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 September 30, 2020

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)

graphic

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)

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

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

As of November 5, 2020, the registrant had 20,176,131 shares outstanding of its common stock, $.01 par value.



Table of Contents

Quarterly Report on Form 10-Q
For The Quarterly Period Ended
September 30, 2020

Table of Contents

Chembio Diagnostics, Inc.

 
 
Page
 
 
 
FORWARD-LOOKING STATEMENTS AND STATISTICAL ESTIMATES
3
 
 
 
Part I. FINANCIAL INFORMATION:
 
 
 
 
Item 1. Financial Statements:
 
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019
4
 
 
 
 
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2020 and 2019
5
 
 
 
 
Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2020 and 2019
6
 
 
 
 
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2020 and 2019
7
 
 
 
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2020 and 2019
9
 
 
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
10
 
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
 
 
 
 
Item 4. Controls and Procedures
47
 
 
 
Part II. OTHER INFORMATION:
 
 
 
 
 
Item 1. Legal Proceedings
49
 
 
 
 
Item 1A. Risk Factors
51
 
 
 
 
Item 6. Exhibits
53
 
 
 
SIGNATURES
54

2

Table of Contents
Unless the context requires otherwise, the words ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘our company,’’ ‘‘Chembio’’ and similar terms refer to Chembio Diagnostics, Inc. and its consolidated subsidiaries.

DPP, STAT-PAK, STAT-VIEW and SURE CHECK are our registered trademarks, and CHEMBIO and MICRO READER are our trademarks. For convenience, these trademarks appear in this report without ® and symbols, and that practice does not mean that we will not assert, to the fullest extent under applicable law, our rights to the trademarks.

FORWARD-LOOKING STATEMENTS AND STATISTICAL ESTIMATES

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

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

Forward-looking statements and statistical estimates inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted or expressed in this report. These risks and uncertainties include those described in 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, in Part II, Item 1A. "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, in Part II, Item 1A. "Risk Factors" in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, as filed with the Securities and Exchange Commission on August 7, 2020, and in Part II, Item 1A, “Risk Factors,” of this report. You should interpret many of the risks identified in these reports as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Investors are cautioned not to place undue reliance on any forward-looking statements or statistical estimates, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement or statistical estimate, whether as a result of new information, future events or otherwise.

3

Table of Contents

PART I
Item 1.          FINANCIAL STATEMENTS
 CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF

 
(Unaudited)
September 30, 2020
   
December 31, 2019
 
- ASSETS -
           
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
28,687,453
   
$
18,271,352
 
Accounts receivable, net of allowance for doubtful accounts of $276,210 and $62,000 as of September 30, 2020 and December 31, 2019, respectively
   
3,522,498
     
3,661,325
 
Inventories, net
   
12,363,486
     
9,598,030
 
Prepaid expenses and other current assets
   
1,007,473
     
693,013
 
TOTAL CURRENT ASSETS
   
45,580,910
     
32,223,720
 
                 
FIXED ASSETS:
               
Property, plant and equipment, net
   
8,033,112
     
5,933,569
 
Finance lease right-of-use asset, net
   
248,892
     
210,350
 
                 
OTHER ASSETS:
               
Operating lease right-of-use assets, net
   
6,316,221
     
7,030,744
 
Intangible assets, net
   
3,648,495
     
3,914,352
 
Goodwill
   
5,696,679
     
5,872,690
 
Deposits and other assets
   
462,664
     
543,539
 
                 
TOTAL ASSETS
 
$
69,986,973
   
$
55,728,964
 
                 
- LIABILITIES AND STOCKHOLDERS’ EQUITY -
               
CURRENT LIABILITIES:
               
Accounts payable and accrued liabilities
 
$
6,558,782
   
$
5,526,243
 
Deferred revenue
   
3,865,754
     
125,000
 
Finance lease liabilities
   
57,715
     
41,894
 
Operating lease liabilities
   
710,535
     
568,294
 
Note payable
   
-
     
180,249
 
TOTAL CURRENT LIABILITIES
   
11,192,786
     
6,441,680
 
                 
OTHER LIABILITIES:
               
Long-term operating lease liabilities
   
6,448,515
     
6,969,603
 
Long-term finance lease liabilities
   
200,397
     
171,953
 
Long-term debt, less current portion, net
   
18,040,427
     
17,644,149
 
Deferred tax liability
   
165,326
     
466,326
 
                 
TOTAL LIABILITIES
   
36,047,451
     
31,693,711
 
                 
COMMITMENTS AND CONTINGENCIES
   
     
 
                 
STOCKHOLDERS’ EQUITY:
               
Preferred stock - 10,000,000 shares authorized; none outstanding
   
-
     
-
 
Common stock - $0.01 par value; 100,000,000 shares authorized; 20,213,956 shares and 17,733,617 shares issued at September 30, 2020 and December 31, 2019, respectively
   
202,139
     
177,335
 
Additional paid-in capital
   
124,622,252
     
95,433,077
 
Accumulated deficit
   
(89,967,147
)
   
(71,585,003
)
Treasury stock - 33,290 and 0 shares at cost, at September 30, 2020 and December 31, 2019, respectively
   
(150,919
)
   
-
 
Accumulated other comprehensive (loss) income
   
(766,803
)
   
9,844
 
TOTAL STOCKHOLDERS’ EQUITY
   
33,939,522
     
24,035,253
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
69,986,973
   
$
55,728,964
 

See accompanying notes to condensed consolidated financial statements

4

Table of Contents

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30, 2020
   
September 30, 2019
   
September 30, 2020
   
September 30, 2019
 
REVENUES:
                       
Net product sales
 
$
8,406,457
   
$
8,510,629
   
$
17,914,623
   
$
23,381,906
 
R&D and grant revenue
   
1,654,500
     
971,980
     
3,756,161
     
3,528,033
 
License and royalty revenue
   
211,521
     
238,330
     
572,450
     
703,352
 
TOTAL REVENUES
   
10,272,478
     
9,720,939
     
22,243,234
     
27,613,291
 
                                 
COSTS AND EXPENSES:
                               
Cost of product sales
   
7,467,746
     
6,649,114
     
17,512,925
     
18,112,676
 
Research and development expenses
   
2,351,880
     
2,223,939
     
6,233,040
     
6,542,591
 
Selling, general and administrative expenses
   
5,348,958
     
4,455,588
     
13,903,192
     
12,565,601
 
Severance, restructuring and other related costs
   
11,651
     
-
     
1,122,310
     
-
 
Acquisition costs
   
-
     
-
     
63,497
     
395,612
 
     
15,180,235
     
13,328,641
     
38,834,964
     
37,616,480
 
LOSS FROM OPERATIONS
   
(4,907,757
)
   
(3,607,702
)
   
(16,591,730
)
   
(10,003,189
)
                                 
OTHER INCOME:
                               
Interest expense, net
   
(735,819
)
   
(195,970
)
   
(2,110,011
)
   
(183,368
)
                                 
LOSS BEFORE INCOME TAXES
   
(5,643,576
)
   
(3,803,672
)
   
(18,701,741
)
   
(10,186,557
)
                                 
Income tax benefit
   
104,778
     
20,667
     
319,597
     
400,339
 
                                 
NET LOSS
 
$
(5,538,798
)
 
$
(3,783,005
)
 
$
(18,382,144
)
 
$
(9,786,218
)
                                 
Basic loss per share
 
$
(0.28
)
 
$
(0.22
)
 
$
(0.98
)
 
$
(0.58
)
                                 
Diluted loss per share
 
$
(0.28
)
 
$
(0.22
)
 
$
(0.98
)
 
$
(0.58
)
                                 
Weighted average number of shares outstanding, basic
   
20,104,547
     
16,923,695
     
18,728,372
     
16,912,583
 
                                 
Weighted average number of shares outstanding, diluted
   
20,104,547
     
16,923,695
     
18,728,372
     
16,912,583
 

See accompanying notes to condensed consolidated financial statements

5

Table of Contents

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 
 
For the Three Months Ended
   
For the Nine Months Ended
 
 
 
September 30, 2020
   
September 30, 2019
   
September 30, 2020
   
September 30, 2019
 
Net loss
 
$
(5,538,798
)
 
$
(3,783,005
)
 
$
(18,382,144
)
 
$
(9,786,218
)
Other comprehensive income (loss):
                               
Foreign currency translation adjustments
   
262,094
     
(61,306
)
   
(776,645
)
   
(172,345
)
Comprehensive loss
 
$
(5,276,704
)
 
$
(3,844,311
)
 
$
(19,158,789
)
 
$
(9,958,563
)

See accompanying notes to condensed consolidated financial statements

6

Table of Contents

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

 
For The Nine Months Ended September 30, 2020
 
   
Common Stock
   
Additional
Paid-in-
   
Treasury Stock
   
Accumulated
   
Accumulated Other
Comprehensive
       
   
Shares
   
Amount
   
Capital
   
Shares
   
Amount
   
Deficit
   
Income
   
Total
 
Balance at December 31, 2019
   
17,733,617
   
$
177,335
   
$
95,433,077
     
-
   
$
-
   
$
(71,585,003
)
 
$
9,844
   
$
24,035,253
 
                                                                 
Common Stock:
                                                               
Restricted stock issued
   
34,249
     
343
     
117,956
     
-
     
-
     
-
     
-
     
118,299
 
Restricted stock compensation, net 
   
(440,631
)
   
(4,406
)
   
(292,495
)
   
-
     
-
     
-
     
-
     
(296,901
)
Shares tendered for withholding taxes
   
-
     
-
     
145,056
     
(31,486
)
   
(145,056
)
   
-
     
-
     
-
 
                                                                 
Options:
                                                               
Stock option compensation
   
-
     
-
     
139,449
     
-
     
-
     
-
     
-
     
139,449
 
                                                                 
Comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
-
     
(863,294
)
   
(863,294
)
                                                                 
Net loss
   
-
     
-
     
-
     
-
     
-
     
(4,999,549
)
   
-
     
(4,999,549
)
                                                                 
Balance at March 31, 2020
   
17,327,235
   
$
173,272
   
$
95,543,043
     
(31,486
)
 
$
(145,056
)
 
$
(76,584,552
)
 
$
(853,450
)
 
$
18,133,257
 
                                                                 
Common Stock:
                                                               
Issuance of stock, net
   
2,619,593
     
26,196
     
28,410,545
     
-
     
-
     
-
     
-
     
28,436,741
 
Restricted stock issued
   
18,858
     
189
     
(189
)
   
-
     
-
     
-
     
-
     
-
 
Restricted stock compensation, net
   
(29,543
)
   
(296
)
   
262,405
     
-
     
-
     
-
     
-
     
262,109
 
Shares tendered for withholding taxes
   
-
     
-
     
(192,161
)
   
(1,804
)
   
(5,863
)
   
-
     
-
     
(198,024
)
                                                                 
Options:
                                                               
Exercised
   
5,528
     
55
     
(55
)
   
-
     
-
     
-
     
-
     
-
 
Stock option compensation
   
-
     
-
     
122,115
     
-
     
-
     
-
     
-
     
122,115
 
                                                                 
Warrants exercised
   
253,161
     
2,532
     
(2,532
)
   
-
     
-
     
-
     
-
     
-
 
                                                                 
Comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
-
     
(175,447
)
   
(175,447
)
                                                                 
Net loss
   
-
     
-
     
-
     
-
     
-
     
(7,843,797
)
   
-
     
(7,843,797
)
                                                                 
Balance at June 30, 2020
   
20,194,832
   
$
201,948
   
$
124,143,171
     
(33,290
)
 
$
(150,919
)
 
$
(84,428,349
)
 
$
(1,028,897
)
 
$
38,736,954
 
                                                                 
Common Stock:
                                                               
Restricted stock issued
   
19,124
     
191
     
105,561
     
-
     
-
     
-
     
-
     
105,752
 
Restricted stock compensation
   
-
     
-
     
275,985
     
-
     
-
     
-
     
-
     
275,985
 
                                                                 
Options:
                                                               
Stock option compensation
   
-
     
-
     
97,535
     
-
     
-
     
-
     
-
     
97,535
 
                                                                 
Comprehensive income
   
-
     
-
     
-
     
-
     
-
     
-
     
262,094
     
262,094
 
                                                                 
Net loss
   
-
     
-
     
-
     
-
     
-
     
(5,538,798
)
   
-
     
(5,538,798
)
                                                                 
Balance at September 30, 2020
   
20,213,956
   
$
202,139
   
$
124,622,252
     
(33,290
)
 
$
(150,919
)
 
$
(89,967,147
)
 
$
(766,803
)
 
$
33,939,522
 

See accompanying notes to condensed consolidated financial statements

7

Table of Contents
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

 
For The Nine Months Ended September 30, 2019
 
   
Common Stock
   
Additional
Paid-in-Capital
   
Accumulated
Deficit
   
Accumulated Other
Comprehensive Income
   
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
 
                                                 
Comprehensive loss
   
-
     
-
     
-
     
-
     
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
 
                                                 
Common Stock:
                                               
Restricted stock issued
   
375,000
     
3,750
     
(3,750
)
   
-
     
-
     
-
 
Restricted stock compensation
   
-
     
-
     
307,774
     
-
     
-
     
307,774
 
                                                 
Options:
                                               
Exercised
   
24,075
     
241
     
(241
)
   
-
     
-
     
-
 
Stock option compensation
   
-
     
-
     
69,097
     
-
     
-
     
69,097
 
                                                 
Comprehensive loss
   
-
     
-
     
-
     
-
     
(313,225
)
   
(313,225
)
                                                 
Net loss
   
-
     
-
     
-
     
(3,186,680
)
   
-
     
(3,186,680
)
                                                 
Balance at June 30, 2019
   
17,565,534
   
$
175,655
   
$
91,674,175
   
$
(63,913,087
)
 
$
1,157
   
$
27,937,900
 
                                                 
Common Stock:
                                               
Restricted stock compensation
   
-
     
-
     
440,396
     
-
     
-
     
440,396
 
                                                 
Options:
                                               
Stock option compensation
   
-
     
-
     
66,192
     
-
     
-
     
66,192
 
                                                 
Warrant on term debt
   
-
     
-
     
1,196,093
     
-
     
-
     
1,196,093
 
                                                 
Foreign currency translation adjustments
   
-
     
-
     
-
     
-
     
(61,306
)
   
(61,306
)
                                                 
Net loss
   
-
     
-
     
-
     
(3,783,005
)
   
-
     
(3,783,005
)
                                                 
Balance at September 30, 2019
   
17,565,534
   
$
175,655
   
$
93,376,856
   
$
(67,696,092
)
 
$
(60,149
)
 
$
25,796,270
 

See accompanying notes to condensed consolidated financial statements

8

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

 
September 30,2020
   
September 30, 2019
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Cash received from customers and grants
 
$
26,122,815
   
$
29,423,872
 
Cash paid to suppliers and employees
   
(37,776,303
)
   
(35,185,776
)
Cash paid for operating leases
   
(797,482
)
   
(474,150
)
Cash paid for finance leases
   
(14,762
)
   
(4,033
)
Interest and taxes, net
   
(1,681,155
)
   
(158,120
)
Net cash used in operating activities
   
(14,146,887
)
   
(6,398,207
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Patent application costs
   
(181,417
)
   
(346,663
)
Acquisition of and deposits on fixed assets
   
(3,000,763
)
   
(2,568,244
)
Acquisitions
   
-
     
145,760
 
Net cash used in investing activities
   
(3,182,180
)
   
(2,769,147
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Issuance of stock, net
   
28,436,741
     
-
 
Proceeds from issuance of long-term debt, net
   
-
     
18,850,000
 
Stimulus package loan
   
2,978,315
     
-
 
Payment of stimulus package loan
   
(2,978,315
)
   
-
 
Payments of tax withholding on stock award
   
(348,944
)
   
-
 
Payments on debt issuance costs
   
-
     
(186,313
)
Payments on note payable
   
(180,249
)
   
(136,232
)
Payments on finance leases
   
(37,166
)
   
(9,851
)
Net cash provided by financing activities
   
27,870,382
     
18,517,604
 
                 
Effect of exchange rate changes on cash
   
(125,214
)
   
(6,909
)
INCREASE IN CASH AND CASH EQUIVALENTS
   
10,416,101
     
9,343,341
 
Cash and cash equivalents - beginning of the period
   
18,271,352
     
12,524,551
 
                 
Cash and cash equivalents - end of the period
 
$
28,687,453
   
$
21,867,892
 
                 
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
               
                 
Net loss
 
$
(18,382,144
)
 
$
(9,786,218
)
Adjustments:
               
Depreciation and amortization
   
2,057,275
     
1,666,675
 
Benefit from deferred tax liability
   
(301,000
)
   
(402,639
)
Provision of doubtful accounts
   
214,210
     
-
 
Non-cash inventory changes
   
2,530,444
     
-
 
Share based compensation
   
824,345
     
1,230,966
 
Changes in assets and liabilities:
               
Accounts receivable
   
138,827
     
1,995,986
 
Inventories
   
(5,295,899
)
   
(558,122
)
Prepaid expenses and other current assets
   
(314,460
)
   
103,883
 
Deposits and other assets
   
80,873
     
(20,608
)
Accounts payable and accrued liabilities
   
559,888
     
(442,725
)
Deferred revenue
   
3,740,754
     
(185,405
)
Net cash used in operating activities
 
$
(14,146,887
)
 
$
(6,398,207
)
                 
Supplemental disclosures for non-cash investing and financing activities:
               
Deposits on manufacturing equipment transferred to fixed assets
 
$
472,651
   
$
430,000
 

See accompanying notes to condensed consolidated financial statements

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CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)

NOTE 1 — DESCRIPTION OF BUSINESS:

Chembio Diagnostics, Inc. (“Chembio”) and its subsidiaries (collectively with Chembio, the “Company”) develop and commercialize point-of-care rapid tests used for the detection and diagnosis of infectious diseases, including COVID-19, sexually transmitted disease, and fever and tropical disease. Coupled with the Company's extensive scientific expertise, its novel DPP technology offers broad market applications beyond infectious disease. Chembio’s products are sold globally, directly and through distributors, to hospitals and clinics, physician offices, clinical laboratories, public health organizations, government agencies, and consumers under the Company’s DPP, STAT PAK, SURE CHECK and STAT-VIEW registered trademarks or under the private labels of the Company’s marketing partners.

The Company has been expanding its product portfolio based upon its proprietary DPP technology platform  that provides high-quality, rapid diagnostic results in 15 to 20 minutes using a small drop of blood from the fingertip or alternative samples. Through advanced multiplexing, the DPP platform can detect up to eight, distinct test results from a single patient sample, which can deliver greater clinical value than other rapid tests. For certain applications, Chembio’s easy-to-use, highly portable, battery-operated DPP Micro Reader optical analyzer then reports accurate results in approximately 15 seconds, making it well-suited for decentralized testing where real-time results enable patients to be clinically assessed while they are still on-site. Objective results produced by the DPP Micro Reader can reduce the possibility of the types of human error that can be experienced in the visual interpretations required by many rapid tests.

All DPP tests are developed and manufactured in the United States and are the subject of a range of domestic and global patents and patents pending.
 
During the nine months ended September 30, 2020, the Company refocused its business strategy on the development and commercialization of the DPP COVID-19 IgM/IgG System, which consists of a new serological test for COVID-19 and a Micro Reader analyzer. In the nine months ended September 30, 2020, the Company developed, received regulatory approval in the US, Brazil and Europe, and commercialized the DPP COVID-19 IgM/IgG System, which provided numerical readings for both IgM and IgG levels of antibodies to the virus, and began developing its strategy for a portfolio of products both related to and expanding beyond COVID-19. On June 16, 2020, the U.S. FDA Food and Drug Administration (the "FDA") revoked the Company’s Emergency Use Authorization ("EUA") for the DPP COVID-19 System in the U.S., and the Company immediately began developing a revised version. The Company submitted an application for EUA to the FDA for its new rapid antibody test system, DPP SARS-CoV-2 IgM/IgG on September 8, 2020.

On July 6, 2020, the Company received a $628,071 grant from the Department of Health and Human Services; Office of the Assistant Secretary for Preparedness and Response; Biomedical Advanced Research and Development Authority, Division of Research Innovation and Ventures ("BARDA") to assist the Company in developing a COVID-19 point-of-care antigen system using Chembio’s proprietary DPP technology and submitting an application for EUA to the FDA for the system. On October 15, 2020, Chembio submitted the EUA application for the DPP SARS-CoV-2 Antigen test system, which was designed to detect SARS-CoV-2 antigens in only 20 minutes. The DPP SARS-CoV-2 Antigen test system consists of a DPP SARS-CoV-2 Antigen test cartridge, a DPP Micro Reader optical analyzer and a minimally-invasive nasal swab.

In addition to its DPP COVID-19 rapid test products, the Company has a broad portfolio of infectious disease products, which it expects to generate a diminished amount of revenue for the foreseeable future both due to the impact of the global COVID-19 pandemic and while it focuses on the development, manufacture, and commercialization of DPP COVID-19 products. Through Research & Development (“R&D”) Services, the Company is developing tests in collaboration with Takeda Pharmaceutical Company Limited.

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Large and growing markets have been established for these types of tests, initially in high prevalence regions where they are indispensable for large-scale prevention and treatment programs. 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.

Through R&D Services, the Company develops tests for third parties using its DPP platform and, in limited cases, other platforms in projects that the Company believes have the potential to create value for the rest of its business. In addition, the Company routinely enters into arrangements with governmental and non-governmental organizations for the funding of certain R&D efforts.

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES:

(a)
Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements include the accounts of Chembio and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Chembio’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC.

The Company’s future working capital needs will depend on many factors, including the rate of its business and revenue growth, the timing of its continuing automation of U.S. manufacturing, and the timing of its investment in research and development as well as sales and marketing. If the Company is unable to increase its revenues and manage its expenses in accordance with its operating plan, it may need to reduce the level or slow the timing of the growth plans contemplated by its operating plan, which would likely curtail or delay the growth in its business contemplated by its operating plan and could impair or defer its 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.

All adjustments contained in the accompanying unaudited condensed consolidated financial statements are of a normal recurring nature and are necessary to present fairly the financial position of the Company as of September 30, 2020. Interim results are not necessarily indicative of results that may be expected for any other interim period or for an entire year.

(b)
Use of Estimates:

The preparation of the consolidated financial statements in conformity with GAAP requires management to make assumptions and estimates that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and these notes. Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in certain areas. Generally, matters subject to estimation and judgment include accounts receivable realization, inventory, asset impairments, recognition of revenue including variable consideration and pursuant to milestones, useful lives of intangible and fixed assets, stock-based compensation, business combinations, and deferred tax asset valuation allowances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates.

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(c)
Fair Value of Financial Instruments:

The carrying values for cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate fair value due to the immediate or short-term maturity of these financial instruments. Included in cash and cash equivalents were $21.0 million and $16.0 million as of September 30, 2020 and December 31, 2019, respectively, of money market funds that are Level 1 fair value measurements under the hierarchy. The fair value of the Company’s total debt of $20.0 million (carrying value of $18.0 million) and $20.0 million (carrying value of $17.6 million) as of September 30, 2020 and December 31, 2019, respectively, is a Level 2 fair value measurement under the hierarchy, and the carrying value approximates fair value.

Fair value measurements of all financial assets and liabilities that are 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).

(d)
Cash and Cash Equivalents:

Cash and cash equivalents are defined as short-term, highly liquid investments with original maturities of three months or less, and include restricted cash of $2.3 million and $0 as of September 30, 2020 and December 31, 2019, respectively.

The Company is contractually obligated to maintain the restricted cash balance on deposit with a bank as security for the banks issuance of a guarantee on behalf of the Company for its performance under purchase orders from and related advance payments by a customer. The Company expects that the restriction will be released within the next twelve months.

(e)
Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash instruments with well-known financial institutions and, at times, may maintain balances in excess of the Federal Deposit Insurance Corporation insurance limit. The Company monitors the credit ratings of the financial institutions to mitigate this risk. Concentration of credit risk with respect to trade receivables is principally mitigated by the Company’s ability to obtain letters of credit from certain foreign customers and its diverse customer base, both in number of customers and geographic locations.

(f)
Fixed Assets:

Fixed assets are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, which range from three to seven years. Leasehold improvements are amortized over the useful life of the asset or the lease term, whichever is shorter. Deposits paid for fixed assets are capitalized and not depreciated until the related asset is placed in service.

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(g)
Valuation of Long-Lived Assets and Intangible Assets:

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 long-lived tangible and intangible assets was recorded for the nine months ended September 30, 2020 or 2019.

(h)
Revenue Recognition:

The Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under Accounting Standards Update (“ASU”) 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 revenue when (or as) the Company satisfies the performance obligation.

Product Revenue

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 the product 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 excludes certain taxes from the transaction price (e.g., sales, value added and some excise taxes).

The Company’s contracts with customers often include promises to transfer products or services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require judgment. Typical products sold are diagnostic tests and typical services performed are R&D studies. Revenues from product sales are recognized at a point-in-time and revenues from R&D studies are recognized ratably over the period of the agreement, unless the related performance obligations indicate otherwise.

Judgment is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. SSP is directly observable and the Company can use a range of amounts to estimate SSP, as it sells products and services separately, and can determine whether there is a discount to be allocated based on the relative SSP of the various products and services, for the various geographies.

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 and returns. 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, market events and trends, and the specific facts and circumstances of each arrangement. The transaction price, which includes variable consideration reflecting the impact of discounts, allowances and returns 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 revenue and earnings in the period of adjustment.

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License and Royalty Revenue

The Company receives royalty revenue on sales by its licensee of products covered under patents that the Company owns. The Company does not have future performance obligations under this license arrangement. The Company records revenue based on estimates of the sales that occurred during the relevant period as a component of license and royalty revenue. The relevant period estimates of sales are based on interim data provided by the licensee 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 revenue 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 contracts with customers 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 Accounting Standards Codification (“ASC”) Topic 958. Such contracts are further described under Disaggregation of Revenue below. Grants are invoiced and revenue is recognized ratably as that is the depiction of the timing of the transfer of services. The R&D study, which encompasses various phases of product development processes: design feasibility & planning, product development and design optimization, design verification, design validation and process validation, and pivotal studies, is also recognized ratably.

In June 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This ASU clarifies the guidance presented in ASC Topic 958, “Not-for-Profit Entities,” for evaluating whether a transaction is reciprocal (i.e., an exchange transaction) or nonreciprocal (i.e., a contribution) and for distinguishing between conditional and unconditional contributions. The ASU also clarified the guidance used by entities other than not-for-profits to identify and account for contributions made.

Disaggregation of Revenue

The following table disaggregates total revenues:

 
For the Three Months Ended
 
   
September 30, 2020
   
September 30, 2019
 
   
Exchange
Transactions
   
Non-Exchange
Transactions
   
Total
   
Exchange
Transactions
   
Non-Exchange
Transactions
   
Total
 
Net product sales
 
$
8,406,457
   
$
-
   
$
8,406,457
   
$
8,510,629
   
$
-