Company Quick10K Filing
Quick10K
Chembio Diagnostics
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$7.64 17 $131
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-29 Regulation FD, Exhibits
8-K 2019-05-01 Earnings, Exhibits
8-K 2019-04-02 Other Events, Exhibits
8-K 2019-03-20 Enter Agreement, Officers, Exhibits
8-K 2019-03-07 Earnings, Exhibits
8-K 2019-02-27 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-02-05 Enter Agreement, Off-BS Arrangement, Officers, Exhibits
8-K 2019-01-21 Enter Agreement, Officers, Exhibits
8-K 2019-01-21 Enter Agreement, Officers, Exhibits
8-K 2018-12-19 Other Events, Exhibits
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-11-06 M&A, Exhibits
8-K 2018-11-05 Enter Agreement, Other Events, Exhibits
8-K 2018-10-17 Enter Agreement, Earnings, Other Events, Exhibits
8-K 2018-09-17 Amend Bylaw, Exhibits
8-K 2018-08-08 Regulation FD, Exhibits
8-K 2018-08-07 Officers, Other Events, Exhibits
8-K 2018-07-25 Other Events, Exhibits
8-K 2018-07-19 Regulation FD, Other Events, Exhibits
8-K 2018-05-30 Regulation FD, Exhibits
8-K 2018-05-24 Regulation FD, Exhibits
8-K 2018-05-10 Shareholder Vote, Regulation FD, Exhibits
8-K 2018-04-26 Regulation FD, Exhibits
8-K 2018-04-25 Regulation FD, Exhibits
8-K 2018-03-14 Regulation FD, Exhibits
8-K 2018-02-27 Officers
8-K 2018-02-09 Other Events, Exhibits
8-K 2018-02-08 Other Events, Exhibits
8-K 2018-01-08 Regulation FD, Exhibits
SPLK Splunk 19,890
SLM Sallie Mae 4,420
AAN Aaron's 3,840
FBP First Bancorp 2,400
JOUT Johnson Outdoors 730
DGL Invesco DB Gold Fund 0
GSRX Green Spirit Industries 0
LVIS Levi Strauss 0
OLBG OLB Group 0
DPDW Deep Down 0
CEMI 2019-03-31
Part I
Item 1. Financial Statements
Note 1 - Description of Business:
Note 2 - Acquisition:
Note 3 - Summary of Significant Accounting Policies:
Note 4 - Stockholders' Equity:
Note 5 - Commitments, Contingencies, and Concentrations:
Note 6 - Note Payable:
Note 7 - Deferred Research and Development Revenue:
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 ex31_1.htm
EX-31.2 ex31_2.htm
EX-32 ex32.htm

Chembio Diagnostics Earnings 2019-03-31

CEMI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q.htm 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended March 31, 2019
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from: ______ to ________

000-30379
(Commission File Number)

Chembio Diagnostics, Inc.
(Exact name of registrant as specified in its charter)

Nevada
 
88-0425691
(State or other jurisdiction of incorporation)
 
(IRS Employer Identification Number)

555 Wireless Blvd.
Hauppauge, NY 11788
(Address of principal executive offices including zip code)
(631) 924-1135
(Registrant’s telephone number, including area code)
N/A
(Former Name or Former Address, if Changed Since Last Report)

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

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

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

 
Large accelerated filer ☐
Accelerated filer
 
Non-accelerated filer ☐ 
Smaller reporting company
 
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes ☐ No ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒

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

Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
CEMI
 
The NASDAQ Stock Market LLC

As of April 25, 2019, the Registrant had 17,166,459 shares outstanding of its common stock, $.01 par value.



Quarterly Report on Form 10-Q
For The Quarterly Period Ended
March 31, 2019

Table of Contents

Chembio Diagnostics, Inc.
 
 
Page
     
Part I. FINANCIAL INFORMATION:
 
   

Item 1. Financial Statements:

     
 
4
     
 
5
     
 
6
     
  7
     
  8
     
 
9
     
 
21
     
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
     
 
25
     
Part II. OTHER INFORMATION:
 
     
 
26
     
 
26
     
 
27
     
28
     
EXHIBITS 
 
 
Unless the context requires otherwise, the words ‘‘we,’’ ‘‘our,’’ ‘‘our company,’’ ‘‘us,’’ ‘‘Chembio,’’ and similar terms refer to Chembio Diagnostics, Inc. and its consolidated subsidiaries.

STAT-PAK, STAT-VIEW, SURE CHECK and DPP are our registered trademarks, and our logo design is our trademark. For convenience, these trademarks appear in this Quarterly Report on Form 10-Q supplement without ® and symbols, but that practice does not mean that we will not assert, to the fullest extent under applicable law, our rights to the trademarks.


NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “anticipate,” “project,” “target,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors, including those described or incorporated by reference in “Item 1A. Risk Factors” of Part II of this report, that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.

Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Except as required by law, we assume no obligation to update these statements publicly or to update the reasons actual results could differ materially from those anticipated in these statements, even if new information becomes available in the future.

You should read this report, and the documents that we reference in this report, including exhibits that are being filed as part of this report, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

PART I
Item 1.
FINANCIAL STATEMENTS

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

   
March 31, 2019
   
December 31, 2018
 
   
(Unaudited)
       
- ASSETS -
           
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
7,370,678    
$
12,524,551
 
Accounts receivable, net of allowance for doubtful accounts of $ 42,000 at March 31, 2019 and December 31, 2018
    7,717,865      
7,373,971
 
Inventories, net
    9,855,824      
7,851,222
 
Prepaid expenses and other current assets
    2,242,264      
702,010
 
TOTAL CURRENT ASSETS
    27,186,631
     
28,451,754
 
                 
FIXED ASSETS:
   

     
 
Property, plant and equipment, net
    3,204,543
      2,873,920
 
Operating lease right-of-use asset     5,807,458       -
 

    9,012,001       2,873,920
 
                 
OTHER ASSETS:
               
Intangible assets, net
    3,772,226
     
3,884,831
 
Goodwill
    4,854,946      
4,983,127
 
Deposits and other assets
    770,653
     
717,551
 
      9,397,825
      9,585,509  
                 
TOTAL ASSETS
 
$
45,596,457
   
$
40,911,183
 
                 
- LIABILITIES AND STOCKHOLDERS’ EQUITY -
               
CURRENT LIABILITIES:
               
Accounts payable and accrued liabilities
 
$
6,373,927    
$
5,888,681
 
Deferred revenue
    200,000
     
422,905
 
Current portion of operating lease liability
    514,118
      -  
Current portion of note payable
    207,694       207,694  
TOTAL CURRENT LIABILITIES
    7,295,739
     
6,519,280
 
                 
OTHER LIABILITIES:
               
Note payable
    141,508      
171,821
 
Operating lease liability
    6,466,603
      -
 
Deferred tax liability
    631,673      
892,308
 
                 
TOTAL LIABILITIES
    14,535,523
     
7,583,409
 
                 
COMMITMENTS AND CONTINGENCIES (Note 6)
               
                 
STOCKHOLDERS’ EQUITY:
               
Preferred stock - 10,000,000 shares authorized; none outstanding
   
-
     
-
 
Common stock - $.01 par value; 100,000,000 shares authorized; 17,166,459 shares issued and outstanding at March 31, 2019 and December 31, 2018
    171,664      
171,664
 
Additional paid-in capital
    91,301,295
     
90,953,788
 
Accumulated deficit
    (60,726,407 )
   
(57,909,874
)
Accumulated other comprehensive income
    314,382      
112,196
 
TOTAL STOCKHOLDERS’ EQUITY
    31,060,934
     
33,327,774
 
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
45,596,457
   
$
40,911,183
 

See accompanying notes to condensed consolidated financial statements
 
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
For the three months ended
 
   
March 31, 2019
   
March 31, 2018
 
REVENUES:
           
Net product sales
 
$
6,382,986    
$
6,398,227
 
License and royalty revenue
   
216,191
     
201,931
 
R&D and grant revenue
    1,701,789      
1,116,974
 
TOTAL REVENUES
    8,300,966      
7,717,132
 
                 
COSTS AND EXPENSES:
               
Cost of product sales
    4,770,337
     
4,117,779
 
Research and development expenses
    2,217,632
     
1,847,102
 
Selling, general and administrative expenses
    4,013,071
     
2,406,569
 
Acquisition costs
    395,612
      -  
      11,396,652
     
8,371,450
 
LOSS FROM OPERATIONS
    (3,095,686
)
   
(654,318
)
                 
OTHER INCOME:
               
Interest income, net
    6,684       1,975  
                 
LOSS BEFORE INCOME TAXES
    (3,089,002 )  
 
(652,343
)
     
         
Income tax provision (benefit)
    (272,469 )    
-
 
                 
NET LOSS
 
$
(2,816,533 )  
$
(652,343
)
                 
Basic loss per share
 
$
(0.16 )  
$
(0.05
)
                 
Diluted loss per share
 
$
(0.16 )
 
$
(0.05
)
                 
Weighted average number of shares outstanding, basic
    17,166,459      
13,267,246
 
                 
Weighted average number of shares outstanding, diluted
    17,166,459
     
13,267,246
 
 
See accompanying notes to condensed consolidated financial statements
 
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
   
For the three months ended
 
   
March 31, 2019
   
March 31, 2018
 
Net loss
  $ (2,816,533 )
 
$
(652,343
)
Other comprehensive income (loss):
               
Foreign currency translation adjustments
    202,186
   
252,298
 
Comprehensive loss
  $ (2,614,347 )
 
$
(400,045
)

See accompanying notes to condensed consolidated financial statements
 
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

    For the three months ended March 31, 2019
 
 
 
Common Stock
   
Additional
Paid-in-Capital
   
Accumulated
Deficit
   
AOCI
   
Total
 
 
 
Shares
   
Amount
   
Amount
   
Amount
   
Amount
   
Amount
 
Balance at December 31, 2018
   
17,166,459
   
$
171,664
   
$
90,953,788
   
$
(57,909,874
)
 
$
112,196
   
$
33,327,774
 
                                                 
Common Stock:
                                               
Restricted stock compensation
   
-
     
-
     
281,248
     
-
     
-
     
281,248
 
                                                 
Options:
     
     
     
     
     
     
 
Stock option compensation
   
-
     
-
     
66,259
     
-
     
-
     
66,259
 
 
                                               
Foreign currency translation adjustments
     -        -        -        -       202,186       202,186  
                                                 
Net loss
   
-
     
-
     
-
     
(2,816,533
)
   
-
     
(2,816,533
)
 
                                               
Balance at March 31, 2019
   
17,166,459
   
$
171,664
   
$
91,301,295
   
$
(60,726,407
)
 
$
314,382    
$
31,060,934  



    For the three months ended March 31, 2018
 
 
 
Common Stock
   
Additional
Paid-in-Capital
   
Accumulated
Deficit
   
AOCI
   
Total
 
 
 
Shares
   
Amount
   
Amount
   
Amount
   
Amount
   
Amount
 
Balance at December 31, 2017
   
12,318,570
   
$
123,185
   
$
62,821,288
   
$
(50,044,225
)
 
$
178,948
   
$
13,079,196
 
                                                 
Common Stock:
                                               
New stock from offering
   
1,783,760
     
17,838
     
10,916,514
     
-
     
-
     
10,934,352
 
                                                 
Options:
     
     
     
     
     
     
 
Exercised
    60,372
      604
      71,309
      -
      -
      71,913
 
Stock option compensation
   
-
     
-
     
97,250
     
-
     
-
     
97,250
 
 
                                               
Foreign currency translation adjustments
     -        -        -       -       252,298       252,298  
                                                 
Net loss
   
-
     
-
     
-
     
(652,343
)
   
-
     
(652,343
)
 
                                               
Balance at March 31, 2018
   
14,162,702
   
$
141,627
   
$
73,906,361
   
$
(50,696,568
)
 
$
431,246    
$
23,782,666  

See accompanying notes to condensed consolidated financial statements

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
(Unaudited)

 
 
March 31, 2019
   
March 31, 2018
 
 
           
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Cash received from customers and grants
 
$
7,869,167    
$
6,039,385
 
Cash paid to suppliers and employees
    (12,349,126
)
   
(8,358,631
)
Cash paid for operating leases
 

(281,603 )    
-
 
Interest received, net
    6,684      
1,975
 
Net cash used in operating activities
    (4,754,878
)
   
(2,317,271
)
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Patent application costs
    (45,176 )
    -  
Acquisition of and deposits on fixed assets
    (532,296 )
   
(41,530
)
Net cash used in investing activities
    (577,472 )
   
(41,530
)
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from option exercises
   
-
     
71,914
 
Payments on note payable
    (29,930 )
   
-
 
Proceeds from sale of common stock, net
   
-
     
10,934,352
 
Net cash (used in) provided by financing activities
   
(29,930
)    
11,006,266
 
 
               
Effect of exchange rate changes on cash
    208,407      
19,771
 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (5,153,873 )
   
8,667,236
 
Cash and cash equivalents - beginning of the period
   
12,524,551
     
3,790,302
 
 
               
Cash and cash equivalents - end of the period
 
$
7,370,678
   
$
12,457,538
 
 
               
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
               
 
               
Net loss
 
$
(2,816,533
)
 
$
(652,343
)
Adjustments:
               
Depreciation and amortization
    355,468      
222,955
 
Share based compensation
    347,507      
97,250
 
Provision for (benefit from) deferred tax liability
    (272,469 )
    -  
Changes in assets and liabilities:
               
Accounts receivable
    (208,894
)
   
(1,727,747
)
Inventories
    (1,992,906 )
   
(1,378,732
)
Prepaid expenses and other current assets
    (366,990
)
   
(282,003
)
Deposits and other assets
    (62,402 )
   
67,542
 
Accounts payable and accrued liabilities
    485,246      
1,285,807
 
Deferred revenue
    (222,905 )
   
50,000
 
Net cash used in operating activities
 
$
(4,754,878 )
 
$
(2,317,271
)
 
               
Supplemental disclosures for non-cash investing and financing activities:
               
Deposits on manufacturing equipment transferred to fixed assets
 
$
-
   
$
58,495
 
Additions to right-of-use assets and deferred rent obtained from new operating lease liabilities
    6,980,721
     
-
 
Measurement period acquisition adjustment to accounts receivable
    135,000

    -


See accompanying notes to condensed consolidated financial statements
 
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

NOTE 1 — DESCRIPTION OF BUSINESS:

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

The Company’s product commercialization and product development efforts are focused in two areas: infectious disease, which includes both sexually transmitted and tropical & fever disease; and strategic collaborations with leading global healthcare companies in order to leverage the DPP platform. In infectious disease, the Company is commercializing tests for HIV, Syphilis, Zika virus, dengue virus, and chikungunya virus, and developing tests for hepatitis C, malaria, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi. Certain of these are also being developed as part of fever panel tests. Through strategic collaborations, the Company is developing tests for a specific form of cancer, concussions, bovine tuberculosis, and, in collaboration with global biopharmaceutical company AstraZeneca, an undisclosed biomarker.

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

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, under its STAT-PAK, SURE CHECK, STAT-VIEW and DPP registered trademarks, or under the private labels of its marketing partners.

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

NOTE 2 — ACQUISITION:

On November 6, 2018, pursuant to a share purchase agreement, the Company acquired all of the outstanding shares of opTricon GmbH (“opTricon”), a privately-held Germany based developer and manufacturer of handheld analyzers for rapid diagnostic tests, for $5.5 million in cash, subject to routine post-closing adjustments. Since 2015, the Company and opTricon have been parties to an agreement under which the Company has collaborated in developing its DPP Micro Reader, a handheld, battery-operated analyzer that uses an innovative image sensor to provide, when combined with the Company’s DPP tests, a quantitative interpretation of diagnostic results. The Company purchased opTricon because it believes it will enable it to promote DPP tests and DPP Micro Reader more actively across global markets. The results of opTricon operations have been reflected in the consolidated financial statements since November 6, 2018.

As a result of the consideration paid exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $3,337,000 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. In addition, the Company recorded $2,260,000 in intangible assets associated with the addition of opTricon’s developed technology and customer base. During the three months ended March 31, 2019, the Company reduced Goodwill by $135,000 related to routine post-closing adjustments. The Consolidated Statements of Operations for the three months ended March 31, 2019 include $395,612 of transaction costs related to the opTricon acquisition.

The acquisition was accounted for using the purchase method of accounting. The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of November 6, 2018:

   
Amount
 
Net current assets
 
$
404,204
 
Property, plant and equipment
   
125,000
 
Goodwill
   
3,337,000
 
Deferred tax liability
   
(635,000
)
Other intangible assets (estimated useful life):
       
Developed technology (7 years)
   
1,900,000
 
Customer contracts / relationships (10 years)
   
360,000
 
Total consideration
 
$
5,491,204
 

The Company calculated the fair value of the fixed assets based on the net book value of opTricon as that approximates fair value. The developed technology and customer contracts/relationships were based on discounted cash flows using management estimates.

As indicated, the allocation of the purchase price shown above is preliminary, pending completion of an analysis of the deferred tax liability. Therefore, an adjustment may be required.
 
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:


a)
Basis of Presentation:

The preceding (a) condensed consolidated balance sheet as of December 31, 2018, which has been derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements as of March 31, 2019 and for the three-month periods ended March 31, 2019 and 2018 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 the Company believes 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, 2018, previously filed with the SEC on March 18, 2019.

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 March 31, 2019 and, its condensed consolidated results of operations for the three-month periods ended March 31, 2019 and 2018 have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.


b)
Revenue Recognition:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with customers, Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The intent of the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is for a company to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and in certain circumstances, allowing estimates of variable consideration to be recognized before contingencies are resolved. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.

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

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

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

Product Revenues

Revenues from product sales are recognized and commissions are accrued when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon tendering to the customer. The Company expenses 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. The Company has made an accounting policy election to account for shipping and handling activities that occur either when or after goods are tendered to the customer as a fulfillment activity, and therefore recognizes freight and distribution expenses in cost of product sales.

The Company’s payment terms vary by the type and location of the Company’s customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 60 days from date of shipment or satisfaction of the performance obligation.

Reserves for Discounts and Allowances

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

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

Royalty Revenues

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

R&D and grant revenue

All such contracts are evaluated under the five-step model described above. For certain contracts that represent grants where the funder does not meet the definition of a customer, the Company recognizes revenue when earned in accordance with ASU No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. Such contracts are further described under Disaggregation of Revenue, below. Grants are invoiced and revenue is recognized as expenses are incurred as that is the depiction of the timing of the transfer of services. Performance obligations generally follow the major phases of product development processes: design feasibility & planning, product development & design optimization, design verification, design validation & process validation, and pivotal studies.

Disaggregation of Revenue

The following tables disaggregate Total Revenues.
 
    For the three months ended March 31, 2019     For the three months ended March 31, 2018
 
   
Exchange
Transactions
   
Non-Exchange
Transactions
    Total
   
Exchange
Transactions
   
Non-Exchange
Transactions
   
Total
 
Net product sales     6,382,986
      -
      6,382,986
    $ 6,398,227    
$
-
    $ 6,398,227  
License and royalty revenue     216,191
     
-
      216,191
      201,931      
-
      201,931  
R&D and grant revenue     773,066
     
928,723
      1,701,789
      612,155       504,819       1,116,974  
      7,372,243
      928,723
     
 8,300,966
    $ 7,212,313     $ 504,819     $ 7,717,132  
                                                 
                    Total                     Total
 
Africa                   $
2,416,300
                    $
1,638,530  
Asia                    
121,098
                      967,574  
Europe & Middle East
                   
2,143,221
                      983,876  
Latin America
                   
1,072,066
                      2,689,893  
United States
                   
2,548,281
                     
1,437,259
 
                    $ 8,300,966                     $
7,717,132
 

Exchange transactions are recognized in accordance with ASC 606, while non-exchange transactions are recognized in accordance with ASC 985.

Contract Liabilities

Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as (or when) the Company performs under the contract.  At December 31, 2018, the Company reported $422,905 in deferred revenue of which $422,905 was earned and recognized as R&D and grant revenue during the three months ended March 31, 2019. At March 31, 2019, the Company reported $200,000 in deferred revenue that is expected to be recognized during the second quarter of 2019.
 

c)
Inventories
 
Inventories consist of the following at:

   
March 31, 2019
   
December 31, 2018
 
Raw materials
  $ 3,596,884    
$
2,803,677
 
Work in process
    632,897      
263,043
 
Finished goods
    5,626,043      
4,784,502
 
    $ 9,855,824    
$
7,851,222
 
 
Inventories, consisting of material, labor and manufacturing overhead, are stated at the lower of cost and net realizable value. Cost is determined on the first-in, first-out method. The Company’s policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a write-down for any inventory considered slow moving or obsolete. There were reserves against inventory of approximately $67,000  and $78,000 as of March 31, 2019 and December 31, 2018, respectively.
 

d)
Loss Per Share:

Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period including outstanding restricted stock that by its terms is includible in the calculation. Diluted loss per share for the three-month periods ended March 31, 2019 and 2018 reflects the potential dilution from the exercise or conversion of other securities into common stock, if dilutive.

There were 705,301 and 732,199 weighted-average number of options outstanding as of March 31, 2019 and 2018, respectively, that were not included in the calculation of diluted per common share equivalents for the three months ended March 31, 2019 and 2018 respectively, because the effect would have been anti-dilutive.


e)
Stock Incentive Plan:

Effective June 3, 2008, the Company’s stockholders voted to approve the 2008 Stock Incentive Plan (“SIP”), with 625,000 shares of common stock available to be issued.  At the Annual Stockholder Meeting on September 22, 2011 the Company’s stockholders voted to approve an increase to the shares of common stock issuable under the SIP by 125,000 to 750,000.  Under the terms of the SIP, which expired during 2018, the Board of Directors or its Compensation Committee had the discretion to select the persons to whom awards were to be granted. Awards could be stock options, restricted stock and/or restricted stock units (“Equity Award Units”).  The awards became vested at such times and under such conditions as determined by the Board or its Compensation Committee.  Cumulatively through March 31, 2019, there were 508,889 options exercised, and at March 31, 2019, 99,132 options were outstanding and no Equity Award Units were available to be issued under the SIP.

Effective June 19, 2014, the Company’s stockholders voted to approve the 2014 Stock Incentive Plan (“SIP14”), with 800,000 shares of common stock available to be issued.  Under the terms of the SIP14, the Board or its Compensation Committee has the discretion to select the persons to whom awards are to be granted.  Awards can be in the form of Equity Award Units.  The awards vest at such times and under such conditions as determined by the Board or its Compensation Committee.  Cumulatively through March 31, 2019, there were 85,407 options exercised, and at March 31, 2019, 390,968 options were outstanding and 21,061 Equity Award Units were still available to be issued under the SIP14. During 2018, 266,839 shares of restricted stock and 20,725 restricted stock units were awarded under SIP14.


f)
Stock-Based Compensation:

The fair value of restricted stock and restricted stock unit awards are their fair value on the date of grant. Stock-based compensation expense for stock options is calculated using the Black-Scholes valuation model based on awards ultimately expected to vest, together with the fair value of restricted stock and restricted stock unit awards, are reduced for actual forfeitures and expensed on a straight-line basis over the requisite service period of the grant. 

Stock option compensation expense in each of the periods presented represents the estimated fair value of unvested, outstanding options, amortized on a straight-line basis over the requisite vesting periods of the entire awards.

Stock-based compensation expense recognized in the condensed consolidated statements of operations was classified as follows:
 
 
 
For the three months ended
 

  March 31, 2019
    March 31, 2018
 
Cost of product sales
  $ 3,491    
$
8,150  
Research and development expenses
    59,846       11,920  
Selling, general and administrative expenses
    284,170       77,180  
 
  $ 347,507    
$
97,250  

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

   
For the three months ended
 
   
March 31, 2019
   
March 31, 2018
 
Expected term (in years)
    N/A       N/A  
Expected volatility
   

   

Expected dividend yield
   

   

Risk-free interest rate
   

   

 
The following table provides stock option activity for the three months ended March 31, 2019:

Stock Options
 
Number of
Shares
   
Weighted
Average
Exercise Price
per Share
 
Weighted
Average
Remaining
Contract
Term
 
Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2018
   
711,968
   
$
5.62
 
3.33 years
 
$
687,364
 
                           
Granted
   
-
     
-
       
-
 
Exercised
   
-
     
-
     

-
 
Forfeited/expired/cancelled
    15,000       5.68         30,286  
Outstanding at March 31, 2019
    696,968    
$
5.62  
3.08 years
 
$
647,586  
Exercisable at March 31, 2019
    466,509    
$
4.62  
2.34 years
 
$
643,918
 

The following table summarizes information about stock options outstanding at March 31, 2019:

   
Stock Options Outstanding
   
Stock Options Exercisable
 
Range of
Exercise
Prices
  Number of Shares
   
Average
Remaining
Contract Term
(Year)
   
Weighted
Average
Exercise
Price
   
Aggregate
Intrinsic
Value
   
Number of Shares
   
Weighted
Average
Exercise
Price
   
Aggregate
Intrinsic
Value
 
1 to 2.79999
   
-
     
-
   
$
-
   
$
-
     
-
   
$
-
   
$
-
 
2.8 to 4.59999
    304,343       1.65       3.45       639,418
      304,343       3.45       639,418  
4.6 to 6.39999
    137,875       3.20       5.87       8,168       77,750       5.87      
4,500
 
6.4 to 8.19999
    207,875       4.81       7.31      
-
      75,041       7.21      
-
 
8.2 to 12
    46,875       4.36       11.45      
-
      9,375       11.45      
-
 
 Total
    696,968       3.08    
$
5.62    
$
647,586       466,509    
$
4.62    
$
643,918  

As of March 31, 2019, there was $630,345 of net unrecognized compensation cost related to stock options that are not vested, which is expected to be recognized over a weighted average period of approximately 2.27 years. The total fair value of shares vested during the three-month periods ended March 31, 2019 and 2018 was $204,567 and $333,845, respectively.

The following table summarizes information about restricted stock and restricted stock units outstanding as of March 31, 2019:

   
Number of
Shares & Units
   
Weighted
Average
Grant Date
Fair Value
 
Outstanding at December 31, 2018
   
287,564
   
$
9.65
 
                 
Granted
    -       -  
Earned/released
     -        -  
Forfeited/expired/cancelled
     -        -  
Outstanding at March 31, 2019
   
287,564
    $
9.65
 

As of March 31, 2019, there was $1,387,496 of net unrecognized compensation cost related to restricted stock and restricted stock units that are not vested, which is expected to be recognized over a weighted average period of approximately 2.3 years.


g)
Geographic Information and Economic Dependency
 
The Company produces only one group of similar products known collectively as “rapid medical tests”, and it operates in a single business segment. Net product sales by geographic area were as follows:

   
For the three months ended
 
   
March 31, 2019
   
March 31, 2018
 
Africa
 
$
2,416,300    
$
1,638,530
 
Asia
    121,098      
967,574
 
Europe & Middle East
    1,178,025      
392,070
 
Latin America
    1,072,066      
2,689,893
 
United States
    1,595,497      
710,160
 
   
$
6,382,986    
$
6,398,227
 
 
Long-lived assets by geographic area are as follows:

   
For the three months ended
 
   
March 31, 2019
   
December 31, 2018
 
Asia
 
$
503,327    
$
466,185  
Europe & Middle East
    111,067       123,752  
United States
    2,590,149       2,283,983  
   
$
3,204,543    
$
2,873,920  


h)
Fair Value of Financial Instruments:

The carrying value for cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value due to the immediate or short-term maturity of these financial instruments. Included in cash and cash equivalents is $4.7 million and $4.7 million as of March 31, 2019 and December 31, 2018, respectively, of money market funds that are Level 1 fair value measurements under the hierarchy. The fair value of the Company’s notes payable approximates the recorded value as the rate is based upon the current rates offered to the Company for similar financial instruments.

Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories:

  Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

  Level 2:
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and,

  Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).


i)
Accounts Payable and Accrued Liabilities:

Accounts payable and accrued liabilities consist of:

   
March 31, 2019
   
December 31, 2018
 
Accounts payable – suppliers
 
$
4,226,625    
$
3,622,765
 
Accrued commissions
   
510,303
     
588,131
 
Accrued royalties / license fees
   
221,556
     
279,213
 
Accrued payroll
   
293,009
     
48,867
 
Accrued vacation
   
356,464
     
264,789
 
Accrued bonuses
   
236,785
     
494,318
 
Accrued expenses – other
   
529,185
     
590,598
 
TOTAL
 
$
6,373,927
   
$
5,888,681
 


j)
Goodwill Long-Lived Assets and Intangible Assets:

Goodwill represents the excess of the purchase price the Company paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company’s acquisition of opTricon in November 2018 and CDM in January 2017. Goodwill is not amortized but rather is tested annually as of the first day of the fiscal fourth quarter for impairment or more frequently if the Company believes that indicators of impairment exist. The Company makes a qualitative evaluation about the likelihood of goodwill impairment, which is based on a number of applicable factors. If the Company concludes that it is more likely than not that the carrying value of the applicable reporting unit is greater than its fair value, then the Company recognizes an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.
 
Following is a table that reflects changes in Goodwill:

Beginning balance December 31, 2018
 
$
4,983,127
 
opTricon measurement period adjustment     (135,000 )
Change in foreign currency exchange rate
    6,819
Balance at March 31, 2019
 
$
4,854,946  

Intangible assets consist of the following at:

  March 31, 2019     December 31, 2018  

Weighted
Average
Useful Life
 
Cost
   
Accumulated
Amortization
   
Net Book
Value
   
Cost
   
Accumulated
Amortization
   
Net Book
Value
 
Intellectual property
10   $ 1,135,164     $ 203,121     $ 932,043    
$
1,089,688
    $ 173,633     $ 916,055  
Developed technology
7     1,900,015        76,614       1,823,401        1,910,315        -        1,910,315  
Customer contracts/relationships
10
    1,113,640       182,940
      930,700
      1,121,600       151,929       969,671  
Trade names
11
    108,521       22,439
      86,082
     
108,521
      19,731       88,790  
      $ 4,257,340     $ 485,114
    $ 3,772,226    
$
4,230,124
    $ 345,293     $ 3,884,831  

Intellectual property, developed technology, customer contracts/relationships, and trade names are amortized over 10, 7, 10, and 11 years, respectively. Amortization expense for the three months ended March 31, 2019 and 2018 was approximately $139,000 and $45,000, respectively. Amortization expense, subject to changes in currency exchange rates, is expected to be $496,512 per year from 2019 through 2023, and total $1,402,271 for all of the years thereafter.
 
Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable.  In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. 

No impairment of goodwill, long-lived tangible, and intangible assets was recorded for the three months ended March 31, 2019 and 2018.


k) Taxes:

At the end of each interim reporting period, the Company estimates its effective tax rate expected to be applied for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis, and may change in subsequent interim periods. Accordingly, the Company’s effective tax benefit for the three-month period ended March 31, 2019 was 8.8%, compared to the effective tax rate of 0.0% for the three-month period ended March 31, 2018. The Company’s effective tax rates for both periods were affected primarily by a full valuation allowance on domestic net deferred tax assets and the benefit from foreign net operating losses.


l)
Research and Development:

R&D costs are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.


m)
Allowance for Doubtful Accounts:
 
The Company records allowances for doubtful accounts for the estimated probable losses on uncollectible accounts receivable. The allowance is based upon the credit worthiness of the Company’s customers, the Company’s historical experience, the age of the receivable and current market and economic conditions. Receivables are written off against these allowances in the period they are determined to be uncollectible.


n)
Acquisition Costs:

Acquisition costs include period expenses, primarily professional services, related to acquisition activities.


o)
Foreign Currency Translation:

The functional currency of a foreign subsidiary is the local currency. Assets and liabilities of foreign subsidiaries that use a currency other than U.S. dollars as their functional currency are translated to U.S. dollars at end of period currency exchange rates. The consolidated statements of operations of foreign subsidiaries are translated to U.S. dollars at average period currency exchange rates. The effect of translation for foreign subsidiaries is generally reported in Other Comprehensive Income. Foreign transaction gains are immaterial.
 

p)
Recent Accounting Pronouncements Affecting the Company:

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires the entity to recognize the assets and liabilities for the rights and obligations created by leased assets. Leases are to be classified as either finance or operating, with classification affecting expense recognition in the income statement. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provide supplemental adoption guidance and clarification to ASU No. 2016-02 must be adopted concurrently with the adoption of ASU No. 2016-02, and which are cumulatively referred to as “Topic 842”. Topic 842 was effective for the Company in the first quarter of 2019, and is to be applied using either a modified retrospective approach or an optional transition method, which allows an entity to apply the new standard at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
As further discussed at Footnote 5(e) - Leases, the Company adopted Topic 842 on January 1, 2019 under the optional transition method and elected the short-term lease exception and available practical expedients. Under the transition method, the Company did not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date.

NOTE 4 — STOCKHOLDERS’ EQUITY:

No options were exercised during the first quarter of 2019. During the first quarter of 2018, options to purchase 119,947 shares of the Company’s common stock were exercised on a cashless basis into 60,372 shares of common stock at an exercise price of $4.71 by the option holder surrendering options and shares of common stock already owned as payment of the exercise price.
 
NOTE 5 — COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS:


a)
Concentrations:

The following table discloses product sales the Company had to each customer that purchased in excess of 10% of the Company’s net product sales for the periods indicated:
 
 
 
For the three months ended
   
Accounts Receivable as of
 
 
 
March 31, 2019
   
March 31, 2018
   
March 31, 2019
   
March 31, 2018
 
 
 
Sales
   
% of Sales
   
Sales
   
% of Sales
             
Customer 1
  $ 1,833,590       29 %  
$
2,409,758
     
38
%
  $ 2,867,414    
$
1,189,232
 
Customer 2
    *       *
   
839,399
     
13
%
    *      
438,869
 
Customer 3
   
*
     
*

   
801,625
     
13
%
   
-
     
-
 
 
In the table above, an asterisk (*) indicates that product sales to the customer did not exceed 10% for the period indicated.

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

The following table discloses purchases the Company made from each vendor that sold to the Company in excess of 10% of the Company’s total purchases for the periods indicated:
 
   
For the three months ended
   
Accounts Payable as of
 
 
 
March 31, 2019
   
March 31, 2018
   
March 31, 2019
   
March 31, 2018
 
 
 
Purchases
   
% of Purc.
   
Purchases
   
% of Purc.
             
Vendor 1
 
$
*
     
*
   
$
469,357
     
16
%
  $
*
    $
163,538
 
Vendor 2
    *       *
   
335,105
     
11
%
    *      
-
 
 
In the table above, an asterisk (*) indicates that purchases from the vendor did not exceed 10% for the period indicated.

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


b)
Governmental Regulation:

All of the Company’s existing and proposed diagnostic products are regulated by the U.S. Food and Drug Administration, U.S. 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 applicable requirements can lead to sanctions, including withdrawal of products from the market, recalls, refusal to authorize government contracts, product seizures, civil money penalties, injunctions, and criminal prosecution.


c)
Employment Contracts:

The Company has multi-year contracts with two key employees that call for salaries presently aggregating $820,000 per year. The contracts expire in March 2020 and December 2021. The following table is a schedule of future minimum salary commitments as of March 31, 2019:

2019
 
$
615,000  
2020
    478,750  
2021
    365,000  


d)
Pension Plan:

The Company has a 401(k) plan established for its employees whereby it matches 40% of the first 5% of salary (or up to 2% of salary) that an employee contributes to the plan. Matching contribution expenses totaled $24,030 and $23,264 for the three months ended March 31, 2019 and 2018, respectively.
 

e)
Leases:

Chembio’s leases have historically been limited to its facilities in New York, Germany, and Malaysia. As of March 31, 2019, the Company has entered into five leases. One of the leases is subject to a sublease for the remainder of its term, as further described, below.

The Company’s leases generally include optional renewal periods. Upon entering into a new lease, we evaluate the leasehold improvements and regulatory requirements related to our operations in that location. To the extent that the initial lease term of the related lease is less than the useful life of the leasehold improvements and potential regulatory costs associated with moving the facility, we conclude that it is reasonably certain that a renewal option will be exercised, and thus that renewal period is included in the lease term, and the related payments are reflected in the right-of-use (“ROU”) asset and lease liability.

The Company’s leases generally include fixed rental payments with defined annual increases. While certain of the Company’s leases are gross leases, the majority of the Company’s leases are net leases in which we make separate payments to the lessor based on the lessor’s property and casualty insurance costs, the property taxes assessed on the property, and a portion of the common area maintenance where applicable. The Company has elected the practical expedient not to separate lease and nonlease components for all of the Company’s facility leases. The Company has also elected the practical expedient for short-term lease exception for all of our facility leases.

All leases are operating leases. During the three months ended March 31, 2019, the Company recognized $281,603 rent expense associated with the Company’s leases. Of that amount, $83,232, $31,552, and $166,819 have been classified in Cost of product sales, Research and development expenses, and Selling, general and administrative expenses, respectively. During the three months ended March 31, 2019, the Company had $281,603 and $0 of cash and non-cash activities, respectively, associated with its leases. During the three months ended March 31, 2018, the Company recognized $152,237 of rent expense associated with the Company’s leases. Of that amount, $128,063, $14,195, and $9,979 have been classified in Cost of product sales, Research and development expenses, and Selling, general and administrative expenses, respectively.

As of March 31, 2019, the deferred rent component of ROU assets totaling $1,173,263 was classified in Prepaid expenses and other current assets.

During the three months ended March 31, 2019, the Company executed an operating sublease related to its former Holbrook, NY facility. The sublease runs conterminously with the base lease in Holbrook, for which the Company remains primarily responsible.

The interest rates implicit in each of the leases are not readily determinable, and the Company does not have an established incremental borrowing rate as its only debt is a seller-financed note for manufacturing equipment. Therefore, the Company used an interest rate based on the marketplace for public debt. The weighted-average discount rate associated with operating leases as of March 31, 2019 is 8.84%.

As of March 31, 2019, the weighted-average lease term for all operating leases is 10 years. The future payments due under operating leases as of March 31, 2019 are as follows:

   
Amount
 
Due in 2019
  $ 474,150  
2020
    813,444
 
2021
    998,071
 
2022
    1,026,044
 
2023 and thereafter
    7,803,847
 
      11,115,556
 
Less: effects of discounting
    (4,134,835 )
Lease liabilities recognized
  $ 6,980,721  

As previously disclosed in our 2018 Annual Report on Form 10-K, and under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining non-cancellable lease terms in excess of one year would have been as follows for the years ending December 31,

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


f) Litigation:
 
From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. The outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s future financial position or results of operations.

NOTE 6 — NOTE PAYABLE:

In September 2017, the Company entered into an agreement with an equipment vendor to purchase automated assembly equipment for approximately $660,000. The terms call for prepayments of 30% down, 60% at time of factory acceptance testing and 10% after delivery.  The vendor agreed to lend the Company 15%, 40%, and 10% of each originally scheduled payment, respectively.  The Company paid interest at an annual rate of 12% until delivery.  Beginning in September 2018, the Company began making monthly payments of principal and interest of approximately $20,150, at an annual rate of 12% over a twenty-four month period.

NOTE 7 — DEFERRED RESEARCH AND DEVELOPMENT REVENUE:

The Company recognizes income from R&D milestones when those milestones are reached and non-milestone contracts and grants when earned.  These projects are invoiced after expenses are incurred. Any projects or grants funded in advance are deferred until earned. As of March 31, 2019 and December 31, 2018, there were $200,000 and $422,905 unearned advanced revenues, respectively.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, or our Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the section titled “Item 1A. Risk Factors” in Part I of our Annual Report. The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period.

Our management’s discussion and analysis of financial condition and results of operations is intended to help you understand the business operations and financial condition of the Company as of March 31, 2019, and for the three months ended March 31, 2019. This discussion should be read in conjunction with Item 1. Financial Statements. 

The following discussion is presented in six sections:


Executive Overview


Consolidated Results of Operations


Liquidity and Capital Resources


Recent Developments


Significant Accounting Policies and Critical Accounting Estimates


Recently Issued Accounting Pronouncements

Executive Overview
 
Our Business

Through our wholly owned subsidiaries, Chembio Diagnostic Systems Inc., Chembio Diagnostics Malaysia Sdn Bhd and Chembio Diagnostics GmbH, we develop, manufacture and commercialize point-of-care diagnostic tests that are used to detect or diagnose diseases. All products that are currently being developed are based on our patented DPP technology, a novel point-of-care diagnostic platform that offers certain customer advantages as compared to traditional lateral flow technology. Chembio was formed in 1985.
 
Business Strategy

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

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

We are pursuing four corporate priorities, aimed at executing on our key building blocks to drive growth and operating efficiency:

expand our core point-of-care infectious disease business;

leverage our patented DPP technology and scientific expertise through collaborations;

broaden our sales channels worldwide; and

automate our U.S. manufacturing operations to increase capacity and margin.

Our accomplishments in 2019 have included:
 
Achieved total revenue of $8.3 million for the three months ended March 31, 2019, an increase of 8% over same period in the prior year
 
Commenced automated manufacturing

Achieved ANVISA Approval in Brazil for Zika/Dengue/Chikungunya multiplex test

Completed Zika 510(k) study, funded by BARDA

Signed agreement with Perseus Science to develop a point-of-care test for concussion

Received US patent for optical analyzer technology

Our product commercialization and product development efforts are focused in two areas: infectious disease, which includes both sexually transmitted and tropical & fever disease; and strategic collaborations with leading global healthcare companies, which leverage the DPP platform to provide us with additional revenue streams. In infectious disease, we are commercializing tests for HIV, Syphilis, Zika virus, dengue virus, and chikungunya virus, and developing tests for hepatitis C, malaria, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi. Certain of these are also being developed as part of fever panel tests. Through strategic collaborations, we are developing tests for a specific form of cancer, concussions, bovine tuberculosis, and for eosinophilic respiratory disease, the latter in collaboration with global biopharmaceutical company AstraZeneca.

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

Our products are sold globally, directly and through distributors, to hospitals and clinics, physician offices, clinical laboratories, public health organizations, government agencies, and consumers.

Consolidated Results of Operations

Three Months Ended March 31, 2019 versus Three Months Ended March 31, 2018
 
The results of operations for the three months ended March 31, 2019 and 2018 were as follows (dollars in thousands):

   
March 31, 2019
   
March 31, 2018
 
TOTAL REVENUES
 
$
8,301
     
100
%
 
$
7,717
     
100
%
 
                               
OPERATING COSTS AND EXPENSES:
                               
Cost of product sales
   
4,770
      57
%
   
4,118
     
53
%
Research and development expenses
   
2,218
     
27
%
   
1,847
     
24
%
Selling, general and administrative expenses
   
4,013
     
48
%
   
2,406
     
31
%
Acquisition Costs    
396
      5
%
   
-
      -
%
      11,397
              8,371          
                                 
LOSS FROM OPERATIONS
   
(3,096
)
           
(654
)
       
 
                               
OTHER INCOME
   
7
             
2
         
 
                               
LOSS BEFORE INCOME TAXES
   
(3,089
)
   
(37
)%
   
(652
)
   
(8
)%
 
                               
Income tax provision (benefit)
   
(272
)
           
-
         
NET LOSS
 
$
(2,817
)
         
$
(652
)
       

Percentages in the table reflect the percent of total revenues.

Total Revenues

Total revenues during the quarter ended March 31, 2019 were $8.3 million, an increase of $0.6 million, or 7.6% compared to the quarter ended March 31, 2018. The increase in total net revenues was comprised of the following:


Comparable product sales, reflecting gains in Africa, the United States, and Europe, offset by lower sales in Latin America and Asia. Africa continued to benefit from our winning the single largest tender in our history for the supply of HIV tests to Ethiopia, together with meaningful commercial successes in that region. The United States benefited from winning back a large state program, and Europe reflects both the increasing trend of HIV self-testing and contribution from our acquisition of opTricon (now Chembio Diagnostics GmbH) in November 2018. Latin America declines represented supply chain timing differences.

$0.6 million, or 45% increase in R&D and grant, and license and royalty revenues, reflecting our continued success in securing governmental, non-governmental, and commercial partnerships, in particular associated with our DPP technology platform, and advancing the development work on those programs.

Gross Product Margin

Cost of product sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross product margin percentage is gross product margin as a percentage of net product sales.

Gross product margin decreased by $0.7 million, or 29% compared to 2018. The following schedule calculates gross product margin (dollars in thousands):

    For the three months ended     Favorable/(unfavorable)  
 
 
 
March 31, 2019
   
March 31, 2018
   
$ Change
   
% Change
 
Net product sales
 
$
6,383
   
$
6,398
   
$
(15
)
    -

Less: Cost of product sales
   
(4,770
)
   
(4,118
)
   
(652
)
   
(16
)%
  Gross product margin
 
$
1,613
   
$
2,280
   
$
(667
)
   
(29
)%
Gross margin percentage
   
25.3
%
   
35.6
%
               

The $0.7 million decrease in gross product margin was comprised of the following:


comparable product sales volume as described above, and

$0.7 million from unfavorable product margins, related to increased labor (including contract labor) to manually assemble our products and the impact of geographic mix on average selling prices.

The decreases in gross product margin and gross product margin percentage reflect increased labor (including contract labor) costs required to manually assemble our products and the impact of geographic mix on average selling prices. As noted above, we have commenced automated manufacturing on our first line and have two other lines on order. We expect the automation to both reduce our reliance on manual labor and contribute to improving gross product margin.

Research and Development

This category includes costs incurred for clinical & regulatory affairs and other research & development, as follows (dollars in thousands):

   
For the three months ended
     Favorable/(unfavorable)  
 
   
March 31, 2019
   
March 31, 2018
   
$ Change
   
% Change
 
Clinical & regulatory affairs
 
$
439
   
$
484
   
$
45
     
9
%
Other research & development
   
1,779
     
1,363
     
(416
)
   
(31
)%
  Total Research and Development
 
$
2,218
   
$
1,847
   
$
(371
)
   
(20
)%

The decrease in clinical & regulatory affairs costs for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 is primarily associated with decreased spending on the Company’s U.S. clinical trial evaluating its DPP® HIV-Syphilis System. The increase in other research & development costs is primarily associated with an increase in spending on materials & supplies, each corresponding with the growth in R&D and grant revenue-related projects.

Selling, General and Administrative Expense

Selling, general and administrative expense, or SG&A, includes administrative expenses, sales and marketing costs (including commissions), and other corporate items.

The $1.6 million, or 66.8% increase in SG&A for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, was primarily associated with the inclusion of costs from Chembio Diagnostics GmbH; legal, rent, and other costs related to the lease for our new Hauppauge, NY corporate headquarters, R&D labs, and manufacturing facility; and, higher non-cash equity compenastion costs.

Acquisition Costs

Acquisition costs for the three months ended March 31, 2019 include legal, due diligence, audit, and related costs associated with acquisitions. The $0.4 million increase in acquisition costs for the three months ended March 31, 2019 as compared to 2018 is associated with the acquisition of opTricon in November 2018.

Other Income

Other income consists principally of interest income earned on our deposits, net of interest expense, which remained consistent in the first quarter of 2019 as compared to the first quarter of 2018.

Income Tax Provision

During the first quarter of 2019, we recognized a tax benefit of $0.3 million related to losses generated by our foreign subsidiaries. As of March 31, 2019 and 2018, our United States deferred tax assets included a full valuation allowance.

Liquidity and Capital Resources

During the three months ended March 31, 2019, we funded our business operations, including capital expenditures and working capital requirements, principally from cash and cash equivalents. Our operations used cash flow of $4.8 million. As of  March 31, 2019, we had no outstanding debt other than a $0.3 million seller-financed note payable incurred in connection with our purchase of automated manufacturing equipment.

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 rate of our business and revenue growth, 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 not be able to generate the cash flow needed to fund our automation of U.S. manufacturing and our investment in research and development and sales and marketing at the time contemplated by our operating plan.  In such an event, we may elect to reduce the level, or otherwise delay the timing, of such funding and/or such investments, 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.

If we do not elect to reduce or delay such funding or investments, or if we determine to effect one or more acquisitions of businesses, technologies or products, we may be required to seek to raise additional funds through public or private financings, strategic relationships, or other arrangements, to the extent funding would be available to us on acceptable terms or at all. If we were to raise additional funds through the issuance of equity or convertible securities, the issuance could result in substantial dilution to existing stockholders, and the holders of these new securities or debt may have rights, preferences and privileges senior to those of the holders of common stock.
Sources of Funds
Research and Development Awards. We frequently seek research and development programs that may be awarded by government, non-governmental organizations, and non-profit entities, including private foundations. During the three months ended March 31, 2019, we recognized grant revenue totaling $0.9 from government, non-governmental organizations, and non-profit entities.

Working Capital. The following table sets forth selected working capital information:
   
March 31, 2019
 
   
(in thousands)
 
Cash and cash equivalents          
 
$
7,371  
Accounts receivable, net of allowance for doubtful amounts          
    7,718  
Inventories, net          
    9,856  
Prepaid expenses and other current assets          
   
2,242
 
Total current assets          
    27,187  
Less: Total current liabilities          
   
(7,296
)
Working capital          
 
$
19,891
 
Our cash and cash equivalents at March 31, 2019 were unrestricted and 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 balance fluctuates 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
Cash Flow Used in Operating Activities. Our operations used $4.8 million of cash during the three months ended March 31, 2019, primarily due to the net loss adjusted for non-cash items for the quarter of $2.4 million, a $0.2 million increase in accounts receivable related to the 7.6% increase in total revenue, a $2.0 million increase in inventory associated with supply chain timing, $0.4 million increase in prepaid expenses and other current assets related to prepaid rent and security deposits for our new Hauppauge corporate headquarters facility, offset by a $0.5 million increase in accounts payable and accrued liabilities.
Capital Expenditures. During the three months March 31, 2019, we continued to invest in manufacturing equipment and other fixed assets. Our capital expenditures totaled $0.6 million in the three months ended March 31, 2019.

Effects of Inflation
Inflation and changing prices have not had a material effect on our business, and we do not expect that they will materially affect our business in the foreseeable future. Any impact of inflation on cost of revenue and operating expenses, especially employee compensation costs, may not be readily recoverable in the price of our product offerings.
Off-Balance Sheet Arrangements

We do 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.

Critical Accounting Estimates

There were no significant changes in our critical accounting estimates during the three months ended March 31, 2019 to augment the critical accounting estimates disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, other than those described in the Notes to the condensed consolidated financial statements included in this report.

Recently Issued Accounting Pronouncements

A discussion of recent accounting pronouncements is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and is updated in the Notes to the condensed consolidated financial statements included in this report.

ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk.