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 June 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)

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 July 31, 2020, the registrant had 20,161,542 shares outstanding of its common stock, $.01 par value.




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

Table of Contents

Chembio Diagnostics, Inc.

 
 
Page
 
 
 
3
 
 
 
Part I. FINANCIAL INFORMATION:
 
 
 
 
Item 1. Financial Statements:
 
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
9
 
 
 
 
10
 
 
 
 
27
 
 
 
 
43
 
 
 
Part II. OTHER INFORMATION:
 
 
 
 
 
44
 
 
 
 
45
 
 
 
 
52
 
 
 
53

2


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, MICRO READER and our logo design are our trademarks. For convenience, these trademarks appear in this report 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.

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 Reoprt on Form 10-Q for the quarterly period ended March 31, 2020, as filed with the Securities and Exchange Commission on May 4, 2020, and 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


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

 
(Unaudited)
June 30, 2020
   
December 31, 2019
 
- ASSETS -
           
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
36,427,468
   
$
18,271,352
 
Accounts receivable, net of allowance for doubtful accounts of $156,000 and $62,000 as of June 30, 2020 and December 31, 2019, respectively
   
2,610,587
     
3,661,325
 
Inventories, net
   
14,131,540
     
9,598,030
 
Prepaid expenses and other current assets
   
742,908
     
693,013
 
TOTAL CURRENT ASSETS
   
53,912,503
     
32,223,720
 
                 
FIXED ASSETS:
               
Property, plant and equipment, net
   
7,705,890
     
5,933,569
 
Finance lease right-of-use asset, net
   
258,884
     
210,350
 
                 
OTHER ASSETS:
               
Operating lease right-of-use assets, net
   
6,515,282
     
7,030,744
 
Intangible assets, net
   
3,605,194
     
3,914,352
 
Goodwill
   
5,534,624
     
5,872,690
 
Deposits and other assets
   
429,884
     
543,539
 
                 
TOTAL ASSETS
 
$
77,962,261
   
$
55,728,964
 
                 
- LIABILITIES AND STOCKHOLDERS’ EQUITY -
               
CURRENT LIABILITIES:
               
Accounts payable and accrued liabilities
 
$
9,290,887
   
$
5,526,243
 
Deferred revenue
   
4,097,155
     
125,000
 
Finance lease liabilities
   
55,712
     
41,894
 
Operating lease liabilities
   
776,691
     
568,294
 
Note payable
   
75,708
     
180,249
 
TOTAL CURRENT LIABILITIES
   
14,296,153
     
6,441,680
 
                 
OTHER LIABILITIES:
               
Long-term operating lease liabilities
   
6,565,019
     
6,969,603
 
Long-term finance lease liabilities
   
210,408
     
171,953
 
Long-term debt, less current portion, net
   
17,903,401
     
17,644,149
 
Deferred tax liability
   
250,326
     
466,326
 
                 
TOTAL LIABILITIES
   
39,225,307
     
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; 20,194,832 shares and 17,733,617 shares issued at June 30, 2020 and December 31, 2019, respectively
   
201,948
     
177,335
 
Additional paid-in capital
   
124,143,171
     
95,433,077
 
Accumulated deficit
   
(84,428,349
)
   
(71,585,003
)
Treasury stock - 33,290 and 0 shares at cost, at June 30, 2020 and December 31, 2019, respectively
   
(150,919
)
   
-
 
Accumulated other comprehensive (loss) income
   
(1,028,897
)
   
9,844
 
TOTAL STOCKHOLDERS’ EQUITY
   
38,736,954
     
24,035,253
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
77,962,261
   
$
55,728,964
 

See accompanying notes to condensed consolidated financial statements

4


CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30, 2020
   
June 30, 2019
   
June 30, 2020
   
June 30, 2019
 
REVENUES:
                       
Net product sales
 
$
3,791,574
   
$
8,785,041
   
$
9,508,166
   
$
15,409,326
 
R&D and grant revenue
   
1,193,973
     
854,264
     
2,101,660
     
2,556,053
 
License and royalty revenue
   
125,625
     
248,831
     
360,929
     
465,022
 
TOTAL REVENUES
   
5,111,172
     
9,888,136
     
11,970,755
     
18,430,401
 
                                 
COSTS AND EXPENSES:
                               
Cost of product sales
   
5,670,737
     
6,989,975
     
10,045,179
     
12,001,611
 
Research and development expenses
   
1,922,306
     
2,101,020
     
3,881,159
     
4,318,652
 
Selling, general and administrative expenses
   
4,397,593
     
4,096,942
     
8,554,234
     
8,110,013
 
Severance, restructuring and other related costs
   
387,540
     
-
     
1,110,658
     
-
 
Acquisition costs
   
-
     
-
     
63,497
     
395,612
 
     
12,378,176
     
13,187,937
     
23,654,727
     
24,825,888
 
LOSS FROM OPERATIONS
   
(7,267,004
)
   
(3,299,801
)
   
(11,683,972
)
   
(6,395,487
)
                                 
OTHER INCOME:
                               
Interest (expense) income
   
(712,052
)
   
5,918
     
(1,374,192
)
   
12,602
 
                                 
LOSS BEFORE INCOME TAXES
   
(7,979,056
)
   
(3,293,883
)
   
(13,058,164
)
   
(6,382,885
)
                                 
Income tax benefit
   
(135,259
)
   
(107,203
)
   
(214,818
)
   
(379,672
)
                                 
NET LOSS
 
$
(7,843,797
)
 
$
(3,186,680
)
 
$
(12,843,346
)
 
$
(6,003,213
)
                                 
Basic loss per share
 
$
(0.42
)
 
$
(0.19
)
 
$
(0.71
)
 
$
(0.36
)
                                 
Diluted loss per share
 
$
(0.42
)
 
$
(0.19
)
 
$
(0.71
)
 
$
(0.36
)
                                 
Weighted average number of shares outstanding, basic
   
18,868,144
     
16,914,171
     
18,032,723
     
16,906,936
 
                                 
Weighted average number of shares outstanding, diluted
   
18,868,144
     
16,914,171
     
18,032,723
     
16,906,936
 

See accompanying notes to condensed consolidated financial statements

5


CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 
 
For the Three Months Ended
   
For the Six Months Ended
 
 
 
June 30, 2020
   
June 30, 2019
   
June 30, 2020
   
June 30, 2019
 
Net loss
 
$
(7,843,797
)
 
$
(3,186,680
)
 
$
(12,843,346
)
 
$
(6,003,213
)
Other comprehensive loss:
                               
Foreign currency translation adjustments
   
(175,447
)
   
(313,225
)
   
(1,038,741
)
   
(111,039
)
Comprehensive loss
 
$
(8,019,244
)
 
$
(3,499,905
)
 
$
(13,882,087
)
 
$
(6,114,252
)

See accompanying notes to condensed consolidated financial statements

6


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

 
For The Six Months Ended June 30, 2020
 
   
Common Stock
   
Additional
Paid-in-Capital
   
Treasury
Stock
   
Accumulated
Deficit
   
Accumulated Other
Comprehensive
Income
   
Total
 
   
Shares
   
Amount
   
Shares
   
Amount
 
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
 

See accompanying notes to condensed consolidated financial statements

7

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

 
For The Six Months Ended June 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
 

See accompanying notes to condensed consolidated financial statements

8



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

 
June 30,2020
   
June 30, 2019
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Cash received from customers and grants
 
$
16,993,648
   
$
17,627,823
 
Cash paid to suppliers and employees
   
(22,751,210
)
   
(24,421,683
)
Cash paid for operating leases
   
(457,277
)
   
(305,157
)
Cash paid for finance leases
   
(9,367
)
   
-
 
Interest and taxes, net
   
(1,106,778
)
   
12,602
 
Net cash used in operating activities
   
(7,330,984
)
   
(7,086,415
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Patent application costs
   
(98,186
)
   
(72,295
)
Acquisition of and deposits on fixed assets
   
(2,351,160
)
   
(1,077,203
)
Acquisitions
   
-
     
145,760
 
Net cash used in investing activities
   
(2,449,346
)
   
(1,003,738
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Issuance of stock, net
   
28,436,741
     
-
 
Stimulus package loan
   
2,978,315
     
-
 
Payment of stimulus package loan
   
(2,978,315
)
   
-
 
Payments of tax withholding on stock award
   
(343,080
)
   
-
 
Payments on note payable
   
(104,542
)
   
(92,158
)
Payments on finance leases
   
(23,578
)
   
-
 
Net cash (used in) provided by financing activities
   
27,965,541
     
(92,158
)
                 
Effect of exchange rate changes on cash
   
(29,095
)
   
161,835
 
INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS
   
18,156,116
     
(8,020,476
)
Cash and cash equivalents - beginning of the period
   
18,271,352
     
12,524,551
 
                 
Cash and cash equivalents - end of the period
 
$
36,427,468
     
4,504,075
 
                 
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
               
                 
Net loss
 
$
(12,843,346
)
 
$
(6,003,213
)
Adjustments:
               
Depreciation and amortization
   
1,441,823
     
750,322
 
Benefit from deferred tax liability
   
(216,000
)
   
(379,672
)
Provision of doubtful accounts
   
94,262
     
-
 
Share based compensation
   
347,141
     
724,378
 
Changes in assets and liabilities:
               
Accounts receivable
   
1,050,738
     
(360,037
)
Inventories
   
(4,533,511
)
   
(1,219,454
)
Prepaid expenses and other current assets
   
(49,894
)
   
131,752
 
Deposits and other assets
   
113,655
     
(255,124
)
Accounts payable and accrued liabilities
   
3,291,993
     
(570,872
)
Deferred revenue
   
3,972,155
     
95,505
 
Net cash used in operating activities
 
$
(7,330,984
)
 
$
(7,086,415
)
                 
Supplemental disclosures for non-cash investing and financing activities:
               
Deposits on manufacturing equipment transferred to fixed assets
 
$
472,651
   
$
-
 
                 

See accompanying notes to condensed consolidated financial statements

9

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



NOTE 1 — DESCRIPTION OF BUSINESS:

Chembio Diagnostics, Inc. (“Chembio”) and its subsidiaries (collectively with Chembio, the “Company”) develop and commercialize rapid tests used for the detection and diagnosis of infectious diseases.

The Company has been expanding its product portfolio based upon its proprietary DPP technology, a novel, rapid diagnostic platform that uses a drop of blood from the fingertip to provide high-quality, cost-effective diagnostic results in approximately 15 minutes.
 
The Company’s product development and commercialization efforts are focused on infectious disease testing. During the six months ended June 30, 2020, the Company refocused its business strategy on the development and commercialization of the DPP COVID-19 System, which consists of a new serological test for COVID-19 and a Micro Reader analyzer. In the six months ended June 30, 2020, the Company developed, received regulatory approval in the US, Brazil and Europe for, and commercialized the DPP COVID-19 System, and began developing its strategy for a portfolio of products both related to and expanding beyond COVID-19. Near the end of that period, the U.S. FDA revoked the Company’s Emergency Use Authorization for the DPP COVID-19 System, and the Company immediately began developing a revised version.

In addition to the DPP COVID-19 System, the Company has a broad portfolio of infectious disease products, which it expects to generate a diminished amount of revenue for the foreseeable future while it focuses on the development, manufacture, and commercialization of the DPP COVID-19 System and related products. Through Research & Development (“R&D”) Services, the Company is developing tests for a rare disease in collaboration with Takeda Pharmaceutical Company Limited and a biomarker development project in collaboration with AstraZeneca plc.

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.

The Company’s products are sold globally to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments 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.
 
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.

10

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

(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 $26.8 million and $16.0 million as of June 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 $17.9 million) and $20.0 million (carrying value of $17.6 million) as of June 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 $3.3 million and $0 as of June 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.
11

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

(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.

(g)
License Agreements:

The Company records up-front payments related to license agreements as prepaids and amortizes them over their respective economic life. As of both June 30, 2020 and 2019, total prepaids related to license agreements were $100,000.

(h)
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 six months ended June 30, 2020 or 2019.

(i)
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.

12

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

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.

13

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Disaggregation of Revenue

The following table disaggregates total revenues:

 
For the Three Months Ended
 
   
June 30, 2020
   
June 30, 2019
 
   
Exchange
Transactions
   
Non-Exchange
Transactions
   
Total
   
Exchange
Transactions
   
Non-Exchange
Transactions
   
Total
 
Net product sales
 
$
3,791,574
   
$
-
   
$
3,791,574
   
$
8,785,041
   
$
-
   
$
8,785,041
 
R&D and grant revenue
   
1,193,973
     
-
     
1,193,973
     
619,139
     
235,125
     
854,264
 
License and royalty revenue
   
125,625
     
-
     
125,625
     
248,831
     
-
     
248,831
 
   
$
5,111,172
   
$
-
   
$
5,111,172
   
$
9,653,011
   
$
235,125
   
$
9,888,136
 

 
For the Six Months Ended
 
   
June 30, 2020
   
June 30, 2019
 
   
Exchange
Transactions
   
Non-Exchange
Transactions
   
Total
   
Exchange
Transactions
   
Non-Exchange
Transactions
   
Total
 
Net product sales
 
$
9,508,167
   
$
-
   
$
9,508,166
   
$
15,409,326
   
$
-
   
$
15,409,326
 
R&D and grant revenue
   
2,101,660
     
-
     
2,101,660
     
1,392,204
     
1,163,849
     
2,556,053
 
License and royalty revenue
   
360,928
     
-
     
360,929
     
465,022
     
-
     
465,022
 
   
$
11,970,755
   
$
-
   
$
11,970,755
   
$
17,266,552
   
$
1,163,849
   
$
18,430,401
 

Exchange transactions are recognized in accordance with ASC Topic 606, while non-exchange transactions are recognized in accordance with ASU 2018-08.

The following table disaggregates revenues by geographic location of the customer:

 
 
For the Three Months Ended
   
For the Six Months Ended
 
 
 
June 30, 2020
   
June 30, 2019
   
June 30, 2020
   
June 30, 2019
 
Africa
 
$
552,570
   
$
2,342,740
   
$
1,436,085
   
$
4,759,040
 
Asia
   
119,319
     
119,548
     
482,607
     
240,646
 
Europe & Middle East
   
1,635,016
     
1,107,558
     
3,811,172
     
3,250,779
 
Latin America
   
780,567
     
4,897,297
     
2,896,963
     
6,177,770
 
United States
   
2,023,699
     
1,420,993
     
3,343,928
     
4,002,166
 
   
$
5,111,172
   
$
9,888,136
   
$
11,970,755
   
$
18,430,401
 

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 June 30, 2020, the Company reported $4,097,155 in deferred revenue, of which $1.4 million is expected to be recognized during the three months ending September 30, 2020, and the remainder over the next 12 months.

(j)
Inventories:

Inventories consisted of the following at:

 
 
June 30, 2020
   
December 31, 2019
 
Raw materials
 
$
5,136,583
   
$
2,901,319
 
Work in process
   
2,609,407
     
793,343
 
Finished goods
   
6,385,550
     
5,903,368
 
 
 
$
14,131,540
   
$
9,598,030
 

14

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

(k)
Loss Per Share:

Basic loss per share is computed by dividing net loss attributable to holders of Chembio’s common stock (“common stock”) by the weighted-average number of shares of common stock outstanding for the period excluding unvested restricted stock. Diluted loss per share for the six months ended June 30, 2020 and 2019 reflected the potential dilution from the exercise or conversion of other securities into common stock, if dilutive.

There were 56,995 and 641,839 restricted shares awards outstanding as of June 30, 2020 and 2019, respectively, that were not included in the calculation of diluted income per share for the three and six months ended June 30, 2020 and 2019, because their effect would have been anti-dilutive. There were 1,034,124 and 688,122 weighted-average options outstanding as of June 30, 2020 and 2019, respectively, that were not included in the calculation of diluted income per share for the three and six months ended June 30, 2020 and 2019, respectively, because their effect would have been anti-dilutive.

(l)
Research and Development:

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

(m)
Equity Plans:

Effective June 3, 2008, Chembio’s stockholders voted to approve the 2008 Stock Incentive Plan (the “SIP”), with 625,000 shares of common stock available to be issued. At the Annual Stockholder Meeting on September 22, 2011, Chembio’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 of Chembio (the “Board”) 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 (collectively, “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 June 30, 2020, there were 694,000 options expired, forfeited or exercised, and at June 30, 2020, 56,000 options were outstanding. No Equity Award Units are available to be issued under the SIP.

Effective June 19, 2014, Chembio’s stockholders voted to approve the 2014 Stock Incentive Plan (the “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 June 30, 2020, there were 432,502 Equity Award Units expired, forfeited or exercised. At June 30, 2020, 346,437 Equity Award Units were outstanding, and 21,061 Equity Award Units remained available to be issued under the SIP14.

Effective June 18, 2019, Chembio’s stockholders voted to approve the 2019 Omnibus Incentive Plan (the “2019 Plan”), with 2,400,000 shares of common stock available to be issued. In addition, shares of common stock underlying any outstanding award granted under the 2019 Plan that, following the effective date of the 2019 Plan, expire, or are terminated, surrendered or forfeited for any reason without issuance of such shares, shall be available for the grant of new awards under the 2019 Plan. Under the terms of the 2019 Plan, 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 options, stock appreciation rights, restricted stock, restricted stock units, or other stock-based awards under the 2019 Plan (collectively, “2019 Equity Units”). The 2019 Equity Units become vested at such times and under such conditions as determined by the Board or its Compensation Committee. Cumulatively through June 30, 2020, 436,728 2019 Equity Units has been exercised or forfeited. At June 30, 2020, 1,251,072 2019 Equity Units were outstanding, and 712,200 2019 Equity Units were available to be awarded under the 2019 Plan.

(n)
Stock-Based Compensation:

The fair value of restricted stock and performance/restricted stock unit awards are determined on the date of grant. Stock-based compensation expense for stock options is calculated using the Black-Scholes valuation model. Stock based compensation is reduced for actual forfeitures in the period in which the forfeiture occurs and generally recognized on a straight-line basis over the service period of the grant. During the three and six months ended June 30, 2020, 29,543 and 470,174 shares of restricted stock were forfeited, respectively.
15

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

Stock-based compensation expense (net of recovery) recognized in the condensed consolidated statements of operations was classified as follows:

 
 
For The Three Months Ended
June 30,
   
For The Six Months Ended
June 30,
 
 
 
2020
   
2019
   
2020
   
2019
 
Cost of product sales
 
$
-
   
$
2,300
   
$
6,300
   
$
5,800
 
Research and development expenses
   
90,924
     
56,300
     
154,737
     
116,100
 
Selling, general and administrative expenses
   
293,301
     
318,300
     
610,089