Item 1. FINANCIAL STATEMENTS
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
(Unaudited)
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Cash received from customers and grants
|
|
$
|
11,928,304
|
|
|
$
|
18,468,607
|
|
Cash paid to suppliers and employees
|
|
|
(17,614,106
|
)
|
|
|
(21,054,210
|
)
|
Interest expense
|
|
|
-
|
|
|
|
(749
|
)
|
Interest received
|
|
|
9,729
|
|
|
|
1,844
|
|
Net cash used in operating activities
|
|
|
(5,676,073
|
)
|
|
|
(2,584,508
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition of License
|
|
|
-
|
|
|
|
(450,000
|
)
|
Acquisition of and deposits on fixed assets
|
|
|
(79,877
|
)
|
|
|
(477,553
|
)
|
Net cash used in investing activities
|
|
|
(79,877
|
)
|
|
|
(927,553
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from option exercises
|
|
|
57,575
|
|
|
|
-
|
|
Proceeds from line of credit
|
|
|
-
|
|
|
|
600,000
|
|
Payment of credit line
|
|
|
-
|
|
|
|
(600,000
|
)
|
Proceeds from sale of common stock, net
|
|
|
12,493,398
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
12,550,973
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
6,795,023
|
|
|
|
(3,512,061
|
)
|
Cash and cash equivalents - beginning of the period
|
|
|
5,376,931
|
|
|
|
4,614,538
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of the period
|
|
$
|
12,171,954
|
|
|
$
|
1,102,477
|
|
|
|
|
|
|
|
|
|
|
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(10,789,290
|
)
|
|
$
|
(1,748,059
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
876,103
|
|
|
|
981,579
|
|
Deferred taxes
|
|
|
5,800,818
|
|
|
|
(603,370
|
)
|
Share based compensation
|
|
|
220,274
|
|
|
|
267,850
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,785,261
|
)
|
|
|
(1,176,062
|
)
|
Inventories
|
|
|
150,867
|
|
|
|
627,762
|
|
Prepaid expenses and other current assets
|
|
|
(37,626
|
)
|
|
|
(249,915
|
)
|
Deposits and other assets
|
|
|
1,481
|
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
|
|
(213,039
|
)
|
|
|
(494,293
|
)
|
Customer deposits and deferred revenue
|
|
|
99,600
|
|
|
|
(190,000
|
)
|
Net cash used in operating activities
|
|
$
|
(5,676,073
|
)
|
|
$
|
(2,584,508
|
)
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures for non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Deposits on manufacturing equipment transferred to fixed assets
|
|
$
|
49,590
|
|
|
$
|
20,017
|
|
See accompanying notes to condensed consolidated financial statements
NOTE 1 — DESCRIPTION OF BUSINESS:
Chembio Diagnostics, Inc. (the "Company" or "Chembio") and its wholly-owned subsidiary, Chembio Diagnostic Systems Inc., 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 54% of the Company's product revenues in the first nine months of 2016. The Company's products based on its DPP® platform represented approximately 43% of the Company's product revenues in the first nine months of 2016. The Company also has other rapid tests and components that together represented approximately 3% of product sales in the first nine months of 2016. 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 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|
a)
|
Basis of Presentation:
|
The preceding (a) condensed consolidated balance sheet as of December 31, 2015, which has been derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements as of September 30, 2016 and for the three and nine-month periods ended September 30, 2016 and 2015, 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, 2015, 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 September 30, 2016, its condensed consolidated results of operations for the three and nine-month periods ended September 30, 2016 and 2015, respectively, and its condensed consolidated cash flows for the nine-month periods ended September 30, 2016 and 2015, 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 currently has positive working capital; it has increased cash approximately $6.80 million for the nine months ended September 30, 2016. See Note 5. The Company closed on 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 $12.5 million. Approximately $2.68 million of the total $4.21 million of accounts receivable is comprised from one customer, and the Company has a high degree of confidence that the receivables are fairly stated and collectible from this customer.
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 $453,006 and $353,406 as of September 30, 2016 and December 31, 2015, 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:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Raw materials
|
|
$
|
1,881,144
|
|
|
$
|
2,248,371
|
|
Work in process
|
|
|
655,777
|
|
|
|
370,340
|
|
Finished goods
|
|
|
890,237
|
|
|
|
959,314
|
|
|
|
$
|
3,427,158
|
|
|
$
|
3,578,025
|
|
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 nine-month periods ended September 30, 2016 and 2015, have been included in the earnings per share computations:
|
For the three months ended
|
|
For the nine months ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Basic
|
|
11,142,090
|
|
|
9,628,248
|
|
|
10,150,737
|
|
|
9,625,282
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
11,142,090
|
|
|
9,628,248
|
|
|
10,150,737
|
|
|
9,625,282
|
As there were losses for the three and nine months ended September 30, 2016 and 2015, no common share equivalents are included in the diluted per share computations.
There were 614,949 and 650,728 weighted-average number of options outstanding as of September 30, 2016 and 2015, respectively, that were not included in the calculation of diluted per common share equivalent for the three months ended September 30, 2016 and 2015 respectively. There were 677,050 and 661,570 weighted-average number of options outstanding as of September 30, 2016 and 2015, respectively, that were not included in the calculation of diluted per common share equivalent for the nine months ended September 30, 2016 and 2015, 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 September 30, 2016, there were 452,534 options exercised and 227,931 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 September 30, 2016, there were no options exercised, 129,750 options outstanding and 670,250 options or shares still available to be issued under the 2014-SIP.
There were 106,875 stock options granted during the nine months ended September 30, 2016 and none for the nine months ended 2015. The weighted average estimated fair value, at their respective dates of grant, of stock options granted in the nine months ended September 30, 2016, was $2.77 per share. 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 nine months ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Expected term (in years)
|
n/a
|
|
n/a
|
|
4.5 to 5.0
|
|
n/a
|
Expected volatility
|
n/a
|
|
n/a
|
|
43.00% to 48.66%
|
|
n/a
|
Expected dividend yield
|
n/a
|
|
n/a
|
|
0 %
|
|
n/a
|
Risk-free interest rate
|
n/a
|
|
n/a
|
|
0.90 % to 0.97%
|
|
n/a
|
The Company's results for the three-month periods ended September 30, 2016 and 2015 include share-based compensation expense, consisting solely of stock options, totaling $74,100 and $72,200, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within research and development ($27,300 and $14,800, respectively) and selling, general and administrative expenses ($46,800 and $57,400, respectively). The results for the nine-month periods ended September 30, 2016 and 2015 include share-based compensation expense, consisting solely of stock options, totaling approximately $220,300 and $267,900, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within research and development ($62,000 and $47,900, respectively) and selling, general and administrative expenses ($158,300 and $220,000, 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 nine months ended September 30, 2016 and 2015 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 nine months ended September 30, 2016:
Stock Options
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price per Share
|
|
Weighted Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
Outstanding at December 31, 2015
|
|
|
649,478
|
|
|
$
|
3.75
|
|
3.21 years
|
|
$
|
1,032,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
106,875
|
|
|
|
7.05
|
|
|
|
|
|
Exercised
|
|
|
191,804
|
|
|
|
3.73
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
564,549
|
|
|
$
|
4.38
|
|
3.60 years
|
|
$
|
1,773,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2016
|
|
|
255,549
|
|
|
$
|
4.13
|
|
2.90 years
|
|
$
|
850,302
|
As of September 30, 2016, there was $372,716 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 2.34 years. The total fair value of stock options vested during the nine-month periods ended September 30, 2016 and 2015 was approximately $237,095 and $332,500, 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 Company produces only one group of similar products known collectively as "rapid medical tests". In addition, the Company generates revenue from R&D, milestone and grant revenue and from license and royalties, all of which are currently earned in the U.S. Management believes that it operates in a single business segment. Net product sales by geographic area are as follows:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
Africa
|
|
$
|
577,108
|
|
|
$
|
341,520
|
|
|
$
|
1,686,327
|
|
|
$
|
3,049,257
|
|
Asia
|
|
|
34,116
|
|
|
|
37,569
|
|
|
|
187,105
|
|
|
|
147,722
|
|
Europe
|
|
|
313,664
|
|
|
|
474,164
|
|
|
|
642,427
|
|
|
|
696,998
|
|
North America
|
|
|
903,327
|
|
|
|
1,579,588
|
|
|
|
3,953,469
|
|
|
|
3,965,356
|
|
South America
|
|
|
673,882
|
|
|
|
3,776,784
|
|
|
|
3,983,860
|
|
|
|
10,286,531
|
|
|
|
$
|
2,502,097
|
|
|
$
|
6,209,625
|
|
|
$
|
10,453,188
|
|
|
$
|
18,145,864
|
|
|
g)
|
Accounts Payable and Accrued Liabilities:
|
Accounts payable and accrued liabilities consist of:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Accounts payable – suppliers
|
|
$
|
1,179,884
|
|
|
$
|
1,260,520
|
|
Accrued commissions
|
|
|
359,978
|
|
|
|
129,192
|
|
Accrued royalties / license fees
|
|
|
338,162
|
|
|
|
732,301
|
|
Accrued payroll
|
|
|
227,546
|
|
|
|
146,962
|
|
Accrued vacation
|
|
|
269,472
|
|
|
|
244,810
|
|
Accrued bonuses
|
|
|
-
|
|
|
|
177,700
|
|
Accrued expenses – other
|
|
|
213,351
|
|
|
|
109,947
|
|
TOTAL
|
|
$
|
2,588,393
|
|
|
$
|
2,801,432
|
|
|
h)
|
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 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.
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. The Company is currently assessing the impact on its consolidated financial position and results of operations.
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 is currently evaluating the impact of the provisions of ASU 2016-09.
NOTE 3 — COLLABORATIVE RESEARCH AND DEVELOPMENT ARRANGEMENTS:
|
a)
|
RVR DPP® technology transfer agreement:
|
In February 2014, the Company entered into a technology transfer agreement with RVR Diagnostics Sdn Bhd for $1,500,000. The agreement was modified in September 2014. The Company did not earn revenues during the nine-month periods ended September 30, 2016 and 2015, respectively from this agreement. The Company earned $1,250,000 from this grant from inception through September 30, 2016. See Note 8, "SUBSEQUENT EVENT".
In October 2014, the Company entered into a technology development agreement with a diagnostics company for $300,000. The Company earned none and $140,000 for the nine-month periods ended September 30, 2016 and 2015, respectively, from this agreement. The Company earned $300,000 from this grant from inception through September 30, 2016 and the development is completed.
|
c)
|
Brain Injury agreement:
|
In January 2015, the Company entered into a technology development agreement with Perseus Science Group LLC for $946,000. The Company earned $180,381 and $300,000 for the nine-month periods ended September 30, 2016 and 2015, respectively, from this agreement. The Company earned $650,000 from this grant from inception through September 30, 2016.
In January 2015, the Company was awarded a grant from the Bill & Melinda Gates Foundation for $307,000. The Company earned none and $307,000 for the nine-month periods ended September 30, 2016 and 2015, respectively, from this agreement. The Company earned $307,000 from this grant from inception through September 30, 2016 and the development is completed.
In April 2016, the Company was awarded a grant from the Bill & Melinda Gates Foundation for $678,000. The Company earned $224,938 for the nine-month period ended September 30, 2016 from this agreement, which is the total amount earned from this grant from inception through September 30, 2016.
In October 2014, the Company entered into a technology development agreement with an international diagnostics company for $320,000. The Company earned $65,000 and $165,000 for the nine-month periods ended September 30, 2016 and 2015, respectively, from this agreement. The Company earned $270,000 from this grant from inception through September 30, 2016.
|
f)
|
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 $2,259,786 and none for the nine-month periods ended September 30, 2016 and 2015, respectively, from this agreement. The Company earned $2,668,265 from this grant from inception through September 30, 2016.
In August 2016, the Company was awarded a grant for 5,933,742 from BARDA, which is part of the U.S. Department of Health And Human Resources. The Company earned $221,563 for the nine-month period ended September 30, 2016 from this agreement. The Company earned $221,563 from this grant from inception through September 30, 2016.
NOTE 4 — RIGHTS AGREEMENT:
In March 2016, the Company entered into a Rights Agreement dated as of March 8, 2016 (the "Rights Agreement") between the Company and Action Stock Transfer Corp., as Rights Agent. Pursuant to the Rights Agreement, the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, $0.01 par value (the "Common Stock"), of the Company. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2016, and the Rights were distributed to the Company's shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.
Rights Initially Not Exercisable.
The Rights are not exercisable until a Distribution Date, which is defined below. Until a Right is exercised, the holder thereof, in his capacity as a holder of Rights, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Separation and Distribution of Rights
. The Rights will be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur
of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date") or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 20% or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date").
NOTE 5 — COMMON STOCK, WARRANTS AND OPTIONS:
The Company closed on 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 $12,493,398. 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 was to be 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 6 — COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS:
The following table discloses product sales and accounts receivable that 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 nine months ended
|
|
Accounts Receivable as of
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Sales
|
|
% of Sales
|
|
Sales
|
|
% of Sales
|
|
Sales
|
|
% of Sales
|
|
Sales
|
|
% of Sales
|
|
|
|
|
Customer 1
|
$
|
662,841
|
|
26
|
|
$
|
3,749,480
|
|
60
|
|
$
|
3,919,011
|
|
37
|
|
$
|
10,093,512
|
|
56
|
|
$
|
2,683,910
|
|
$
|
7,871,679
|
Customer 2
|
|
*
|
|
*
|
|
|
1,116,504
|
|
18
|
|
|
1,796,477
|
|
17
|
|
|
2,841,803
|
|
16
|
|
|
-
|
|
|
563,385
|
Customer 3
|
|
*
|
|
*
|
|
|
*
|
|
*
|
|
|
*
|
|
*
|
|
|
1,750,722
|
|
10
|
|
|
*
|
|
|
189,472
|
(*) 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 nine months ended
|
|
Accounts Payable as of
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Purchases
|
|
% of Purc.
|
|
Purchases
|
|
% of Purc.
|
|
Purchases
|
|
% of Purc.
|
|
Purchases
|
|
% of Purc.
|
|
|
|
|
Vendor 1
|
$
|
132,122
|
|
11
|
|
$
|
*
|
|
*
|
|
$
|
558,044
|
|
12
|
|
$
|
*
|
|
*
|
|
$
|
53,682
|
|
$
|
*
|
Vendor 2
|
|
*
|
|
*
|
|
|
167,670
|
|
9
|
|
|
*
|
|
*
|
|
|
654,253
|
|
12
|
|
|
*
|
|
|
46,866
|
(*) 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
three
key employees: CEO John J. Sperzel II; COO Sharon Klugewicz; and CSTO Javan Esfandiari. The contracts call for salaries presently aggregating $
975,000
per year. The Sperzel contract expires in March 2017, the Klugewicz contract expires in May 2017, and the Esfandiari contract expires in March 2019. In connection with the Sperzel contract that expires in March 2017, the Company issued, in March 2014, options to purchase 250,000 common shares of stock, with
1/5
vesting on each of the first
five
anniversaries of the grant. In connection with the Klugewicz contract that expires in May 2017, no options were issued; however in connection with the prior Klugewicz contract that expired in May 2015, the Company issued, in May 2013, options to purchase
5,000
shares of common stock, with
one-half
vesting on each of the first and second anniversaries 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.
NOTE 7 — INCOME TAXES:
The Company recorded a full valuation allowance during the nine months ended September 30, 2016, on its deferred tax assets. Changes in expectations since the filing of our Form 10-K for 2015 and our Form 10-Q for the three months ended March 31, 2016 resulted in a different conclusion and now the Company believes that the valuation allowance is necessary as it is more likely than not that the deferred tax asset will not be realized in the foreseeable future based on information available at this time. This conclusion was reached because of uncertainties related to future taxable income, in terms of both its timing and its sufficiency, which would enable the Company to realize the deferred tax assets.
NOTE 8 — SUBSEQUENT EVENTS:
On November 4, 2016, Chembio entered into an agreement with the two shareholders of RVR Diagnostics Sdn Bhd (RVR), a Malaysia company for Chembio to acquire all the stock and any other equity interests in RVR. The agreement includes the following provisions:
(i)
The purchase price at closing shall consist of $1.4 million cash; $1.85 million in Chembio's stock (based on a 15-day volume weighted average trading price ("VWAP")); and Chembio's forgiveness of a $250,000 contingent obligation from RVR to Chembio;
(ii)
The two sellers of the RVR stock also will be entitled to receive milestone payments of an aggregate total of up to $100,000 in cash and $150,000 in Chembio's common stock (calculated with the same 15-day VWAP) in increasing amounts up to the $250,000 maximum aggregate milestone payment to the extent that RVR's sales for 2017 exceed $2.25 million;
(iii)
Each of the two sellers will be employed by RVR for one year after closing at a salary of $10,000 per month;
(iv)
The Company will be entitled to undertake due diligence after signing of the Stock Purchase Agreement;
(v)
Each of the two sellers will indemnify the Company for any undisclosed liabilities;
(vi)
The Company, immediately after signing the Agreement and as soon as RVR has provided the Company with the RVR financial statements needed for the filing, will file a registration statement with the SEC to register the issuance of the shares to the sellers, and the closing will occur within a few days after the registration statement becomes effective with the SEC;
(vii)
Closing of the transaction is subject to a number of other conditions that can be waived by the party for whom the condition is to be satisfied; and
(viii)
Upon closing of the acquisition, the directors of RVR will be Magentiren Vajuram, Avijit Roy, Katherine Davis, John Sperzel, and Rich Larkin. Messrs. Vajuram and Roy are the selling stockholders and also the current management of RVR.