the Company's common stock on March 31, 2017, which was $5.3666 per share. Each option granted will expire and terminate, if not exercised sooner, upon the earlier to occur of (a) 30 days after termination of Mr. Sperzel's employment with the Company or (b) the seventh anniversary of the effective date of the grant.
During the first quarter of 2017, the Company issued options to purchase 5,000 shares of common stock to each of six members of the executive team. The options became exercisable on the date of issue. The options issued have an exercise price of $5.25 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
During the first quarter of 2017, the Company issued options to purchase 36,000 shares of common stock to a newly-hired vice-president of operations. The options are exercisable in three equal annual installments starting on the first anniversary of the date of issue. The options issued have an exercise price of $6.30 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
During the year 2016, options to purchase 191,804 shares of the Company's common stock were exercised for cash and on a cashless basis into 125,750 shares of common stock at exercise prices ranging from $2.80 to $5.56 by surrendering options and shares of common stock already owned.
During the fourth quarter of 2016, the Company issued options to purchase 36,000 shares of common stock to a newly-hired president of the EMEA and APAC regions. The options are exercisable in three equal annual installments starting on the first anniversary of the date of issue. The options issued have an exercise price of $7.15 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
The Company closed an underwritten public offering of 2,300,000 shares of its common stock on August 3, 2016. The price per share of common stock sold in the offering was $6.00 per share. The net proceeds of the offering, after deducting the underwriters' discounts and other offering expenses payable by the Company, was approximately $12,493,000. The Company intends to use the net proceeds for business expansion and working capital, including product development, operational improvements, clinical trials, and sales and marketing.
During the second quarter of 2016, the Company issued options to one of its directors pursuant to the Company's compensation policy for directors. The director was issued options to purchase 46,875 shares of common stock. The options become exercisable in five equal annual installments starting on the date of issue. The options issued have an exercise price of $8.86 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.
The Company entered into an employment agreement, effective as of March 5, 2016 (the "Employment Agreement"), with Javan Esfandiari to serve as the Company's Chief Scientific and Technical Officer, for an additional term of three years through March 5, 2019. Pursuant to the Employment Agreement, the Company issued to Mr. Esfandiari incentive and non-qualified stock options to purchase 60,000 shares of the Company's common stock. Of these stock options, options to purchase 20,000 shares vest on each of the first three anniversaries of March 11, 2016 which is the date on which the Employment Agreement was entered into. The exercise price for these options is equal to the trading price for the Company's common stock on March 11, 2016, which was $5.64 per share. Each option granted will expire and terminate, if not exercised sooner, upon the earlier to occur of (a) 30 days after termination of Mr. Esfandiari's employment with the Company or (b) the fifth anniversary of the effective date of the grant.
NOTE 7 — COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS:
The following table discloses product sales and accounts receivable the Company had with respect to each customer that purchased in excess of 10% of the Company's net product sales for the periods indicated:
|
For the three months ended
|
|
For the six months ended
|
|
Accounts Receivable as of
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
|
Sales
|
|
% of Sales
|
|
Sales
|
|
% of Sales
|
|
Sales
|
|
% of Sales
|
|
Sales
|
|
% of Sales
|
|
|
|
|
Customer 1
|
|
$
|
956,207
|
|
33
|
%
|
|
$
|
666,765
|
|
33
|
%
|
|
$
|
2,895,794
|
|
35
|
%
|
|
$
|
3,256,170
|
|
41
|
%
|
|
$
|
2,729,804
|
|
|
$
|
3,389,505
|
Customer 2
|
|
|
*
|
|
*
|
|
|
|
*
|
|
*
|
|
|
|
*
|
|
*
|
|
|
|
1,796,477
|
|
23
|
%
|
|
|
*
|
|
|
|
-
|
Customer 3
|
|
|
*
|
|
*
|
|
|
|
*
|
|
*
|
|
|
|
1,326,171
|
|
16
|
%
|
|
|
*
|
|
*
|
|
|
|
-
|
|
|
|
*
|
Customer 4
|
|
|
399,482
|
|
14
|
%
|
|
|
*
|
|
*
|
|
|
|
754,408
|
|
9
|
%
|
|
|
*
|
|
*
|
|
|
|
-
|
|
|
|
*
|
(*) Product sales did not exceed 10% for the period indicated.
Note that sales include product sales only while accounts receivable reflects the total due from the customer, which includes freight.
The following table discloses purchases and accounts payable that the Company had with respect to each vendor that sold to the Company in excess of 10% of the Company's total purchases for the periods indicated:
|
For the three months ended
|
|
For the six months ended
|
|
Accounts Payable as of
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
|
Purchases
|
|
% of Purc.
|
|
Purchases
|
|
% of Purc.
|
|
Purchases
|
|
% of Purc.
|
|
Purchases
|
|
% of Purc.
|
|
|
|
|
Vendor 1
|
|
$
|
*
|
|
*
|
|
|
$
|
203,020
|
|
12
|
%
|
|
$
|
*
|
|
*
|
|
|
$
|
425,922
|
|
13
|
%
|
|
$
|
*
|
|
|
$
|
60,935
|
Vendor 2
|
|
|
698,838
|
|
32
|
%
|
|
|
*
|
|
*
|
|
|
|
698,838
|
|
26
|
%
|
|
|
*
|
|
*
|
|
|
|
-
|
|
|
|
*
|
Vendor 3
|
|
|
204,781
|
|
11
|
%
|
|
|
*
|
|
*
|
|
|
|
*
|
|
*
|
|
|
|
*
|
|
*
|
|
|
|
29,613
|
|
|
|
*
|
(*) Purchases did not exceed 10% for the period indicated
The Company currently buys materials which are purchased under intellectual property rights agreements and are important components in its products. Management believes that other suppliers could provide similar materials on comparable terms as the vendors shown in this table. A change in suppliers, however, could cause a delay in manufacturing, either from the logistics of changing suppliers or from product changes attributable to new components, which could result in a possible loss of sales, and which could adversely affect operating results.
|
b)
|
Governmental Regulation:
|
All of the Company's existing and proposed diagnostic products are regulated by the United States Food and Drug Administration, United States Department of Agriculture, certain U.S., state and local agencies, and/or comparable regulatory bodies in other countries. Most aspects of development, production, and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing, and record keeping, are subject to regulatory review. After marketing approval has been granted, Chembio must continue to comply with governmental regulations. Failure to comply with these regulations can result in significant penalties.
|
c)
|
Employment Agreements:
|
The Company has employment contracts with four key employees: CEO John J. Sperzel III; CSTO Javan Esfandiari; Managing Director of RVR Magentiren Vajuram; Vice-President of RVR Dr. Avijit Roy. The contracts call for salaries presently aggregating $1,000,000 per year. The Sperzel contract expires in March 2020, the Esfandiari contract expires in March 2019, and the Vajuram and Roy contracts expire January 9, 2018. In connection with the Sperzel contract that expires in March 2020, the Company issued, in March 2017, options to purchase 20,000 common shares of stock, which vest on the third anniversary of the grant. In connection with the Esfandiari contract that expires in March 2019, the Company issued, in March 2016, options to purchase 60,000 shares of common stock, with one-third vesting on each of the first, second and third anniversaries of the grant.