ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report. In addition to historical information, the following discussion contains forward-looking statements that involves risks, uncertainties and assumptions. See “Forward-Looking Statements and Statistical Estimates” on page 3 of this report. Please read Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 13, 2020, Part II, Item1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, as filed with the Securities and Exchange Commission on May 4, 2020, and Part II, Item1A. “Risk Factors” of this report for a discussion of factors that could cause our actual results to differ materially from our expectations.
Overview of Six Months Ended June 30, 2020
We develop, manufacture and commercialize diagnostic tests used for the detection and diagnosis of infectious diseases. We have been expanding our product portfolio based upon our proprietary DPP technology, a novel, rapid diagnostic platform that uses a drop of blood or alternative sample types from the fingertip to provide high-quality, cost-effective results in approximately 15 minutes. Our products are sold globally to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals, and retail establishments.
The global COVID-19 pandemic significantly affected our operating results for the six months ended June 30, 2020. We anticipated that, in addition to the business disruption and general economic effects caused by the pandemic, a substantial portion of the funding that would otherwise have been available for testing for infectious diseases addressed by our diagnostic tests, such as the human immunodeficiency virus or HIV, would be redirected to testing for the novel coronavirus that causes COVID-19. In February 2020 we began the process of shifting substantially all of our resources to leverage our DPP lateral flow technology to address the acute and escalating need for an accurate diagnostic test for COVID-19.
In the latter half of the first quarter of 2020, we developed, and began to manufacture for commercialization, the DPP COVID-19 System, which consists of our new serological test for COVID-19 and our Micro Reader analyzer. The DPP COVID-19 System can provide discrete, accurate readings for IgM and IgG antibody levels in approximately 15 minutes from a simple fingerstick drop of blood. Our actions in the first-quarter led to several subsequent key achievements:
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We acquired three regulatory approvals of the DPP COVID-19 System in our targeted global testing market: an Emergency Use Authorization, or EUA, granted by the U.S. Food and Drug Administration, or FDA, in April 2020; an approval for emergency use issued by Brazil’s Agência Nacional de Vigilância Sanitária, or ANVISA, in April 2020, and a CE Marking for the European Union obtained in early May 2020.
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Stony Brook Medicine selected the DPP COVID-19 System to help identify persons who have recovered from COVID-19 for use in an FDA-approved investigation to determine if those persons’ convalescent blood plasma can help treat patients with an active COVID-19 infection.
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We began shipping the DPP COVID-19 System to fulfill a $4 million purchase order from Bio-Manguinhos, a long-standing customer that is a subsidiary of the foundation responsible for the development and production of vaccines, diagnostics and biopharmaceuticals for Brazil’s national public health system.
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We initiated commercial shipments of the DPP COVID-19 System to customers in the United States.
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We strengthened our balance sheet by raising $28.4 million in a secondary public offering in May 2020.
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We stablished a non-exclusive distribution relationship with Thermo Fisher Scientific’s healthcare channel for the distribution of Chembio’s DPP COVID-19 System in the U.S.
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In addition, in June 2020 our DPP platform received further U.S. regulatory approval upon the FDA’s granting of a 510(k) for our DPP Zika IgM System, which includes both a test for Zika IgM antibodies and a Micro Reader. The development and regulatory submission of the DPP Zika IgM System was funded by the Biomedical Advanced Research and Development Authority, part of the Office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services (BARDA). The DPP Zika IgM System had previously received an EUA from the FDA. This was the first 510(k) that includes our Micro Reader, which is the same device used with DPP COVID-19 Systems and DPP HIV-Syphilis Systems, the latter which is pending FDA review for a PMA.
However, later in June 2020 the FDA revoked our EUA for the DPP COVID-19 System, which we refer to as the Revocation, and since then we have been focused on revising the COVID-19 System for antibodies (serology) in anticipation of resubmitting it to the FDA for an EUA. Additionally, as announced in early July 2020, we are developing a DPP COVID-19 System for antigen detection with the support of a $0.6 million award from the Biomedical Advanced Research and Development Authority or BARDA, which is part of the Office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services.
The diminished focus on our existing product portfolio and extensive economic disruption caused by the COVID-19 pandemic, exacerbated by the Revocation in June 2020 and the related impact on product returns and variable consideration, was reflected in our results for the six months ended June 30, 2020 as compared to the prior year period, as total revenue decreased 35.0% to $12.0 million and product sales decreased 38.3% to $9.5 million.
In order to address challenging economic conditions and accelerate implementation of our new business strategy, we are executing a program to reduce operating expenses and better align our costs with revenues. For a further description of this program, see “—Expense Reduction Program” below. Our cash and cash equivalents totaled $36.4 million at June 30, 2020, compared to $18.3 million at December 31, 2019.
DPP COVID-19 System
We believe we have a proven track record in rapidly responding to global health emergencies. Building upon our extensive experience in developing and manufacturing high-quality HIV tests, we received EUAs for DPP tests related to the global outbreak of Ebola, which began in 2014, and Zika, which commenced in 2015 and was awarded a 510(k) in June 2020 as discussed above. When the novel coronavirus emerged, we were confident that we could leverage our DPP platform and our scientific and operational expertise to create an antibody test that could detect the presence of antibodies indicative of recent infection or past infection generated in response to the virus. DPP technology is an advanced, versatile lateral flow testing platform with the capability to multiplex, or detect multiple biomarkers, from a single patient sample. The speed with which we were able to develop a test for COVID-19 illustrates the DPP platform’s applicability to new and emerging infectious diseases.
During the six months ended June 30, 2020, we refocused our business strategy to apply our DPP technology to address the escalating need for COVID-19 diagnostic tests, including tests that can be performed both close to the patient and at a laboratory or hospital. In February 2020 we began the process of shifting substantially all of our resources to the development and commercialization of the DPP COVID-19 IgM/IgG System, which consists of our new serological test for COVID-19 and our Micro Reader analyzer. In the latter half of the first quarter of 2020, we developed, and in preparation for commercialization, began to manufacture the DPP COVID-19 IgM/IgG System.
During the second quarter of 2020, prior to the Revocation, we focused on responding to a substantial number of commercial leads for the DPP COVID-19 IgM/IgG System, establishing and servicing qualified new customers, building a distributor relationship with Thermo Fisher Scientific’s healthcare channel, and manufacturing product to meet demand.
The DPP COVID-19 IgM/IgG System detects antibodies in the blood that are produced by the body in response to a novel coronavirus infection. Detection of an acute infection, as determined by the level of IgM antibodies, helps determine if a patient is still infectious. As the infection progresses, the body typically begins to produce IgG antibodies. As the IgG antibody levels increase, the IgM antibody levels will decrease and eventually disappear. IgG antibodies remain, evidencing the earlier infection. It is not currently known how long IgG antibodies to coronavirus remain in the body.
The DPP COVID-19 System offers discrete detection of IgM and IgG antibodies, with high sensitivity and specificity, from a simple fingerstick drop of blood after approximately 15 minutes of reaction time. Our portable Micro Reader analyzer then reports accurate results in approximately 15 seconds. Objective results produced by the Micro Reader reduce the possibility of the types of human error that can be experienced in the visual interpretations required by many other serological tests. The system is portable, provides accurate results from fingerstick blood or other samples, and can detect multiple biomarkers simultaneously and discretely. At the same time, the easy-to-use testing workflow is scalable. Clinicians can run multiple tests at the same time because cartridges are only required to be inserted in the Micro Reader for 15 seconds to obtain results following the 15-minute test incubation period.
The DPP COVID-19 Antigen System that is under development with the support of BARDA is expected to consist of a DPP COVID-19 Antigen Assay and Micro Reader and to use a respiratory specimen, such as a nasal or nasopharyngeal swab, to detect SARS-CoV-2 antigens. Antigen tests such as the one we are developing are important in the overall response against COVID-19 as they can be provided on a decentralized basis, closer to the point of care, at lower cost and with faster results than alternative molecular test options.
Key Developments
While we have been focusing on a test for COVID-19 for a relatively short time, we have achieved several key developments that we believe demonstrate the potential utility and marketability of the DPP COVID-19 System.
Shipment to Brazil. In March 2020 we received a $4 million purchase order for DPP COVID-19 Systems from Bio-Manguinhos, a long-standing customer that is a subsidiary of the foundation responsible for the development and production of vaccines, diagnostics and biopharmaceuticals for Brazil’s national public health system. In April 2020 we began shipping DPP COVID-19 Systems to Bio-Manguinhos to fulfill this purchase order.
Issuance of EUA. On April 14, 2020, the FDA issued an EUA for emergency use of the DPP COVID-19 System pursuant to Section 564 of the Federal Food, Drug, and Cosmetic Act of 1938. EUA authority allows the FDA, following a declaration of emergency or threat-justifying authorization of emergency use by the Secretary of Health and Human Services, to authorize the introduction into interstate commerce of drugs, devices, or biologics intended for use in an actual or potential emergency involving a biological, chemical, radiological, or nuclear agent. Under this authority, the FDA may authorize such products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions caused by such agents when appropriate findings are made concerning the nature of the emergency, the availability of adequate and approved alternatives, and the quality of available data concerning the effectiveness of the medical product under consideration for emergency use. On February 4, 2020, the Secretary of Health and Human Services determined that the novel coronavirus presented a public health emergency that has a significant potential to affect national security or the health and security of U.S. citizens living abroad and declared that circumstances existed justifying the authorization of emergency use of in vitro diagnostics for detection and/or diagnosis of the novel coronavirus that causes COVID-19. On February 29, 2020, the FDA issued immediately in effect guidance for clinical laboratories, commercial manufacturers and FDA staff to provide a policy to help accelerate the availability of COVID-19 diagnostic tests, and updated that guidance on March 16, 2020 to provide more specific detail to laboratories and commercial manufacturers developing COVID-19 diagnostic tests. To date, the FDA has issued many EUAs for serological tests for use in detecting COVID-19-related antibodies. On May 4, 2020, the FDA further updated its COVID- 19 diagnostic test guidance to require EUA submissions for all serology tests that were previously marketed under FDA enforcement discretion following submission of a notification to FDA. FDA policies regarding diagnostic tests, therapies and other products used to diagnose, treat or mitigate COVID-19 remain in flux as the FDA responds to new and evolving public health information and clinical evidence.
Selection for Use in FDA-Approved Study. In April 2020, Stony Brook Medicine selected the DPP COVID-19 System to assist in the recruitment of patients who have recovered from COVID-19 infections. Stony Brook Medicine is conducting a study intended to determine if convalescent blood plasma from people who have recovered from COVID-19 can help treat hospitalized patients with active COVID-19 infection. Stony Brook University Hospital has received Investigational New Drug approval from the FDA to offer convalescent blood plasma treatment to its patients through a randomized, controlled study and is expected to enroll up to 500 patients from the Long Island, New York area. The DPP COVID-19 System is being used to confirm that patients enrolled in the study had been infected with COVID-19 and now have adequate levels of IgG antibodies to make them eligible to donate convalescent plasma.
Initial Shipments in United States. We made our initial commercial shipments of the DPP COVID-19 System to U.S. customers late in April 2020 and continued to ship product until receipt of the Revocation.
Revocation of EUA. On June 16, 2020, the FDA stated that it was revoking our EUA for the DPP COVID-19 IgM/IgG System was revoked, based in part on the performance of our system in the NCI’s methodology for the evaluation of COVID-19 serology tests. The FDA’s original letter of authorization for the EUA required our participation in a National Institutes of Health/National Cancer Institute (NCI) study. However, the letter stated that the NCI submission and evaluation would only be used to revise our product labeling. After we learned of the results of the NCI study -- but before the FDA took action with respect to the EUA -- we engaged in a number of communications with the FDA about the results of the NCI study and other topics.
Despite the Revocation, we continue to be excited about our opportunities in the market for DPP COVID-19 IgM/IgG Systems, as follows:
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We stand behind the real-world clinical data, including that which we submitted to the FDA, in connection with the DPP COVID-19 IgM/IgG System EUA, and
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The FDA’s recent identification of the performance criteria for COVID-19 serology tests clarified our path forward in working to revise the DPP COVID-19 IgM/IgG System to meet or exceed current FDA requirements.
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Regarding the real-world clinical data for our original DPP COVID-19 System, including the data we submitted to the FDA in connection with our system’s EUA:
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We acknowledge the policy change that led the FDA to create performance criteria and rely on the NCI study for those purposes.
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On April 15, 2020, the DPP COVID-19 IgM/IgG System was granted an EUA. Subsequently, the FDA announced the adoption of a performance review process based in part on a NCI methodology for the evaluation of COVID 19 serology tests. The NCI report acknowledges that this process, which evaluates COVID-19 serology test sensitivity and specificity using a panel of pre-selected samples, may not be indicative of either performance in the real-world or performance of finger stick blood as used in the Chembio system.
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In addition, the NCI study does not invalidate the real-world clinical data that we submitted to the FDA, including that compiled by Chembio as well as independent evaluators at two university medical centers.
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The importance of our system’s real-world performance has been highlighted by a number of customers.
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Targeted Uses and Customers
By changing the way people interact and function in everyday life, the COVID-19 pandemic has created new types of customer needs and has expanded the use cases for diagnostic testing. We believe the DPP COVID-19 System is well-positioned to address both existing and emerging markets by, for example, monitoring infection progression in individuals to improve clinical outcomes, surveilling community populations to determine herd immunity, and facilitating evaluation of potential therapeutic treatments and potential vaccine development processes. Because the DPP COVID-19 System is portable, uses a fingerstick blood sample or other samples, can produce accurate results, and requires approximately 15 minutes for test processing and approximately 15 seconds for results processing, we believe tests can be conducted in a wide variety of settings, including on a decentralized basis without significant infrastructure.
Because the EUA issued by the FDA for emergency use of the DPP COVID-19 System was limited to laboratories certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, to perform moderate and high complexity tests, we are working with the FDA to identify and understand the requirements and guidelines that would be applicable to receiving a certificate of waiver under CLIA with respect to the DPP COVID-19 System. CLIA generally regulates laboratories that test human specimens and ensures laboratories produce accurate, reliable, and timely patient test results, regardless of where the test is performed. As defined by CLIA, waived tests are categorized as simple laboratory examinations and procedures that have an insignificant risk of an erroneous result. A CLIA-waived test can be performed as a point-of-care test at any laboratory with a Certificate of Waiver without need for a highly trained laboratory technician to administer the test, which makes the test more accessible and economical. This would include many physician offices, health clinics and urgent care centers, pharmacies and nursing homes. In the event that FDA approves our application for waived status under CLIA, we anticipate that a diverse customer base will be interested in using the DPP COVID-19 System, based on the DPP COVID-19 System’s portability, accuracy, speed, cost-effectiveness and ease of use.
If we are granted an EUA for the revised DPP COVID-19 System and, until the FDA authorized waived status under CLIA, we will focus our sales efforts on target hospitals, moderately complex physician office labs, urgent care clinics and state and city health departments authorized to perform moderate and high complexity tests in regions that have been most effected by the pandemic. Outside the known health care arena, we anticipate there will be increasing interest from larger institutions and employers as the world evaluates its path back to work and whether individuals may have been exposed to COVID-19 and may have immunity.
Legacy Infectious Disease Product Portfolio
We are a leading provider of diagnostic tests for infectious diseases with a broad portfolio of infectious disease products. We refer to our infectious disease products, other than the DPP COVID-19 System, as our legacy products. As described above under “—DPP COVID-19 System,” in the six months ended June 30, 2020 we began the process of shifting substantially all of our resources to the development and commercialization of the DPP COVID-19 System. As a result, and as illustrated by our results for the six months ended June 30, 2020, we expect to generate a diminished amount of revenue from our legacy products for the foreseeable future, while we continue to focus on the manufacture and commercialization of the DPP COVID-19 System. Thereafter, we intend to recommence the development, marketing, manufacture and sale of the legacy product portfolio consistent with market demand.
Nearly all of our legacy infectious disease products are based on our DPP technology. They require only a single drop of blood from the fingertip or other samples, and provide results in approximately 15 minutes. These products feature:
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enhanced sensitivity and specificity;
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advanced multiplexing; and
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when used with our Micro Reader, accurate results processed in approximately 15 seconds.
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Regulatory Approvals
We have obtained FDA approvals and, directly or through our partners, international regulatory approvals for legacy infectious disease tests as follows:
Product
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U.S.
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International
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DPP COVID-19 IgM/IgG System
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✓
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DPP HIV 1/2 Assay
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✓
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✓
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DPP HIV-Syphilis System
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Pending FDA Approval
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✓
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DPP Syphilis Screen & Confirm Assay
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✓
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DPP ZCD IgM/IgG System
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✓
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DPP Dengue NS1 Antigen System
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✓
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DPP Dengue IgM/IgG System
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✓
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DPP Zika IgM System
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✓
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✓
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DPP Zika IgM/IgG System
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✓
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DPP Chikungunya System
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✓
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DPP Ebola Antigen System
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✓ EUA
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DPP Leishmaniasis Assay
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✓
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HIV 1/2 STAT-PAK Assay
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✓
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✓
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Chagas STAT-PAK Assay
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✓
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SURE CHECK HIV 1/2 Assay
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✓
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✓
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SURE CHECK HIV Self-Test
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✓
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Historically, we have sought to leverage our FDA approvals and, directly or through our partners, international regulatory approvals for infectious disease tests as follows:
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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 targeted for sale in the United States and tests for Chikungunya, Dengue and Zika for sale internationally.
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Legacy Products
Our legacy products include 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 estimates of the World Health Organization, or WHO:
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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.
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We have sought 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 developed a DPP HIV-Syphilis multiplex test and received regulatory approvals covering a number of international markets, including Brazil, Europe, Malaysia and Mexico. In February 2020, we 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 requested the repeat of the reproducibility study, as one of the sites in the trial reported greater variability compared to the other sites. We completed and submitted the repeat study to the FDA in April 2020 and are awaiting its formal review. When appropriate and subject to issuance of the PMA, we will continue the pursuit of the associated CLIA waiver. 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.
Our legacy products also include tests for selected fever and tropical diseases such as Chagas, Ebola, Leishmaniasis and Zika. The market for lateral flow tests for mosquito-borne diseases includes established markets for diseases such as Dengue and Malaria, which WHO estimates collectively 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, Dengue, lassa, leptospirosis, Marburg, Rickettsia and Zika. Though certain of these have not been commercialized, our legacy products include tests using our DPP platform to detect all of the aforementioned fever and tropical diseases, as stand-alone or multiplex tests.
Our investments in these products are attracting international attention. In April 2020, we received a second $1.5 million purchase order from UNICEF for multiplex Zika, Chikungunya and Dengue (DPP ZCD) Systems, including tests and Micro Readers. The orders follow the successful completion of conditions set forth in the previously announced long term arrangement (LTA). Along with the firm purchase commitment of $1.5 million, the LTA includes additional potential purchases of up to $2.0 million, for a total potential amount of up to $3.5 million. Along with the previous UNICEF order for Chembio’s multiplex Zika IgM/IgG System announced in February 2020, the combined LTAs contemplate up to $7.0 million in potential orders. Shipments under these orders commenced during the quarter ended June 30, 2020 and will scheduled for delivery through 2021.
Our DPP ZCD System can accurately detect three unique viral infections, all of which are transmitted by the same type of mosquito, have similar symptoms and are often associated with co-infections. We believe that testing for these viruses in combination will be critical in addressing these co-circulating pathogens. This novel multiplex test will enhance both surveillance capabilities and clinical response efforts, providing significant advantages over current lab-based tests by allowing healthcare providers to take rapid action.
Chembio’s multiplex DPP ZCD System allows simultaneous and discrete detection of antibodies for both active (IgM) and prior exposure (IgG) to Zika, Chikungunya and Dengue viruses. The DPP ZCD System has received approval from ANVISA in Brazil and is CE Marked.
Third-Party Funding
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: the Bill & Melinda Gates Foundation; The Paul G. Allen Family Foundation, or Paul Allen Foundation; The Oswaldo Cruz Foundation (Fiocruz); and the Foundation for Innovative New Diagnostics, or FIND, as well as U.S. government agencies such as the 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.
Legacy Products Under Development
Several tests in our infectious disease pipeline are approaching commercialization, and several have received initial regulatory approvals:
Product
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Collaborator
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Phase I
Feasibility
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Phase II
Development
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Phase III
Verification &
Validation
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Phase IV
Clinical &
Regulatory
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Phase V
Commercial
Launch
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DPP HIV-Syphilis System (US)
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Self-funded
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✓
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✓
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✓
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✓
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PMA pending
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DPP Dengue IgM/IgG System
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Self-funded
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✓
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✓
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✓
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✓
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CE and ANVISA
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DPP Dengue NS1 Antigen System
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Self-funded
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✓
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✓
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✓
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✓
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CE and ANVISA pending
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DPP Chikungunya IgM/IgG System
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Self-funded
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✓
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✓
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✓
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✓
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CE and ANVISA
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DPP Zika Chikungunya Dengue IgM/IgG System
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Self-funded
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✓
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✓
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✓
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✓
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CE and ANVISA
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DPP Ebola Antigen System
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CDC
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✓
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✓
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✓
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✓
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FDA-EUA
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DPP Fever Assay Asia
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FIND
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✓
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✓
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✓
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✓
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DPP Fever Assay Africa
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Paul Allen Foundation
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✓
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✓
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✓
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DPP Fever Assay Malaysia
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Self-funded
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✓
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✓
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✓
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✓
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Sales Channels
We believe our deep experience with infectious diseases, including our development of tests that can multiplex as many as eight different diseases with a single drop of blood and deliver accurate results with our Micro Readers, illustrates our ability to expand our DPP technology into a broader range of tests. Our initial focus for the DPP COVID-19 System is in the United States and in fulfilling existing orders from Brazil, but we expect to expand our sales efforts to include Europe and elsewhere, as demand determines.
There is a diverse customer base interested in using the DPP COVID-19 System. This potential group includes various hospital departments, state and city health departments, ambulatory surgery centers, physician offices, health clinics and urgent care centers, pharmacies, and nursing homes. Outside the known health care arena, we anticipate there will be increasing interest from larger institutions and employers as the world evaluates its path back to work and whether individuals may have been exposed to COVID-19 and may have immunity. We are focusing our initial sales efforts for the DPP COVID-19 System principally on hospitals, physician offices with moderately complex labs, urgent care clinics and state and city health departments in the regions that have been most affected by the pandemic, while monitoring existing and escalating demand throughout the United States and internationally.
Our broader infectious disease portfolio of products is 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 in a small number of countries and regions. While we are focusing substantially on the market for the DPP COVID-19 System, we intend to maintain our relationships with the United Nations Children’s Fund, or UNICEF, and other organizations and agencies that influence market decisions for our legacy products and products under development.
To support our commercial efforts and support future growth, we are also adding to our marketing and customer service teams in a manner that is aligned with our growth expectations.
Manufacturing
In April 2020, we initiated a retrenchment of our Malaysian facility that was completed during the second quarter of 2020 and that included termination of employment of our Malaysian workforce. We now manufacture all of our tests in the United States and Brazil and all of our Micro Readers in Germany.
In 2018, we began process of automating some of our manufacturing processes and expanding our manufacturing capacity in the United States. We initiated the process of automating our U.S. manufacturing processes because we believe the reduced variable costs associated with automated manufacturing lines will improve product gross margins.
As described under “—Business Update—DPP COVID-19 System” above, since February 2020 we have been shifting resources to develop and commercialize the DPP COVID-19 System. Accordingly, and in connection with receipt of an EUA from the FDA for the DPP COVID-19 System, during the three months ended March 31, 2020 we began the process of shifting substantially all of our test manufacturing capacity to the DPP COVID-19 System. This shift included investment totaling approximately $0.8 million to increase tooling capacity, advance our automated manufacturing, and begin recruiting additional workers to expand capacity and supplement absenteeism associated with employee self-quarantines as the result of the COVID-19 pandemic.
During the initial period of expected high demand for COVID-19 tests such as the DPP COVID-19 System, the ultimate duration of which we continue to evaluate, we worked to scale both our manual and automated processes for the assembly of tests for the DPP COVID-19 System. We have designed, and will seek to implement, a capacity growth plan intended to ramp production. Our actual growth in capacity will be tied to market demand, and our ability to ramp capacity will be subject to our ability to fund, manage and execute our internal manufacturing requirements and to continue to have the necessary support of our supply chain and other vendors.
Research & Development Services
Our commercially available products employ either our proprietary DPP technology or traditional lateral flow technology. In recent years, we have, while concurrently developing our own products, executed a strategy to leverage DPP intellectual property, as well as our scientific and operational expertise, through our Research & Development Services program of collaborative projects.
Research & Development Services develops tests for third parties using our DPP platform and, in limited cases, other platforms in projects that we believe have the potential to create value for the rest of our business. Research and development, or R&D, costs related to these collaborations are fully funded by our collaborators. We believe that, in addition to providing revenue to support our R&D organization, these activities further validate the DPP platform’s ability to provide superior diagnostic performance compared with products that utilize traditional lateral flow technology. The projects also expand the know-how of our R&D team, which we seek to leverage in the development of our own products.
Examples of projects performed by Research & Development Services include the following:
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In January 2015 we entered into an agreement with the Concussion Science Group Division of Perseus Science Group LLC, or Perseus, to develop a rapid diagnostic test for traumatic brain injury utilizing both our DPP and optical analyzer technologies.
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In October 2017 we signed a biomarker development project agreement with AstraZeneca plc, or 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 rapid diagnostic tests for infectious diseases. Under terms of the agreement, we receive funding from LumiraDx, subject to satisfying certain milestones, to develop certain neibiw rapid infectious disease tests. Following the regulatory approval and commercialization of tests in accordance with the agreement, we 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 July 2019 we entered into a collaboration agreement with Shire, a subsidiary of Takeda Pharmaceutical to develop a novel rapid diagnostic test to detect an undisclosed biomarker.
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•
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In March 2020 we completed the technical feasibility phase for a potential companion/compatible diagnostic test being developed in collaboration with Shire. The program is focused within Takeda’s Rare Diseases Therapeutic Area Unit, which aspires to transform the treatment of rare diseases in immunology, hematology, metabolic and lysosomal storage disorders. Based on the progress, in March 2020 Takeda provided the next tranche of funding for the next phase of the program.
|
|
•
|
We entered into agreements with LumiraDx in March 2020 (as amended in April 2020) to, among other things, develop a diagnostic test for the detection of the COVID-19 virus and IgM and IgG antibodies on the LumiraDx platform.
|
|
•
|
In July 2020, we were selected to conduct a second research and development services program for Takeda utilizing our DPP technology and Micro Reader analyzers.
|
We believe leading global healthcare organizations and others have chosen to collaborate with us based on our deep scientific expertise with our 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 from various regulatory authorities in the United States, Brazil, the European Union, and Mexico, as well as prequalifications from WHO.
The following table illustrates the status of work within our Research & Development Services program:
Product
|
Collaborator
|
Phase I
Feasibility
|
Phase II
Development
|
Phase III Verification &Validation
|
Phase IV Clinical/
Regulatory
|
Phase V Commercial Launch
|
DPP Rare Disease (undisclosed biomarker)
|
Takeda
|
✓
|
✓
|
|
|
|
DPP (undisclosed biomarker)
|
Takeda
|
✓
|
|
|
|
|
DPP COVID-19 Antigen System
|
BARDA
|
✓
|
|
|
|
|
COVID-19 Test
|
LumiraDx
|
✓
|
✓
|
✓
|
|
|
Infectious Disease Portfolio
|
LumiraDx
|
✓
|
✓
|
|
|
|
DPP Biomarker Development Project
(undisclosed biomarker)
|
AstraZeneca
|
✓
|
✓
|
✓
|
|
CE Mark*
|
DPP TBI
|
Perseus
|
✓
|
✓
|
|
|
|
*For use in pharmaceutical research
Competition
General
Many of our competitors are significantly larger than us, and they may have market presence, engineering, technical and marketing capabilities and financial, personnel and other resources substantially greater than our own. 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:
|
•
|
ability to develop and market products and processes;
|
|
•
|
ability to obtain required regulatory approvals;
|
|
•
|
ability to manufacture cost-effective products that meet applicable regulatory requirements;
|
|
•
|
access to adequate capital; and,
|
|
•
|
ability to attract and retain qualified personnel.
|
Our ability to develop and market other products is in large measure dependent on our having additional resources and collaborative relationships. Some of our product development efforts have been funded by a third party on a project or milestone basis. We believe our proprietary know-how relating to our DPP technology has been instrumental in obtaining collaborations. We believe our patent protection enhances our ability to develop new, more profitable collaborative relationships.
DPP COVID-19 System
Competition is, and will likely continue to be, particularly intense in the market for COVID-19 diagnostic tests. Numerous companies in the United States and internationally have announced their intention to offer new products, services and technologies that could be used in substitution for the DPP COVID-19 System. Many of those competitors are significantly larger, and have substantially greater financial, engineering and other resources, than our company. Existing and potential competitors in the market for COVID-19 diagnostic tests include developers of antigen, serological and molecular tests.
We expect competition to continue to increase as other established and emerging companies enter the market, as customer requirements evolve, and as new products, services and technologies are introduced. The entrance of new competitors is being encouraged by governmental authorities, who are offering funding to support development of testing solutions for COVID-19. For example, on April 29, 2020, the U.S. National Institutes of Health announced it would be using a portion of its $1.5 billion in federal stimulus funding to fund a $500 million national challenge designed to help the agency identify the best candidates for an at-home or point-of-care test for COVID-19. Some of our existing or new competitors may have strong relationships with current and potential customers, including governmental authorities, and, as a result, may be able to respond more quickly to new or changing regulatory requirements, new or emerging technologies, and changes in customer requirements. In addition, during the time period between the Revocation and resubmission we anticipate for EUA, competitors have gained progress in their commercialization efforts, and customers have gained experience in using competitive product.
We believe we will be able to compete successfully based upon (a) the capabilities and attributes of the DPP COVID-19 System, which can provide, for a competitive price, rapid and accurate test results for both IgM and IgG antibodies through portable, close-to-the-patient tests and analyzers, (b) our extensive experience in developing rapid tests to respond to the HIV crisis and the Ebola and Zika global outbreaks.
Expense Reduction Program
During the six months ended June 30, 2020, we began implementing a multi-faceted expense reduction program to reduce operating expenses and facilitate profitable growth. We undertook actions to adjust the size and composition of our organization, including by removing positions that were non-essential in light of our new business strategy, and to remove other expenses, all of which we expect will provide savings throughout, and after, 2020. Certain actions were taken with a view to facilitating our new focus on the development, manufacture and commercialization of the DPP COVID-19 System.
In light of market dynamics, we also completed a retrenchment of our Malaysian operations, including the termination of employment of our Malaysian workforce during the three months ended June 30, 2020. We will maintain our Malaysian subsidiary and facility and sustain the product registrations that were obtained throughout southeast Asia, with the benefit of having that entity to preserve the opportunity to restart operations there in the future when market conditions warrant.
Based on these activities, the Company recorded a restructuring charge ranging of $0.4 million during the three months ended June 30, 2020.
Consolidated Results of Operations
Three Months Ended June 30, 2020 Versus Three Months Ended June 30, 2019
Our results of operations for the three months ended June 30, 2020 and 2019 were as follows (dollars in thousands):
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
TOTAL REVENUES
|
|
$
|
5,111
|
|
|
|
100
|
%
|
|
$
|
9,888
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
5,671
|
|
|
|
111
|
%
|
|
|
6,990
|
|
|
|
71
|
%
|
Research and development expenses
|
|
|
1,922
|
|
|
|
38
|
%
|
|
|
2,101
|
|
|
|
22
|
%
|
Selling, general and administrative expenses
|
|
|
4,397
|
|
|
|
41
|
%
|
|
|
4,097
|
|
|
|
43
|
%
|
Severance and restructuring costs
|
|
|
388
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
|
12,378
|
|
|
|
|
|
|
|
13,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(7,267
|
)
|
|
|
|
|
|
|
(3,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME, NET
|
|
|
(712
|
)
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(7,979
|
)
|
|
|
(156
|
)%
|
|
|
(3,294
|
)
|
|
|
(36
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
(135
|
)
|
|
|
|
|
|
|
(107
|
)
|
|
|
|
|
NET LOSS
|
|
$
|
(7,844
|
)
|
|
|
|
|
|
$
|
(3,187
|
)
|
|
|
|
|
Percentages in the table reflect the percent of total revenues.
Total Revenues
Total revenues during the three months ended June 30, 2020 were $5.1 million, a decrease of $4.8 million, or 48.3%, compared to the three months ended June 30, 2019. As discussed above, in the second quarter, we executed the initial steps to implement our new business model and focus our resources on the development and commercialization of COVID-19 testing products. At the same time, the customers of our legacy infectious disease tests also focused much of their resources on COVID-19 management.
The Revocation had a significant negative impact on our product revenues by triggering the recall of unused tests from customers in the United States. In addition, given the uncertainty of the regulatory environment outside the U.S., we did not recognize net revenue in the second quarter for our shipments of the COVID-19 System outside the U.S.
Gross Product Margin
Cost of product revenue is primarily composed of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses.
Gross product margin is net product revenue less cost of product revenue, and gross product margin percentage is gross product margin as a percentage of net product revenue. Gross product margin during the three months ended June 30, 2020 decreased by $3.7 million, or 205%, from the comparable period of 2019. The gross product margin reduction resulted from losses related to the Revocation during the second quarter, which triggered the return of COVID-19 Systems that were produced and sold to customers in the U.S. It also resulted from cost of product revenue including the cost of COVID-19 Systems that were produced and shipped outside the U.S., but for which revenue was not recognized due to the requirement of GAAP that we have a high degree of confidence that it is probable that a significant reversal in revenue will not occur. Many factors can affect that consideration, including, as examples, things outside our influence, actions of third parties, and evidence from similar situations. After considering all the information available to us, we were not able to recognize the product revenue from those shipments in the second quarter due to the hurdle that requires a high degree of confidence that it is probable that a significant reversal in revenue will not occur.
The following schedule calculates gross product margin (dollars in thousands):
|
|
For the Three Months
Ended June 30
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
Net product sales
|
|
$
|
3,792
|
|
|
$
|
8,785
|
|
|
$
|
(4,993
|
)
|
|
|
56.8
|
%
|
Less: Cost of product sales
|
|
|
(5,671
|
)
|
|
|
(6,990
|
)
|
|
|
1,319
|
|
|
|
18.9
|
%
|
Gross product margin
|
|
$
|
(1,879
|
)
|
|
$
|
1,795
|
|
|
$
|
(3,674
|
)
|
|
|
204.7
|
%
|
Gross product margin percentage
|
|
|
(49.6
|
)%
|
|
|
20.4
|
%
|
|
|
|
|
|
|
|
|
The $3.7 million decrease in gross product margin was composed of the following:
|
•
|
$1 million unfavorable product sales volume as described above, together with
|
|
•
|
$2.6 million unfavorable product margins related to the cost of returned product and product shipped outside the U.S.
|
We believe the our investment in automation will reduce our reliance on manual labor and contribute to improved product gross margins.
Research and Development
This category includes costs incurred for clinical and regulatory affairs and other R&D as follows (dollars in thousands):
|
|
For the Three Months
Ended June 30
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
Clinical and regulatory affairs
|
|
$
|
178
|
|
|
$
|
323
|
|
|
$
|
145
|
|
|
|
44.9
|
%
|
Other research and development
|
|
|
1,744
|
|
|
|
1,778
|
|
|
|
34
|
|
|
|
1.9
|
%
|
Total research and development
|
|
$
|
1,922
|
|
|
$
|
2,101
|
|
|
$
|
179
|
|
|
|
8.5
|
%
|
The decrease in R&D costs for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily associated with the reduction in clinical trial cost related to the DPP HIV-Syphilis System during 2019, offset by costs related to the development of the DPP COVID-19 System.
Selling, General and Administrative Expense
Selling, general and administrative expense includes administrative expenses, sales and marketing costs (including commissions), and other corporate items.
The $0.3 million, or 7.3%, increase in selling, general and administrative expense for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 is primarily related to one-time period costs and equity compensation costs.
Other Income (Expense), net
Other expenses/income, net consists principally of interest expense, net of interest income earned on our deposits, which increased in the three months ended June 30, 2020 compared to comparable period in 2019 due to interest accruing on long-term debt incurred on September 3, 2019, of which $20 million (carrying value of $17.9 million) was outstanding at June 30, 2020. For a description of this long-term debt, please see “—Liquidity and Capital Resources—Sources of Funds—Credit Agreement” below.
Income Tax Benefit
During the three months ended June 30, 2020, we recognized a tax benefit of $0.1 million related to losses generated by our foreign subsidiaries. As of June 30, 2020 and 2019, our U.S. deferred tax assets included a full valuation allowance.
Six Months Ended June 30, 2020 versus Six Months Ended June 30, 2019
The results of operations for the six months ended June 30, 2020 and 2019 were as follows (dollars in thousands):
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
TOTAL REVENUES
|
|
$
|
11,971
|
|
|
|
100
|
%
|
|
$
|
18,430
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
10,045
|
|
|
|
84
|
%
|
|
|
12,002
|
|
|
|
65
|
%
|
Research and development expenses
|
|
|
3,881
|
|
|
|
32
|
%
|
|
|
4,318
|
|
|
|
23
|
%
|
Selling, general and administrative expenses
|
|
|
8,554
|
|
|
|
71
|
%
|
|
|
8,110
|
|
|
|
44
|
%
|
Severance and restructuring costs
|
|
|
1,111
|
|
|
|
9
|
%
|
|
|
-
|
|
|
|
0
|
%
|
Acquisition costs
|
|
|
64
|
|
|
|
1
|
%
|
|
|
396
|
|
|
|
2
|
%
|
|
|
|
23,655
|
|
|
|
|
|
|
|
24,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(11,684
|
)
|
|
|
|
|
|
|
(6,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME, NET
|
|
|
(1,374
|
)
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(13,058
|
)
|
|
|
(109
|
)%
|
|
|
(6,383
|
)
|
|
|
(35
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
(215
|
)
|
|
|
|
|
|
|
(380
|
)
|
|
|
|
|
NET LOSS
|
|
$
|
(12,843
|
)
|
|
|
|
|
|
$
|
(6,003
|
)
|
|
|
|
|
Percentages in the table reflect the percent of total revenues.
Total Revenues
Total revenues during the six months ended June 30, 2020 were $12 million, a decrease of $6.5 million, or 35% compared to the six months ended June 30, 2019. As discussed above, in the second quarter, we executed the initial steps to implement our new business model and focus our resources on the development and commercialization of COVID-19 testing products. At the same time, the customers of our legacy infectious disease tests also focused much of their resources on COVID-19 management. The Revocation had a significant negative impact on our net product revenues by triggering the recall of unused tests from customers in the United States. In addition, given the uncertainty of the regulatory environment outside the U.S., we did not recognize revenue in the second quarter for our shipments of the COVID-19 System outside the U.S. Total revenues for the six months ended June 30, 2020 was also adversely affected by our shift in focus from offering and selling legacy products to developing and beginning to commercialize the DPP COVID-19 System.
Gross Product Margin
Cost of product sales is primarily composed of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses.
Gross product margin is net product revenue less cost of product revenue, and gross product margin percentage is gross product margin as a percentage of net product revenue. Gross product margin during the six months ended June 30, 2020 decreased by $4 million, or 116%, from the comparable period of 2019. The gross product margin reduction resulted from losses related to the revocation during the second quarter, which triggered the return of COVID-19 Systems that were produced and sold to customers in the U.S. It also resulted from cost of product revenue including the cost of COVID-19 Systems that were produced and shipped outside the U.S., but for which revenue was not recognized due to the requirement of GAAP that we have a high degree of confidence that it is probable that a significant reversal in revenue will not occur. Many factors can affect that consideration, including, as examples, things outside our influence, actions of third parties, and evidence from similar situations. After considering all the information available to us, we were not able to recognize the product revenue from those shipments in the second quarter due to the hurdle that requires a high degree of confidence that it is probable that a significant reversal in revenue will not occur.
The following schedule calculates gross product margin (dollars in thousands):
|
|
For the Six Months Ended
|
|
|
Favorable/(Unfavorable)
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
$ Change
|
|
|
% Change
|
|
Net product sales
|
|
$
|
9,508
|
|
|
$
|
15,409
|
|
|
$
|
(5,901
|
)
|
|
|
38.3
|
%
|
Less: Cost of product sales
|
|
|
10,045
|
|
|
|
(12,002
|
)
|
|
|
1,957
|
|
|
|
16.3
|
%
|
Gross product margin
|
|
$
|
(537
|
)
|
|
$
|
3,407
|
|
|
$
|
(3,944
|
)
|
|
|
115.8
|
%
|
Gross product margin percentage
|
|
|
(5.6
|
)%
|
|
|
22.1
|
%
|
|
|
|
|
|
|
|
|
The $3.9 million decrease in gross product margin was composed of the following:
|
•
|
$1.3 million unfavorable product sales volume as described above, together with
|
|
•
|
$2.6 million unfavorable product margins related to the cost of returned product and product shipped outside the U.S.
|
We believe our investment in automation will reduce our reliance on manual labor and contribute to improved product gross margins.
Research and Development
This category includes costs incurred for clinical and regulatory affairs and other research and development, as follows (dollars in thousands):
|
|
For the Six Months Ended
|
|
|
Favorable/(Unfavorable)
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
$ Change
|
|
|
% Change
|
|
Clinical and regulatory affairs
|
|
$
|
500
|
|
|
$
|
763
|
|
|
$
|
263
|
|
|
|
34.5
|
%
|
Other research and development
|
|
|
3,381
|
|
|
|
3,555
|
|
|
|
174
|
|
|
|
4.9
|
%
|
Total Research and Development
|
|
$
|
3,881
|
|
|
$
|
4,318
|
|
|
$
|
437
|
|
|
|
10.1
|
%
|
The decrease in R&D costs for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily associated with the reduction externally funded programs and clinical trial costs related to the DPP HIV-Syphilis System during 2019, offset by costs related to the development of the DPP COVID-19 System.
Selling, General and Administrative Expense
Selling, general and administrative expense includes administrative expenses, sales and marketing costs (including commissions), and other corporate items.
The $0.4 million, or 5.5%, increase in selling, general and administrative expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 related to one-time period costs and equity compensation costs.
Other (Expense) Income, net
Other expenses/income, net consists principally of interest expense, net of interest income earned on our deposits, which increased in the six months ended June 30, 2020 compared to comparable period in 2019 due to interest accruing on long-term debt incurred on September 3, 2019, of which $20 million (carrying value of $17.9 million) was outstanding at June 30, 2020. For a description of this long-term debt, please see “—Liquidity and Capital Resources—Sources of Funds—Credit Agreement” below.
Income Tax Benefit
During the six months ended June 30, 2020, we recognized a tax benefit of $0.2 million related to losses generated by our foreign subsidiaries. As of June 30, 2020 and 2019, our U.S. deferred tax assets included a full valuation allowance.
Liquidity and Capital Resources
During the six months ended June 30, 2020 we have funded our business operations, including capital expenditures and working capital requirements, principally from cash and cash equivalents. Our operations used $7.3 million of cash, and we received proceeds on issuance of stock of $28.5 million (net of expenses). As of June 30, 2020, we had outstanding debt (excluding leases) in the amount of $20.1 million (carrying amount of $17.9 million), consisting of loans of $20.0 million under a credit agreement entered into on September 3, 2019 and $0.1 million under a seller-financed note payable incurred in connection with our purchase of automated manufacturing equipment.
We continually evaluate our liquidity requirements, capital needs and availability of capital resources based on our operating needs and our planned growth initiatives, particularly in the light of our shift in business focus to the DPP COVID-19 System. We believe our existing cash and cash equivalents and our cash flow from operating activities will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future working capital needs will depend on many factors, including the timing of our planned submission of the revised DPP COVID-19 System for an EUA and a successful award of such by the FDA; the rate of our business and revenue growth, particularly if we are able to resume commercialization of the DPP COVID-19 System; the timing of our continuing automation of U.S. manufacturing; and the timing of investment in our research and development as well as sales and marketing. If we are unable to increase our revenues and manage our expenses in accordance with our operating plan, we may need to reduce the level or slow the timing of the growth plans contemplated by our operating plan, which would likely curtail or delay the growth in our business contemplated by our operating plan and could impair or defer our ability to achieve profitability and generate cash flow, or to seek to raise additional funds through debt or equity financings, strategic relationships, or other arrangements.
Sources of Funds
The following table sets forth selected working capital information:
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June 30, 2020
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|
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(in thousands)
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Cash and cash equivalents
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$
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36,427,468
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Accounts receivable, net of allowance for doubtful amounts
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|
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2,610,587
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|
Inventories, net
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|
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14,131,540
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Prepaid expenses and other current assets
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|
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742,908
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Total current assets
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|
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53,912,503
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Less: Total current liabilities
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|
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14,296,153
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Working capital
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|
$
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39,616,350
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|
We received net proceeds of $28.4 million from an underwritten public offering of Common Stock in May 2020.
On April 20, 2020, we entered into an agreement with the U.S Small Business Administration for a loan of $3 million under the Paycheck Protection Program. The loan bears a 1% interest rate and has a two-year term beginning on the date of disbursement. Principal and interest is due at maturity. This loan was returned on May 2020.
On April 24, 2020, we were awarded a grant of $1.0 million from Empire State Development to be used as working capital for the development and production of IgM/IgG serology tests for COVID-19 for sale in the State of New York. Of that total, $0.5 million was funded during the three months ended June 30, 2020.
Our cash and cash equivalents at June 30, 2020, which included a restricted amount of $3.3 million, was held for working capital purposes. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends. We have not entered into, and do not expect to enter into, investments for trading or speculative purposes. Our accounts receivable and investory balances fluctuate from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, and the timing of shipment of our products and the invoicing of our research and development activities.
Uses of Funds
Our operations used $7.3 million of cash during the six months ended June 30, 2020, reflecting a net loss adjusted for non-cash items of $11.2 million (which included $1.1 million of severance and restructuring costs and $0.1 million of acquisition costs), a $1.1 million decrease in accounts receivable, offset by a $4.5 million increase in inventory, a $3.3 million increase in accounts payable and accrued liabilities and a $4.0 million increase in deferred revenue.
During the six months ended June 30, 2020, we continued to invest in manufacturing equipment, leasehold improvements and other fixed assets, particularly in the light of our shift in business focus to our DPP COVID-19 System. Our capital expenditures totaled $2.4 million in the six months ended June 30, 2020.
Off-Balance Sheet Arrangements
As of June 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, or the Exchange Act.
Significant Accounting Policies and Critical Accounting Estimates
The following description of our significant accounting policies and critical accounting estimates augments the disclosure set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.
Revenue Recognition
We recognize revenue for product sales in accordance with FASB ASC 606, Revenue from Contracts with Customers. Revenues from product sales are generally recognized when the customer obtains control of our product, which occurs at a point in time, typically upon tendering to the customer, subject to variable consideration and other provisions of ASC 606. We expense incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial. Freight and distribution activities on products are performed after the customer obtains control of the goods. We have made an accounting policy election to account for shipping and handling activities that occur either when or after goods are tendered to the customer as a fulfillment activity, and therefore recognizes freight and distribution expenses in Cost of Product Sales. We exclude certain taxes from the transaction price (e.g., sales, value added and some excise taxes).
For certain contracts, we recognize revenue from research and development, milestone and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned. For certain collaborative research projects, we recognize revenue by defining milestones at the inception of the agreement and applying judgement and estimates in recognizing revenue for relevant contracts.
Recently Issued Accounting Pronouncements
A discussion of recent accounting pronouncements was included in our 2019 Form 10-K and is updated in subsection (v) of note 2 to the condensed consolidated financial statements included elsewhere in this report.