Numerous companies in the United States and internationally
have introduced or announced their intention to introduce new
products, services and technologies that could be used in
substitution for the DPP SARS-CoV-2 Antigen test system. Many of
those competitors are significantly larger, and have substantially
greater financial, engineering and other resources, than us. In
addition, our competitors may have or may develop products or
technologies that currently or in the future will enable them to
produce competitive products with greater capabilities or at lower
costs than ours. If we are unable to compete effectively, we may
fail to meet our strategic objectives, and our business, financial
condition and operating results could be harmed. In addition, the
production of an efficacious vaccine or other treatment for a
disease underlying one of our products may reduce the demand for
relevant diagnostic products. The success or failure, or perceived
success or failure, of other companies may adversely impact our
ability to obtain any future funding, or to ultimately
commercialize the DPP SARS-CoV-2 Antigen test system.
We face risks
related to an ongoing SEC investigation.
The SEC is conducting a non-public, fact-finding investigation
relating to the May 2020 Offering and to the FDA’s revocation in
June 2020 of an EUA for the DPP COVID-19 IgM/IgG system that was
issued in April 2020. We received subpoenas from the SEC in July
2020 and April 2021 seeking the production of documents in
connection with this investigation. In addition, the SEC delivered
subpoenas in April 2021 to five of our employees (including our
three executive officers, who consist of our Chief Executive
Officer and President, our Executive Vice President and Chief
Financial Officer, and our Executive Vice President and Chief
Scientific and Technology Officer). An additional subpoena was
issued in June 2021 to our former Interim Chief Executive Officer
and Executive Chair. Each subpoena requested the production of
documents relating to the same matters as are the subject of the
subpoenas we received.
We are unable to predict what the timing or outcome of the SEC
investigation will be or what, if any, consequences the SEC
investigation may have with respect to our company or the six
individuals mentioned above. The SEC investigation could result in
considerable legal expenses, divert management’s attention from
other business concerns and harm our business. If the SEC were to
determine that legal violations occurred, we could be required to
pay significant civil penalties or other amounts, and remedies or
conditions could be imposed as part of any resolution. We can
provide no assurances as to the outcome of the SEC
investigation.
Stockholder litigation could negatively impact our business,
operating results and financial condition.
We may incur additional costs in connection with the defense
or settlement of existing and any future stockholder litigation,
including four stockholder lawsuits to date that have been brought
against us. See “Part I, Item 3. Legal Proceedings” below for
additional information regarding existing lawsuits. These lawsuits
or other future litigation may adversely affect the ability of our
technical and management personnel, and our directors, to perform
their normal responsibilities. We could incur significant costs in
connection with any such litigation lawsuits, including costs
associated with the indemnification of obligations to our
directors, officers and other employees, as well as to third
parties such as underwriters of our public offerings.
We expect
competition with respect to testing solutions for COVID-19 to
continue to increase and our success will depend on market
acceptance of our products.
We expect competition to continue to increase as other
established and emerging companies enter the market, as customer
requirements evolve, and as new products, services and technologies
are introduced. The entrance of new competitors is being encouraged
by governmental authorities, which are offering funding to support
development of testing solutions for COVID-19. Some of our existing
or new competitors may have strong relationships with current and
potential customers, including governmental authorities that may
help fund those competing entities through grant awards or other
funding. As a result, those competitors may be able to respond more
quickly to new or changing regulatory requirements, new or emerging
technologies, and changes in customer requirements. We do not
currently have, or have an application pending for, an EUA from the
FDA for any of the COVID-19 Diagnostic Test Systems. Even if we
succeed in obtaining approvals for commercialization for one or
more of the COVID-19 Diagnostic Test Systems, those products may
not compete favorably, and we may not be successful in the face of
existing and new products and technologies offered by our existing
competitors or new companies entering our markets. Any failure to
compete effectively could materially and adversely affect our
business, financial condition and operating results.
The COVID‑19 pandemic could continue to affect our suppliers and
employees, and cause disruptions in current and future plans for
operations and expansion.
The COVID‑19 pandemic may continue to directly and indirectly
adversely impact our business, financial condition and operating
results. The extent to which this will continue will depend on
numerous evolving factors that are highly uncertain, rapidly
changing and cannot be predicted with precision or certainty at
this time.
Our business may continue to be disrupted due to the costs incurred
as a result of additional necessary actions and preparedness plans
to help ensure the health and safety of our employees and continued
operations, including enhanced cleaning processes, protocols
designed to implement appropriate social distancing practices,
and/or adoption of additional wage and benefit programs to assist
employees. We may also have difficulty meeting demand for our
products if our employees are affected by COVID‑19, or if we do not
have adequate space to produce our product with social distancing
practices implemented. We also cannot predict the effect of
COVID‑19 pandemic on our supply chain’s reliability and
costs.
In addition, our business and operations, and the operations of our
suppliers, may continue to be adversely affected by the COVID‑19
pandemic. The pandemic, including the related response, could cause
disruptions due to potential suspension or slowdown of activities
at our third‑party suppliers, manufacturing delays, or increased
prices implemented by our suppliers. The COVID-19 pandemic has
disrupted nearly every aspect of the global supply chain, including
the manufacturing or delivery of some of the key supplies used in
our tests. Many suppliers are experiencing shortages of required
personnel as the result of the tight labor market and underlying
raw material commodities. Some suppliers have been unable to
deliver supplies in the quantity we need or at all. As a result,
these suppliers may stop supplying us components and materials,
limit the allocation of supply and equipment to us due to increased
industry demand, or significantly increase their prices at any time
with little or no advance notice. The adverse effect on our
employees or suppliers could have an adverse impact on our
business, results of operations and financial condition.
We operate in a
fragmented, segmented, and rapidly changing industry, which is
highly competitive with respect to numerous factors, and our
success depends on our ability compete effectively with larger
companies, develop new or enhance existing products, as well as
acceptance of DPP over other diagnostic platform
technologies.
Important competitive factors for our products include price,
quality, performance, ease of use, and customer service. A few
large corporations produce a wide variety of diagnostic tests and
other medical devices and equipment. A larger number of mid‑size
companies generally compete only in the diagnostic industry and a
significant number of small companies produce only a few diagnostic
products. As a result, the diagnostic test industry is highly
fragmented and segmented.
More generally, the point‑of‑care diagnostics industry is
undergoing rapid technological changes, with frequent introductions
of new technology‑driven products and services. As new technologies
become introduced into the point‑of‑care diagnostic testing market,
we may be required to commit considerable additional efforts, time
and resources to enhance our current product portfolio or develop
new products. We may not have the available time and resources to
accomplish this, and many of our competitors have substantially
greater financial and other resources to invest in technological
improvements. We may not be able to effectively implement new
technology‑driven products and services or be successful in
marketing these products and services to our customers, which would
materially harm our operating results.
Although we own DPP patents, lateral flow technology is still
a competitive platform to DPP, and lateral flow technology has a
lower cost of manufacture than DPP products. Although the DPP
platform has shown improved sensitivity as compared with
conventional lateral flow platforms in a number of studies, several
factors go into the development and performance attributes of
products. Therefore the ability of our products to successfully
compete will depend on several other factors, including our having
a patented rapid test platform technology that differentiates DPP
from lateral flow as well as from other diagnostic platform
technologies.
There can be no assurance that our DPP patents or our products
incorporating those patents will not be challenged at some time in
the future.
Our competitors
may develop and commercialize more effective or successful
products, and our research, development and commercialization
efforts may not succeed.
We regularly commit substantial resources to research and
development and the commercialization of our new or enhanced
products. The research and development process usually takes a long
time from inception to commercial launch. During each stage of this
process there is a substantial risk that we will not achieve our
goals in a timely fashion, or at all, and we may have to abandon a
new or enhanced product in which we have invested substantial time
and money. We expect to continue to incur significant costs related
to our research and development activities.
Our products require significant development and investment
prior to commercialization, including testing to demonstrate the
products’ performance capabilities, cost‑effectiveness or other
benefits. We must obtain regulatory approval before most products
may be sold and additional development efforts on these products
may be required before the products will be reviewed. However,
regulatory authorities may not approve these products for
commercial sale or may substantially delay or condition such
approval. There may be little or no market for the product and
entry into or development of new markets for our products may
require an investment of substantial resources even if all
applicable regulatory approvals are obtained. Furthermore, we may
spend a significant amount of money on advertising or other
activities and still fail to develop a market for the product. The
success of our efforts may be affected by our ability to
manufacture products in a cost‑effective manner, whether we can
obtain necessary intellectual property rights and protection and
our ability to obtain reimbursement authorizations in the markets
where the product will be sold. Therefore, if we fail to develop
and gain commercial acceptance for our products, or if competitors
develop more effective products or a greater number of successful
new products, customers may decide not to purchase our
products.
Our products
may not be able to compete with new diagnostic products or existing
products developed by well‑established competitors, which would
negatively affect our business.
The diagnostic industry is focused on the testing of
biological specimens in a laboratory or at the point‑of‑care and is
highly competitive and rapidly changing. Important competitive
factors for our products include price, quality, performance, ease
of use, and customer service.
A few large corporations produce a wide variety of diagnostic
tests and other medical devices and equipment. A larger number of
mid‑size companies generally compete only in the diagnostic
industry and a significant number of small companies produce only a
few diagnostic products. As a result, the diagnostic test industry
is highly fragmented and segmented.
Some of our principal competitors may have considerably
greater financial, technical and marketing resources than we do.
Several companies produce diagnostic tests that compete directly
with our testing product line, including Abbott (Alere), OraSure
Technologies and Trinity Biotech. Some competitors offer broader
product lines and may have greater name recognition than we have.
These and other companies have or may have products incorporating
molecular or other advanced technologies that over time could
directly compete with our testing product line. We also face
competition from certain of our distributors or former customers
that have created or may decide to create, their own products to
compete with ours.
As new products incorporating new technologies enter the
market, our products may become obsolete or a competitor’s products
may be more effective or more effectively marketed and sold. If our
competitors’ products take market share from our products through
more effective marketing or competitive pricing, our revenues,
margins and operating results could be adversely affected. In
addition, our revenues and operating results could be negatively
impacted if some of our customers internally develop or acquire
their own sample collection devices and use those devices in place
of our products in order to reduce costs.
Our future
revenues and operating results may be negatively affected by
ongoing consolidation in the healthcare industry.
There has been a significant amount of consolidation in the
healthcare industry. This consolidation has increased the
competition to provide goods and services to customers. In
addition, group purchasing organizations and integrated health
delivery networks have served to concentrate purchasing decisions
for some customers, which has also placed pricing pressure on
medical device suppliers. Due to ongoing consolidation, there could
be additional pressure on the prices of our products.
We may not
successfully manage the transition associated with the appointment
of a new chief financial officer, which could have an adverse
impact on us.
On October 18, 2021, we announced that Neil A. Goldman had
notified the board of directors of his resignation as our Executive
Vice President and Chief Financial Officer. On January 6, 2022, we
announced that we had appointed Lawrence J. Steenvoorden as our
Chief Financial Officer, effective as of January 5, 2022.
The effectiveness of our new Chief Financial Officer, and our
senior leadership team generally, and any further transition as a
result of these changes, could have a significant impact on our
results of operations. Management transition is often difficult and
inherently causes some loss of institutional knowledge, which could
negatively affect our results of operations and financial
condition. Our ability to execute our business strategies may be
adversely affected by the uncertainty associated with these
transitions.
Our continued
growth depends on retaining our current key employees and
attracting additional qualified personnel, and we may not be able
to do so.
Our success depends to a large extent upon the skills and
experience of our executive officers, sales, marketing, operations
and scientific staff. We may not be able to attract or retain
qualified employees due to the intense competition for qualified
personnel among medical products businesses and academic and other
research institutions, as well as to geographic considerations, our
ability to offer competitive compensation and benefits, and other
reasons.
If we are not able to attract and retain the necessary
qualified personnel to accomplish our business objectives, we may
experience constraints that will adversely affect our ability to
effectively manufacture, sell and market our products to meet the
demands of our customers and strategic partners in a timely
fashion, or to support internal research and development
programs.
We have entered into employment contracts with our Chief
Executive Officer, Richard Eberly, our Chief Science &
Technology Officer, Javan Esfandiari, and our Chief Financial
Officer, Lawrence J. Steenvoorden. Due to the specific knowledge
and experience of these executives regarding the industry,
technology and market generally and to our company specifically,
the loss of the services of any one of these executives could have
a material adverse effect on us. We have not obtained a key man
insurance policy on any officers other than Messrs. Eberly and
Esfandiari.
Third‑party
reimbursement policies and potential cost constraints could
negatively affect our business.
The potential end‑users of our products include hospitals,
physicians and other healthcare providers. If these end‑users do
not receive adequate reimbursement for the cost of our products
from their patients’ healthcare insurers or payors, the use of our
products could be negatively impacted. Furthermore, the net sales
of our products could also be adversely affected by changes in
reimbursement policies of government or private healthcare
payors.
Hospitals, physicians and other healthcare providers who
purchase diagnostic products in the United States generally rely on
third‑party payors, such as private health insurance plans,
Medicare and Medicaid, to reimburse all or part of the cost of the
product. Due to the overall escalating cost of medical products and
services, especially in light of the COVID‑19 outbreak and its
straining of healthcare systems across the globe, there is
increased pressure on the healthcare industry, both foreign and
domestic, to reduce the cost of products and services. Given the
efforts to control and reduce healthcare costs in the United
States, available levels of reimbursement may change for our
existing products or products under development. Third‑party
reimbursement and coverage may not be available or adequate in
either the United States or international markets, current
reimbursement amounts may be decreased in the future and future
legislation, and regulation or reimbursement policies of
third‑party payors, may reduce the demand for our products or our
ability to sell our products on a profitable basis.
To the extent
that we are unable to collect our outstanding accounts receivable,
our operating results could be materially harmed.
There may be circumstances and timing that require us to
accept payment terms, including delayed payment terms, from
distributors or customers, which, if not satisfied, could cause
financial losses.
We generally accept payment terms which require us to ship
product before the contract price has been paid fully, and there
also are circumstances pursuant to which we may accept further
delayed payment terms pursuant to which we may continue to deliver
product. To the extent that these circumstances result in
significant accounts receivables and those accounts receivables are
not paid on a timely basis, or are not paid at all, especially if
concentrated in one or two customers, we could suffer financial
losses.
We believe our success depends in part on the continued funding of,
and our ability to participate in, large testing programs in the
U.S. and worldwide, the funding of which may be reduced or
discontinued or otherwise be unavailable to us.
We believe it to be in our best interests to meaningfully
participate in large testing programs. Moreover many of these
programs are funded by governments and other donors, and there can
be no assurance that funding will not be reduced or completely
discontinued. Participation in these programs also requires
alignment and engagement with the many other participants in these
programs, including the World Health Organization, or WHO, the U.S.
Centers for Disease Control and Prevention, the U.S. Agency for
International Development, foreign governments and their agencies,
non‑governmental organizations, and HIV service organizations. If
we are unsuccessful in our efforts to participate in these
programs, our operating results could be materially harmed.
Developing
testing guidelines could negatively affect sales of our
products.
Government agencies may issue diagnostic testing guidelines or
recommendations, which can alter the usage of our HIV testing
products. New laws or guidelines, or changes to existing laws or
guidelines, and the manner in which these new or changed laws and
guidelines are interpreted and applied, could impact the degree to
which our testing products are used. These developments could
affect the frequency of testing, the number of people tested and
whether the testing products are used broadly for screening large
populations or in a more limited capacity. These factors could in
turn affect the level of sales of our products and our results of
operations.
Some of our
programs are supported by government grant awards, and our
inability to obtain additional grant awards in the future or to
derive all of the funding potentially available under those awards
could delay our development and introduction of products.
We have received funding under grant award programs funded by
governmental agencies such as BARDA. To fund a portion of our
future research and development programs, we may apply for
additional grant funding from these or similar governmental
agencies. Funding by these governmental agencies may, however, be
significantly reduced or eliminated in the future for a number of
reasons. For example, some programs are subject to a yearly
appropriations process in Congress. We may not receive full funding
under current or future grants because of budgeting constraints of
the agency administering the program or unsatisfactory progress on
the study being funded.
In addition, some or all of the funding available under grant
awards may be conditioned upon our successfully meeting specified
milestones or other conditions, and there can be no assurance that
those milestones or conditions will be met. For example, in
December 2020 we were awarded the Second Grant pursuant to a
contract from BARDA that included funding milestones related to our
development and pursuit of an EUA for a DPP Respiratory Antigen
Panel and our submission for 510(k) clearance from the FDA for the
DPP SARS CoV 2 Antigen System.
There can be no assurance that we will receive any future
grant awards from any government agencies or that, if a grant award
is obtained, we will receive the full amount potentially available
under the grant award. Our inability to obtain future grant awards,
or to earn the full amount available under those awards, could
delay the development of our product candidates and the
introduction of new products.
We could be exposed to liability if we
experience security breaches or other disruptions, which could harm
our reputation and business.
We may be subject to cyber‑attacks whereby computer hackers
may attempt to access our computer systems or our third-party IT
service providers’ systems and, if successful, misappropriate
personal or confidential information. In addition, a contractor or
other third party with whom we do business may attempt to
circumvent our security measures or obtain such information, and
may purposefully or inadvertently cause a breach involving
sensitive information. We will continue to evaluate and implement
additional protective measures to reduce the risk and detect cyber
incidents, but cyber‑attacks are becoming more sophisticated and
frequent and the techniques used in such attacks change rapidly.
Even though we take cyber‑security measures that are continuously
reviewed and updated, our information technology networks and
infrastructure may still be vulnerable due to sophisticated attacks
by hackers or breaches.
Even the most well protected IT networks, systems, and
facilities remain potentially vulnerable because the techniques
used in security breaches are continually evolving and generally
are not recognized until launched against a target and, in fact,
may not be detected. Any such compromise of our or our third
party’s IT service providers’ data security and access, public
disclosure, or loss of personal or confidential business
information, could result in legal claims proceedings, liability
under laws to protect, privacy of personal information, and
regulatory penalties, disrupt our operations, require significant
management attention and resources to remedy any damages that
result, damage our reputation and customers willingness to transact
business with us, any of which could adversely affect our
business.
Our ability to
efficiently operate our business is reliant on information
technology, and any material failure, inadequacy, interruption or
security breach of that technology could harm our business.
We rely heavily on complex information technology systems
across our operations and on the internet, including for management
of inventory, invoices, purchase orders, shipping, interactions
with our third‑party logistics providers, revenue and expense
accounting, consumer call support, and various other processes and
transactions. Our ability to effectively manage our business,
coordinate the production, distribution and sale of our products,
respond to customer inquiries, and ensure the timely and accurate
recording and disclosure of financial information depends
significantly on the reliability and capacity of these systems and
the internet.
If any of the foregoing systems fails to operate effectively,
problems with transitioning to upgraded or replacement systems, or
disruptions in the operation of the internet, could cause delays in
product sales and reduced efficiency of our operations. Significant
expenditures could be required to fix any such problem.
If there is an
increase in demand for our products, it could require us to expend
considerable resources or harm our customer relationships if we are
unable to meet that demand.
If there are significant or unexpected increases in the demand
for our products, we may not be able to meet that demand without
expending additional capital resources. This would increase our
capital costs, which could negatively affect our earnings and
liquidity in the short term. In addition, new manufacturing
equipment or facilities may require FDA, WHO, and other regulatory
approvals before they can be used to manufacture our products. To
the extent we are unable to obtain or are delayed in obtaining such
approvals, our ability to meet the demand for our products could be
adversely affected. Furthermore, our suppliers may be unable or
unwilling to expend the necessary capital resources or otherwise
expand their capacity, which could negatively affect our
business.
Our business could be negatively affected if we or our
suppliers are unable to develop necessary manufacturing
capabilities in a timely manner. If we fail to increase production
volumes in a cost effective manner or if we experience lower than
anticipated yields or production problems as a result of changes
that we or our suppliers make in our manufacturing processes to
meet increased demand, we could experience shipment delays or
interruptions and increased manufacturing costs, which could also
have a material adverse effect on our revenues and
profitability.
If there are unexpected increases in demand for our products,
we may be required to obtain additional raw materials in order to
manufacture products to meet the increase in demand. However, some
raw materials require significant ordering lead time and some are
currently obtained from a sole supplier or a limited group of
suppliers. It is also possible that one or more of our suppliers
may become unwilling or unable to deliver materials to us. Any
shortfall in our supply of raw materials and components, or our
inability to quickly and cost‑effectively obtain alternative
sources for this supply, could have a material adverse effect on
our ability to meet increased demand for our products. This could
negatively affect our total revenues or cost of sales and related
profits.
If we are unable to meet customer demand for our products, it
could also harm our relationships with our customers and impair our
reputation within the industry. This, in turn, could have a
material adverse effect on our business.
Risks Related to Our
Products
Industry
adoption of alternative technology to our COVID-19 Diagnostic Test
Systems could negatively impact our ability to compete
successfully.
Of the 263 manufacturers and commercial laboratories to
receive an EUA for COVID-19 diagnostics as of December 31, 2021, 66
were for serology tests, 200 were for molecular tests, and 14 were
for antigen tests. Customers or the industry as a whole could adopt
alternative technologies for testing, including molecular point of
care testing, which could result in lower demand for our antigen
test. Various advances in the treatment and monitoring of patients
could cause lower demand for the COVID-19 Diagnostic Test Systems,
including our revised DPP SARS CoV 2 Antigen System or for antigen
testing for COVID-19 as a whole.
COVID-19 is
prone to genetic mutations that may impact the ability of the
COVID-19 Diagnostic Test Systems to adequately detect COVID-19,
SARS-CoV-2 antigens and antibodies, and could adversely affect
demand for the COVID-19 Diagnostic Test Systems and harm our
competitive position.
False test results are a risk with all laboratory tests,
including COVID-19 diagnostic tests. False results can occur in the
presence or absence of a mutation in the COVID-19 virus. Multiple
variations of the virus that causes COVID-19 are circulating
globally and within the United States, including variants of
concern initially identified in California, Brazil, South Africa
and the United Kingdom. In the presence of a mutation in the virus,
false results can occur if a mutation occurs in the region of the
virus that the test is designed to assess. False results may occur
with the COVID-19 Diagnostic Test Systems in the presence or
absence of one or more COVID-19 mutations. If false negatives occur
with the COVID-19 Diagnostic Test Systems, it will may reduce
customer confidence in the accuracy of the COVID-19 Diagnostic Test
Systems and harm our competitive position.
For our
business to succeed in the future, our current and future products
must receive market acceptance.
Market acceptance and the timing of such acceptance, of our
new products or technologies is necessary for our future success.
To achieve market acceptance, we and our distributors will likely
be required to undertake substantial efforts and spend significant
funds to inform every one of the existence and perceived benefits
of our products. We also may require government funding for the
purchase of our products to help create market acceptance and
expand the use of our products.
It may be difficult evaluate the market reaction to our
products and our marketing efforts for new products may not be
successful. The government funding we receive may be limited for
new products. As such, there can be no assurance that any products
will obtain significant market acceptance and fill the market need
that is perceived to exist on a timely basis, or at all.
We may not have
sufficient resources to effectively introduce and market our
products, which could materially harm our operating results.
Introducing and achieving market acceptance for our new
products will require substantial marketing efforts and will
require us and/or our contract partners, sales agents, and/or
distributors to make significant expenditures of time and money. In
some instances we will be significantly or totally reliant on the
marketing efforts and expenditures of our contract partners, sales
agents, and distributors. If they do not have or commit the
expertise and resources to effectively market the products that we
manufacture, our operating results will be materially harmed.
New
developments in health treatments and non‑diagnostic products may
reduce or eliminate the demand for our products.
The development and commercialization of products outside of
the diagnostics industry could adversely affect sales of our
products. For example, the development of a safe and effective
vaccine to COVID-19 or HIV or treatments for other diseases or
conditions that our products are designed to detect, could reduce
or eventually eliminate the demand for our HIV or other diagnostic
products and result in a loss of revenues.
Our future
success will depend on our ability to cost-effectively increase
manufacturing production capacity through the implementation of
additional customized manufacturing automation equipment.
If we successfully commercialize the COVID-19 Diagnostic Test
Systems or other new products, one of our key challenges will be to
increase our production capacity to meet sales demand while
maintaining product quality and reducing production costs. Our
primary strategy to cost-effectively increase product capacity has
been to implement customized automation equipment, and we have
entered into agreements to acquire additional customized automation
equipment. The equipment we order may not be delivered in a timely
manner, and, once delivered, the equipment may require significant
time and effort in order to operate in the manner required to
produce high quality products. We experienced significant
unexpected delays before our current automation equipment operated
in the manner for which it was designed. The investments we make in
this equipment may not yield the anticipated labor and material
efficiencies. If we are not successful in introducing COVID-19
Diagnostic Test Systems or other new products in accordance with
our operating plans, we do not have the right to terminate the
existing purchase orders for additional automation equipment and we
may have excess capacity for a period of time. Our business,
financial condition and results of operations could be harmed if we
are unable to timely obtain automation equipment that meets our
requirements or if there are significant increases in the costs of
equipment.
Customer
concentration creates risks for our business.
A significant portion of our revenues each year comes from a
few large customers. Bio-Manguinhos constituted 51% of our total
revenues in 2021 and 25% of our total revenues in 2020. We had
another customer that accounted for 10% of our total revenues in
2021, and a third customer that accounted for 12% of our revenue in
2020. To the extent that Bio-Manguinhos or any other large customer
fails to meet its purchase commitments, changes its ordering
patterns or business strategy, or otherwise reduces its purchases
or stops purchasing our products, or if we experience difficulty in
meeting the demand by these customers for our products, our
revenues and results of operations could be adversely
affected.
Sales cycles
for our products can be lengthy, which can cause variability and
unpredictability in our business.
Some of our products may require lengthy and unpredictable
sales cycles, which makes it more difficult to accurately forecast
revenues in a given period and may cause revenues and operating
results to vary from period to period. Our products may involve
sales to large public and private institutions which may require
many levels of approval and may be dependent on economic or
political conditions and the availability of grant awards or other
funding from government or public health agencies which can vary
from period to period. There can be no assurance that purchases or
funding from these agencies will occur or continue, especially if
current negative economic conditions continue or intensify. As a
result, we may expend considerable resources on unsuccessful sales
efforts or we may not be able to complete transactions at all or on
a schedule and in an amount consistent with our objectives.
We may face
product liability claims for injuries.
The testing, manufacturing and marketing of medical diagnostic
products involves an inherent risk of product liability claims. If
we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to
limit or cease sales of our products. We cannot be sure that we
will not incur liabilities in excess of the policy limits of our
existing product liability insurance coverage or that we will be
able to continue to obtain adequate product liability insurance
coverage in the future at an acceptable cost, or at all. In
addition, a defect in the design or manufacture of our products
could have a material adverse effect on our reputation in the
industry and subject us to claims of liability for injury and
otherwise. Any substantial underinsured loss resulting from such a
claim could have a material adverse effect on our profitability,
and the damage to our reputation in the industry could have a
material adverse effect on our business.
Our customers
may not adopt rapid point‑of‑care diagnostic testing.
Rapid point‑of‑care tests are beneficial because, among other
things, they can be administered by healthcare providers in their
own facilities or used by consumers at home without sending samples
to central laboratories. But currently the majority of diagnostic
tests used by physicians and other healthcare providers in the U.S.
are provided by clinical reference laboratories and hospital‑based
laboratories. In some international markets, such as Europe,
diagnostic testing is performed primarily by centralized
laboratories. Future sales of our products will depend, in part, on
our ability to expand market acceptance of rapid point‑of‑care
testing and successfully compete against laboratory testing methods
and products. However, we expect that clinical reference and other
hospital‑based laboratories will continue to compete vigorously
against our rapid point‑of‑care products. Even if we can
demonstrate that our products are more cost effective, save time,
or have better performance or other benefits, physicians, other
healthcare providers and consumers may resist changing to rapid
point‑of‑care tests and instead may choose to obtain diagnostic
results through laboratory tests. If we fail to achieve and expand
market acceptance of our rapid point‑of‑care diagnostic tests with
customers, it would have a negative effect on our future sales
growth.
If our products
do not perform properly, it may affect our revenues, stock price
and reputation.
Our products may not perform as expected. For example, a
defect in one of our diagnostic products or a failure by a customer
to follow proper testing procedures may cause the product to report
inaccurate information. Identifying the root cause of a product
performance or quality issue can be difficult and time
consuming.
If our products do not to perform in accordance with the
applicable label claims or otherwise in accordance with the
expectations or needs of our customers, customers may switch to a
competing product or otherwise stop using our products, and our
revenues could be negatively affected. If this occurs, we may be
required to implement holds or product recalls and incur warranty
obligations. Furthermore, the poor performance by one or more of
our products could have an adverse effect on our reputation, our
continuing ability to sell products and the price of our common
stock.
Financial, Economic and Financing
Risks
Because of our
liquidity limitations, we have concluded there is a substantial
doubt about our ability to continue as a going concern and we may
require additional capital to fund our operations, which capital
may not be available to us on acceptable terms or at all.
As described under “Part I, Item 1. Business─Overview”, “Part II,
Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations-Substantial Doubt as to Going Concern
Status” and “─Liquidity and Capital Resources”, management has
determined we could not be certain that our plans and initiatives
to increase our total revenues and improve our liquidity position
would be effectively implemented within one year after the filing
date of this report, when the consolidated financial statements
accompanying this report, or the Accompanying Financial Statements,
are being issued. Without giving effect to the prospect of raising
additional capital pursuant to our at-the-market offerings under
the ATM Agreement, increasing product revenue in the near future or
executing other mitigating plans, many of which are beyond our
control, it is unlikely that we will be able to generate sufficient
cash flows to meet our required financial obligations, including
our debt service and other obligations due to third parties. The
existence of these conditions raises substantial doubt about our
ability to continue as a going concern for the twelve-month period
following the filing date of this report, when the Accompanying
Financial Statements are being issued.
Our diagnostic test products require ongoing funding to
continue our current development and operational plans, and we have
a history of net losses. We intend to continue to expend
substantial resources in the short term in connection with the July
Purchase Orders (see “Part II, Item 7. Management’s Discussion and
Analysis of Financial Condition”), but we may encounter challenges
in fulfilling our obligations, and therefore receiving revenue,
under those purchase orders. See “─Because of our liquidity and
operational limitations, including the availability of staffing and
supply chain resources that are necessary but outside of our
control, we will not be able to timely fulfill all of the
requirements of the July Purchase Order from Bio‑Manguinhos and it
is difficult to reliably estimate the extent to which we will be
able to timely meet those requirements” below. We will also incur
costs associated with research and development activity, corporate
administration, business development, debt service, marketing and
selling of our products, and litigation. In addition, other
unanticipated costs may arise.
As of December 31, 2021, we had outstanding indebtedness of
$20.0 million under the Credit Agreement. We may face further
liquidity challenges if we are unable to meet obligations set forth
in the Credit Agreement, including a financial covenant requiring
that we achieve specified minimum total revenue amounts measured as
of the end of each quarter. A breach of the minimum total revenue
covenant or any other covenant in the Credit Agreement would result
in a default under the Credit Agreement, which could enable the
Lender to declare all amounts outstanding thereunder, together with
accrued interest, to be immediately due and payable. We cannot
assure you that, in such an event, we would have sufficient assets
to pay amounts due under the Credit Agreement. See “─The failure to
comply with the terms of the Credit Agreement could result in a
default under its terms and, if uncured, could result in action
against our pledged assets and dilution of our stockholders”
below.
As a result, we may need to raise capital in one or more debt
or equity offerings to fund our operations and obligations. There
can be no assurance, however, that we will be successful in raising
the necessary capital or that any such offering will be available
to us on terms acceptable to us, or at all. If we are unable to
raise additional capital that may be needed on terms in sufficient
amounts or on terms acceptable to us, it could have a material
adverse effect on our company. If we are unable to raise additional
capital in sufficient amounts or on terms acceptable to us, we may
have to significantly delay, scale back or discontinue our
deliveries under our outstanding customer purchase orders or the
development or commercialization of one or more of our products or
one or more of our other research and development initiatives. The
outbreak of the COVID-19 pandemic has significantly disrupted world
financial markets, negatively impacted U.S. market conditions and
may reduce opportunities for us to seek out additional funding. A
decline in the market price of our common stock, whether or not
coupled with the suspension of trading of our common stock on the
Nasdaq Capital Market, could make it more difficult for us to sell
equity or equity-related securities in the future at a time and
price that we deem appropriate, or at all.
Continuing doubt about our ability to continue as a going
concern may materially and adversely affect the price of our common
stock, and it may be more difficult for us to obtain financing. Any
uncertainty about our ability to continue as a going concern may
also adversely affect our relationships with current and future
employees, suppliers, vendors, customers, grantors, creditors,
regulators and investors, who may become concerned about our
ability to meet our ongoing financial obligations. There is risk
that, among other things:
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third parties lose confidence in
our ability to continue to operate in the ordinary course, which
could impact our ability to execute on our business strategy;
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it may become more difficult for
us to attract, retain or replace employees;
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employees could be distracted
from performance of their duties;
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we could lose some or a
significant portion of our liquidity, either due to stricter credit
terms from vendors, or, in the event we undertake a Chapter 11
proceeding and conclude that we need to procure
debtor-in-possession financing, an inability to obtain any needed
debtor-in-possession financing or to provide adequate protection to
certain secured lenders to permit us to access some or all of our
cash; and
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our vendors and service providers
could seek to renegotiate the terms of our arrangements, terminate
their relationships with us or require financial assurances from
us.
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The Accompanying Financial Statements have been prepared
assuming we will continue as a going concern, which contemplates
continuity of operations, realization of assets and the
satisfaction of liabilities in the normal course of business for
the twelve-month period following the date of this report. As such,
the Accompanying Financial Statements do not include any
adjustments relating to the recoverability and classification of
assets and their carrying amounts, or the amount and classification
of liabilities that may result should we be unable to continue as a
going concern.
Because of our liquidity and operational limitations, including the
availability of staffing and supply chain resources that are
necessary but outside of our control, we may not be able to timely
fulfill all of the requirements of the July Purchase Order from
Bio-Manguinhos and it is difficult to reliably estimate the extent
to which we will be able to timely meet those requirements.
In July 2021 we received the July Purchase Orders, which we
had been pursuing for an extended period of time. See “Part II,
Item 7. Management’s Discussion and Analysis of Financial Condition
below. Our delivery of the full number of tests covered by each of
the July Purchase Orders may be affected by limitations of our
supply chain, staffing and liquidity, including matters that are
outside our control. We have established internal plans designed to
maximize the number of tests we can deliver timely, or at all,
pursuant to the July Purchase Orders, and we expect to continue to
revise those plans as we obtain new information. The number of
uncertainties related to third parties - including the availability
of required personnel, raw materials and other resources -
currently preclude us, however, from reliably estimating the extent
to which we will be able to fulfill the July Purchase Orders on
time and at an acceptable cost, or at all. Our ability to generate
revenue from the July Purchase Orders, and the margins we can
realize from that revenue, will depend on the availability and cost
of human, material and other resources required to build and
deliver tests in accordance with the July Purchase Orders.
In anticipation of receipt of significant purchase orders in
2021, during the first half of 2021 we continued to invest in
automating our test manufacturing processes, all of which are now
based in the United States, by, among other actions, validating and
implementing automated lines to expand our manufacturing
capabilities. We did not know, however, the number or mix of tests
for which purchase orders might be received, and we now need to
configure our automated manufacturing lines for the most efficient
use feasible, subject to numerous staffing and other constraints,
in producing DPP SARS-CoV-2 Antigen tests and HIV 1/2 STAT-PAK
Assays contemplated by the July Purchase Orders. The number of
tests to be delivered pursuant to the July Purchase Orders
significantly exceeds the capacity of our automated manufacturing
lines. We have neither the time nor the resources to increase our
automated manufacturing capacity meaningfully during the delivery
periods contemplated by the July Purchase Orders.
We therefore are relying upon manual assembly processes to
produce a significant portion of the tests deliverable under the
July Purchase Orders and other customer orders, which require that
we successfully recruit, hire and train a significant number of
personnel for employment at our Long Island, New York facilities.
Identifying, hiring and retaining assembly line, formulations,
production, warehouse, quality control and other personnel for our
Long Island facilities at acceptable compensation levels has been
challenging in the past, and those circumstances have been
exacerbated by the continuing effects of the COVID-19 pandemic,
which may discourage potential employees from returning to a
physical worksite at compensation levels that are acceptable to us,
or at all. Upon receiving the July Purchase Orders, we launched a
broad campaign to recruit and retain manufacturing and other
personnel and, more recently, we temporarily increased pay for
manufacturing personnel. Our recruiting efforts have not, however,
proven sufficient to overcome the tight labor market that has been
impacting many U.S. companies, including employers on Long Island,
and we have not been able to hire the number of manufacturing
personnel required to meet our internal plans for delivery of all
of the tests contemplated by the July Purchase Orders. Our
continued inability to identify and hire sufficient numbers of
manufacturing personnel, and to manage turnover of currently
existing and newly hired personnel, would continue to materially
limit our ability to deliver tests under the July Purchase
Orders.
Our delivery of tests covered by the July Purchase Orders has
also been negatively affected by limitations on raw materials,
components and other supplies. We must obtain additional supplies
in order to manufacture tests to meet the requirements of the July
Purchase Orders. Some supplies require significant ordering lead
time, and some are currently obtained from a sole supplier or a
limited group of suppliers. With some of these suppliers, we do not
have long term agreements and instead purchase materials,
components and other supplies through a purchase order process. The
COVID-19 pandemic has disrupted nearly every aspect of the global
supply chain, including the manufacturing or delivery of some of
the key supplies used in our tests. Many suppliers are experiencing
shortages of required personnel as the result of the tight labor
market and underlying raw material commodities. Some suppliers have
been unable to deliver supplies in the quantity we need or at all.
As a result, these suppliers may stop supplying us components and
materials, limit the allocation of supply and equipment to us due
to increased industry demand, or significantly increase their
prices at any time with little or no advance notice. Because of the
foregoing limitations, as exacerbated by the quantities and timing
of supplies required to timely fulfill the July Purchase Orders, we
have been required to seek to identify new sources of supplies to
replace or augment our past sources, which has proven difficult to
do in a reasonable time period and on commercially reasonable
terms, if at all. Moreover, scarcity has caused increases in the
cost of some supplies. Our inability to timely obtain required
supplies has had an adverse effect on our ability to timely fulfill
the July Purchase Orders as well as on our total revenues, cost of
sales, related margin and cash flow.
We have
incurred losses in recent years and we are uncertain about our
future profitability and cash flow.
We incurred an operating loss every year from 2014 through
2021. Under our operating plans, we have made, and plan to continue
to make, significant investments in our production capacity,
including in expanding facilities and automating manufacturing, and
in our sales and marketing, regulatory approval, and research and
development activities. Our ability to achieve profitability and
generate cash flow in the future will depend on our ability to
increase sales of our existing products and to successfully
introduce new and enhanced products into the marketplace, all while
controlling and managing our expenses consistent with our operating
plan.
Because we do not currently have an EUA from the FDA for any of the
COVID-19 Diagnostic Test Systems, we have been unable to increase
our revenues in accordance with our operating plan. As a result,
our operating results have not met our expectations. If we
experience a continuing delay in obtaining, or are unable to
obtain, an EUA for one or more of our COVID-19 Diagnostic Test
Systems, our operating results will be further harmed and we may
not be able to generate the cash flow needed to fund the
investments in our production capacity and other activities. In
such an event, we will be required to implement one or both of the
following:
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We could reduce the level, or
otherwise delay the timing, of the anticipated investments in our
production capacity and other activities, which would likely
curtail or delay the growth in our business contemplated by our
operating plan and could impair or defer our ability to achieve
profitability and generate cash flow. Moreover, if we were to
further reduce the number of our personnel, there can be no
assurance that we would be able, when desirable, to successfully
rehire or rebuild our workforce.
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We could raise additional funds
through public or private financings, strategic relationships, or
other arrangements, to the extent funding would be available to us
on acceptable terms or at all. If we succeed in raising additional
funds through the issuance of equity or convertible securities,
then the issuance could result in substantial dilution to existing
stockholders. Furthermore, the holders of these new securities or
debt may have rights, preferences and privileges senior to those of
the holders of our common stock.
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In such circumstances, we also would need to forego
acquisition opportunities, which could impede our ability to grow
our business.
Our financial
results may fluctuate.
From quarter to quarter and year to year, our operating
results can fluctuate, which could cause our growth or financial
performance to fail to meet the expectations of investors and
securities analysts. Sales to our distributors and other customers
may not meet expectations because of lower than expected customer
demand or other factors, including continued economic volatility
and disruption, reduced governmental funding, and other
circumstances described elsewhere in this report. A variety of
factors could also contribute to the variability of our financial
results, including infrequent, unusual or unexpected changes in
revenues or costs.
Different products provide dissimilar contributions to our
gross product margin. Accordingly, our operating results could also
fluctuate and be negatively affected by the mix of products sold
and the relative prices and gross product margin contribution of
those products. Failure to achieve operating results consistent
with the expectations of investors and securities analysts could
adversely affect our reputation and the price of our common
stock.
The failure to
comply with the terms of the Credit Agreement could result in a
default under its terms and, if uncured, could result in action
against our pledged assets and dilution of our stockholders.
On September 3, 2019, we and certain of our subsidiaries, as
guarantors, entered into the Credit Agreement, under which we
received a $20,000,000 senior secured term loan credit facility
that was drawn in full on September 4, 2019. The Credit Agreement
is secured by a first priority, perfected lien on substantially all
of our property and assets, including our equity interests in our
subsidiaries. See “Part II, Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations─Liquidity
and Capital Resources─Sources of Funds─Credit Agreement.”
The Credit Agreement also contains financial covenants requiring
that we (a) maintain aggregate unrestricted cash of not less than
$3,000,000 at all times, which must be held in one or more accounts
subject to the first priority perfected security interests of the
Lender under the Credit Agreement, and (b) achieve specified
minimum total revenue requirements for the twelve months preceding
each quarter end. The minimum total revenue amounts over the next
year increase from $42.0 million for the twelve months ending March
31, 2022 to $47.4 million for the twelve months ending December 31,
2022 (see note 13 to the Accompanying Financial Statements). These
minimum revenue requirements were developed for purposes of the
Credit Agreement and do not reflect the internal estimates and
plans used by our management and board of directors to establish
operational goals for managing our business. The minimum revenue
requirements for the twelve months ending December 31, 2022 do not,
for example, take into account the challenges we are facing in
ramping up production, including hiring personnel and obtaining
commitments from our supply chain as described above in “─Because
of our liquidity and operational limitations, including the
availability of staffing and supply chain resources that are
necessary but outside of our control, we will not be able to timely
fulfill all of the requirements of the July Purchase Orders and it
is difficult to reliably estimate the extent to which we will be
able to timely meet those requirements.”
In addition, the Credit Agreement contains covenants that
restrict our ability to finance future operations or capital needs
or to engage in other business activities. The Credit Agreement
restricts the ability of our company and the restricted
subsidiaries to:
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incur, assume or guarantee
additional Indebtedness (as defined in the Credit Agreement);
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repurchase capital stock;
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make other restricted payments,
including paying dividends and making investments;
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sell or otherwise dispose of
assets, including capital stock of subsidiaries;
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enter into agreements that
restrict dividends from subsidiaries;
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enter into mergers or
consolidations; and
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enter into transactions with
affiliates.
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A breach of the minimum total revenue covenant or any other
covenant in the Credit Agreement would result in a default under
the Credit Agreement. Upon an event of default under the Credit
Agreement, the Lender could elect to declare all amounts
outstanding thereunder, together with accrued interest, to be
immediately due and payable. In such an event, there can be no
assurance that we would have sufficient liquidity to fund payment
of the amounts that would be due under the Credit Agreement or
that, if such liquidity were not available, we would be successful
in raising additional capital on acceptable terms, or at all, or in
completing any other endeavor to continue to be financially viable
and continue as a going concern. Our inability to raise additional
capital on acceptable terms in the near future, whether for
purposes of funding payments required under the Credit Agreement or
providing additional liquidity needed for our operations, could
have a material adverse effect on our business, prospects, results
of operations, liquidity and financial condition.
Servicing our
debt will require a significant amount of cash. Our ability to
generate sufficient cash to service our debt depends on many
factors beyond our control.
Our ability to make payments on and to refinance our debt, to fund
planned capital expenditures, and to maintain sufficient working
capital depends on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors
that are beyond our control. We cannot assure you that our business
will generate sufficient cash flow from operations or from other
sources in an amount sufficient to enable us to service our debt or
to fund our other liquidity needs. Our operations used $30.9
million in cash in 2021 and $18.9 million in 2020. If our cash flow
and capital resources are insufficient to allow us to make
scheduled payments on our debt, we may need to seek additional
capital or restructure or refinance all or a portion of our debt on
or before the maturity thereof, any of which could have a material
adverse effect on our business, financial condition or results of
operations. We cannot assure you that, if needed, we would be able
to refinance any of our debt on commercially reasonable terms or at
all, or that the terms of that debt will allow any of the above
alternative measures or that these measures would satisfy our
scheduled debt service obligations. If we are unable to generate
sufficient cash flow to repay or refinance our debt on favorable
terms, it could significantly adversely affect our financial
condition. Our ability to restructure or refinance our debt will
depend on the condition of the capital markets and our financial
condition. Any refinancing of our debt could be at higher interest
rates and may require us to comply with more onerous covenants,
which could further restrict our business operations. There can be
no assurance that we will be able to obtain any financing when
needed.
Our ability to
utilize our net operating loss carryforwards and certain other tax
attributes may be limited.
Our ability to utilize our federal net operating loss and tax
credit carryforwards may be limited under Sections 382 and 383 of
the U.S. Internal Revenue Code of 1986, or the Code. The
limitations apply if we experience an “ownership change” (generally
defined as a greater than 50 percentage point change (by value) in
the ownership of our equity by certain stockholders over a rolling
three-year period). Similar provisions of state tax law may also
apply to limit the use of our state net operating loss
carryforwards.
We experienced an ownership change in 2004 and 2006, and we
estimate a portion of our existing federal net operating loss
carryforwards are subject to an annual limitation under Section 382
of the Code. Since our ownership change in 2006, we have not
assessed whether an ownership change has subsequently occurred. If
we have experienced an ownership change at any time since our
ownership change in 2006, we may already be subject to limitations
on our ability to utilize our net operating losses and other tax
attributes generated before such additional ownership change to
offset post-change taxable income. In addition, future changes in
our stock ownership, which may be outside of our control, may
trigger an ownership change and, consequently, the limitations
under Sections 382 and 383 of the Code. As a result, if or when we
earn net taxable income, our ability to use our pre-change net
operating loss carryforwards and other tax attributes to offset
such taxable income may be subject to limitations, which could
adversely affect our future cash flows.
The LIBOR
calculation method may change, and LIBOR is expected to be phased
out after 2021, which may adversely affect our interest expenses
under the Credit Agreement.
Loans under the Credit Agreement bear interest at a rate per
annum equal to the sum of (a) the greater of the one‑month London
Interbank Offered Rate, or LIBOR, and 2.5% plus (b) 8.75%. At any
time at which an event of default has occurred and is continuing,
the interest rate will increase by 4.0%. Accrued interest is
payable on a monthly basis. On July 27, 2017, the U.K. Financial
Conduct Authority announced that it will no longer require banks to
submit rates for the calculation of LIBOR after 2021. On November
30, 2020, ICE Benchmark Administration, or IBA, the administrator
of LIBOR, with the support of the United States Federal Reserve and
the United Kingdom’s Financial Conduct Authority, announced plans
to consult on ceasing publication of USD LIBOR on December 31, 2021
for only the one week and two month USD LIBOR tenors, and on June
30, 2023 for all other USD LIBOR tenors. While this announcement
extended the transition period to June 2023, the United States
Federal Reserve concurrently issued a statement advising banks to
stop new USD LIBOR issuances by the end of 2021. In light of these
recent announcements, the future of LIBOR at this time is uncertain
and any changes in the methods by which LIBOR is determined or
regulatory activity related to LIBOR’s phaseout could cause LIBOR
to perform differently than in the past or cease to exist.
In response to concerns regarding the future of LIBOR, the
Board of Governors of the Federal Reserve System and the Federal
Reserve Bank of New York convened the Alternative Reference Rates
Committee, or ARRC, to identify alternatives to LIBOR. The ARRC has
recommended benchmark replacement procedures to assist issuers in
continued capital market entry while safeguarding against LIBOR’s
discontinuation. The initial steps in the ARRC’s recommended
provision reference variations of the Secured Overnight Financing
Rate, or SOFR. It is not possible to predict the effect of these
changes, other reforms or the establishment of alternative
reference rates in the United States or elsewhere.
Pursuant to the Credit Agreement, if LIBOR becomes unavailable
in the future an alternative benchmark rate will apply. To the
extent our interest rates increase as a result, our interest
expense will increase, in which event we may have difficulties
making interest payments and funding our other fixed costs, and our
available cash flow for general corporate requirements may be
adversely affected.
Our operating
results may be negatively affected by changes in foreign currency
exchange rates.
In the past our exposure to foreign currency exchange rate
risk has not been material. Nevertheless, sales of our products are
subject to currency risks, since changes in the values of foreign
currencies relative to the value of the U.S. dollar can render our
products comparatively more expensive. The fluctuations in the
exchange rate could negatively impact international sales of our
products, as could changes in the general economic
conditions.
The revenues and expenses of our Malaysian, German and
Brazilian subsidiaries are recorded in Malaysian Ringgit, in Euros
and Brazilian Real, respectively. Revenues and expenses denominated
in foreign currencies are translated into U.S. dollars for purposes
of reporting our consolidated financial results, and, consequently,
our operating results reflect exposure to foreign currency exchange
rates, which could increase in the future.
Our foreign subsidiaries’ revenues and expenses and the
translation of their financial results into U.S. dollars may be
negatively affected by fluctuations in the exchange rate. Favorable
movement in exchange rates have benefited us in prior periods.
However, where there are unfavorable currency exchange rate
fluctuations, our consolidated financial statements could be
negatively affected. Furthermore, fluctuations in exchange rates
could affect year‑to‑year comparability of operating results. In
the past, we have not generally entered into hedging instruments to
manage our currency exchange rate risk, but we may need to do so in
the future. However, our attempts to hedge against these risks may
not be successful. If we are unable to successfully hedge against
unfavorable foreign currency exchange rate movements, our
consolidated financial results may be adversely impacted.
We operate in
countries where there is or may be widespread corruption.
We have a policy in place prohibiting our employees,
distributors and agents from engaging in corrupt business
practices, including activities prohibited by the U.S. Foreign
Corrupt Practices Act. Nevertheless, because we work through
independent sales agents and distributors outside the United
States, we do not have control over the day to day activities of
such independent agents and distributors. In addition, in the donor
funded markets in Africa where we sell our products, there is
significant oversight from PEPFAR, the Global Fund, and advisory
committees comprised of technical experts concerning the
development and establishment of national testing protocols. This
is a process that includes an overall assessment of a product that
includes extensive evaluations of product performance, as well as
price and delivery. In Brazil, where we have had numerous product
collaborations with FIOCRUZ, the programs through which our
products may be deployed are all funded by the Brazilian Ministry
of Health. Although FIOCRUZ is affiliated with the Brazilian
Ministry of Health, which is FIOCRUZ’s sole customer, FIOCRUZ is
not the exclusive supplier for the Ministry of Health. However,
because each of our previous collaborations with FIOCRUZ
incorporates a technology transfer aspect, we believe we have a
competitive advantage versus other suppliers to the Brazilian
Ministry of Health, assuming other aspects of our product offering
through FIOCRUZ are otherwise competitive in comparison. We have no
knowledge or reason to know of any activities by our employees,
distributors or sales agents of any actions which could be in
violation of the FCPA, although there can be no assurance of this.
In addition, corruption is a problematic factor in doing business
in Brazil, and, to the extent bribery and similar practices
continue to exist in Brazil, we may be at a competitive
disadvantage in gaining business in Brazil, particularly when
competing with non U.S. companies.
Our subsidiary Chembio Diagnostics Malaysia Sdn. Bhd. is
located in Malaysia. There have been numerous high‑profile
corruption cases, and corruption is one of the most problematic
factors for doing business in Malaysia. While the Malaysian
government has acknowledged the problem, it appears that endemic
corruption is continuing and that market‑based principles are not
applied in cases involving individuals with high‑level political
access. To the extent bribery and similar practices continue to
exist in Malaysia, U.S. companies such as ours, which are subject
to U.S. laws making it illegal to pay bribes to foreign officials,
may make us less competitive in winning business in Malaysia when
competing with non‑U.S. companies.
We base our
estimates or judgments relating to critical accounting policies on
assumptions that can change or prove to be incorrect.
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and
our discussion and analysis of financial condition and results of
operations is based on such statements. The preparation of
financial statements requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. We continuously evaluate
significant estimates used in preparing our financial statements,
including those related: to (1) revenue recognition, including
uncertainties related to variable consideration, milestones and
bill and hold arrangements; (2) stock based compensation; (3)
allowance for uncollectible accounts receivable; (4) inventory
reserves and obsolescence; (5) customer sales returns and
allowances; (6) contingencies; (7) income taxes; (8) goodwill and
intangibles; (8) business acquisition; and (10) research and
development costs.
Our estimates are based on
historical experience and various other assumptions that we believe
to be reasonable, as set forth in our discussion and analysis of
financial condition and results of operations, the results of which
form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these and other estimates
if our assumptions change or if actual circumstances differ from
those in our assumptions. If our operating results fall below the
expectations of securities analysts and investors, the price of our
common Stock may decline.
Risks Related to Intellectual
Property
Our success
depends on our ability to protect our proprietary technology. We
rely on trade secret laws and agreements with our key employees and
other third parties to protect our proprietary rights, and we
cannot be sure that these laws or agreements will adequately
protect our rights.
Our industry places considerable importance on obtaining
patent, trademark and trade secret protection, as well as other
intellectual property rights, for new technologies, products and
processes. Our success depends, in part, on our ability to develop
and maintain a strong intellectual property portfolio or obtain
licenses to patents and technologies, both in the United States and
in other countries. If we cannot continue to develop, obtain and
protect intellectual property rights, our revenues and gross
profits could be adversely affected. Moreover, our current and
future licenses or other rights to patents and other technologies
may not be adequate for the operation of our business.
As appropriate, we intend to file patent applications and
obtain patent protection for our proprietary technology. These
patent applications and patents will cover, as applicable,
compositions of matter for our products, methods of making those
products, methods of using those products and apparatuses relating
to the use or manufacture of those products. However, there have
been changes to the patent laws and proposed changes to the rules
of the U.S. Patent and Trademark Office, which may impact our
ability to protect our technology and enforce our intellectual
property rights. For example, in 2011, the U.S. enacted sweeping
changes to the U.S. patent system under the Leahy‑Smith America
Invents Act, including changes that would transition the U.S. from
a “first‑to‑invent” system to a “first‑to‑file” system and alter
the processes for challenging issued patents. These changes could
increase the uncertainties and costs surrounding the prosecution of
our patent applications and the enforcement or defense of our
issued patents.
We believe that factors such as the technological and creative
skills of our personnel, strategic relationships, new product
developments, frequent product enhancements and name recognition
are essential to our success. All our management personnel are
bound by non‑disclosure agreements. If personnel leave our
employment, in some cases we would be required to protect our
intellectual property rights pursuant to common law theories which
may be less protective than provisions of employment,
non‑competition or non‑disclosure agreements.
We seek to protect our proprietary products under trade secret
and copyright laws, enter into license agreements for various
materials and methods employed in our products, and enter into
strategic relationships for distribution of the products. These
strategies afford only limited protection. We currently have some
foreign patents issued, and we are seeking additional patent
protection in several other foreign jurisdictions for our DPP and
optical technology. We have licenses to reagents (antigens and
peptides) used in several of our products and products under
development. Despite our efforts to protect our proprietary assets,
and respect the intellectual property rights of others, we
participate in several markets where intellectual property rights
protections are of little or no value. This can place our products
and our company at a competitive disadvantage.
Moreover, issued patents remain in effect for a fixed period
and after expiration will not provide protection of the inventions
they cover. Once our patents expire, we may be faced with increased
competition, which could reduce our revenues. We may also not be
able to successfully protect our rights to unpatented trade secrets
and know‑how.
To facilitate development and commercialization of a
proprietary technology base, we may need to obtain additional
licenses to patents or other proprietary rights from other parties.
Obtaining and maintaining these licenses, which may not be
available, may require the payment of up‑front fees and royalties.
In addition, if we are unable to obtain these types of licenses,
our product development and commercialization efforts may be
delayed or precluded.
Any future
intellectual property disputes could require significant resource
and limit or eliminate our ability to sell products or use certain
technologies.
We may be required to expend substantial resources in
asserting or protecting our intellectual property rights, or in
defending suits related to intellectual property rights. We may
seek to enforce our patents or other intellectual property rights
through litigation. Such litigation is prevalent and is expected to
continue. In our business, there are a large number of patents and
patent applications similar to our products, and additional patents
may be issued to third parties relating to our product areas. We,
our customers or our suppliers may be sued for infringement of
patents or misappropriation of other intellectual property rights
with respect to one or more of our products. We may also have
disputes with parties that license patents to us if we believe the
license is no longer needed for our products or the licensed
patents are no longer valid or enforceable.
There are a large number of patents in our industry, and the
claims of these patents appear to overlap in many cases. Therefore
there is a significant amount of uncertainty regarding the extent
of patent protection and infringement. Companies may have pending
patent applications, which are typically confidential for the first
eighteen months following filing that cover technologies we
incorporate in our products. Accordingly, we may be subjected to
substantial damages for past infringement or be required to modify
our products or stop selling them if it is ultimately determined
that our products infringe a third party’s proprietary rights. In
addition, governmental agencies could commence investigations or
criminal proceedings against our employees or us relating to claims
of misuse or misappropriation of another party’s proprietary
rights.
If we are involved in litigation or other legal proceedings
with respect to patents or other intellectual property and
proprietary technology, it could adversely affect our revenues,
results of operations, market share and business because (1) it
could consume a substantial portion of managerial and financial
resources; (2) its outcome would be uncertain and a court may find
that our patents are invalid or unenforceable in response to claims
by another party or that the third‑party patent claims are valid
and infringed by our products; (3) the pendency of any litigation
may in and of itself cause our distributors and customers to reduce
or terminate purchases of our products; (4) a court could award a
preliminary and/or permanent injunction, which would prevent us
from selling our current or future products; and (5) an adverse
outcome could subject us to the loss of the protection of our
patents or to liability in the form of past royalty payments,
penalties, reimbursement of litigation costs and legal fees,
special and punitive damages, or future royalty payments, any of
which could significantly affect our future earnings.
Under certain contracts with third parties, we may indemnify
the other party if our products or activities have actually or
allegedly infringed upon, misappropriated or misused another
party’s proprietary rights. Furthermore, our products may contain
technology provided to us by third parties, and we may be unable to
determine in advance whether such technology infringes the
intellectual property rights of a third party. These other parties
may also not be required or financially able to indemnify us in the
event that an infringement or misappropriation claim is asserted
against us.
There may also be other types of disputes that we become
involved in regarding intellectual property rights, including
state, federal or foreign court litigation, and patent
interference, patent reissue, patent reexamination, or trademark
opposition proceedings in the United States Patent and Trademark
Office. Opposition or revocation proceedings could be instituted in
a foreign patent office as well. These proceedings permit certain
persons to challenge the validity of a patent on the grounds that
it was known from the prior art. The filing of such proceedings, or
the issuance of an adverse decision in such proceedings, could
result in the loss of valuable patent rights that could have a
material adverse effect on our business, financial condition,
results of operations and growth prospects.
Risks Related to Our Reliance on
Third Parties
Our use of
third‑party suppliers, some of which may constitute our sole supply
source, for certain important product components and materials
presents risks that could have negative consequences for our
business.
We purchase certain HIV antigens, a syphilis antigen, COVID-19
antibodies and antigens, the nitrocellulose, and certain other
critical components used in our STAT PAK, STAT VIEW, SURE CHECK and
DPP product lines from a sole or limited number of sources. If for
any reason these suppliers become unwilling or unable to supply our
antigen, nitrocellulose, or other critical component needs, we
believe that alternative supplies could be obtained at a
competitive cost. However, a change in any of the antibodies,
antigens, nitrocellulose or other critical components used in our
products would require additional development work and clinical
trials, as well as approval by the FDA and other regulatory
agencies. In addition, it may be difficult to find such an
alternate supply source in a reasonable time period or on
commercially reasonable terms, if at all. As a result, the
termination or limitation of our relationship with one or more of
these suppliers could require significant time to complete,
increase our costs, and disrupt or discontinue our ability to
manufacture and sell the affected products. In addition,
governmental purchasers or funding programs in a particular country
may require that we purchase key components from suppliers in that
country, which could significantly limit our ability to obtain the
components with the quality, and at the price, we seek.
With some of these suppliers, we do not have long‑term
agreements and instead purchase components and materials through a
purchase order process. As a result, these suppliers may stop
supplying us components and materials, limit the allocation of
supply and equipment to us due to increased industry demand, or
significantly increase their prices at any time with little or no
advance notice. Our reliance on a limited number of suppliers could
also result in delivery problems, reduced control over product
pricing and quality, and our inability to identify and qualify
another supplier in a timely manner.
Moreover, some of these suppliers may experience financial
difficulties that could prevent them from supplying us with
components or subassemblies used in the design and manufacture of
our products. In addition, these suppliers may experience
manufacturing delays or shut downs due to circumstances beyond
their control, such as complications related to COVID‑19, labor
issues, political unrest or natural disasters.
Any supply chain deficiencies could materially and adversely
affect our ability to fulfill customer orders and our results of
operations. The availability of critical components and materials
from sole‑ or limited source suppliers could reduce our control
over pricing, quality and timely delivery, increase our costs,
could disrupt our ability to manufacture and sell, and preclude us
from manufacturing and selling, certain of our products into one or
more markets. Any such event could have a material adverse effect
on our results of operations, cash flow and business.
Our ability to
grow our business will be limited if we fail to maintain existing
distribution channels or develop new distribution channels.
We collaborate with laboratories, diagnostic companies and
distributors in order to sell our products. The sale of our
products depends in large part on our ability to sell products to
these customers and on the marketing and distribution abilities of
the companies with which we collaborate and work with.
Relying on distributors or third parties to market and sell
our products could negatively impact our business for various
reasons, including: (1) we may not be able to find suitable
distributors for our products on satisfactory terms, or at all; (2)
agreements with distributors may prematurely terminate or may
result in litigation between the parties; (3) our distributors or
other customers may not fulfill their contractual obligations and
distribute our products in the manner or at the levels we expect;
(4) our distributors may prioritize their own private label
products that compete with our products; (5) our existing
distributor relationships or contracts may preclude or limit us
from entering into arrangements with other distributors; and (6) we
may not be able to negotiate new or renew existing distribution
agreements on acceptable terms, or at all.
We will try to maintain and expand our business with
distributors and customers and make every effort to require that
they fulfill their contractual obligations, but there can be no
assurance that such companies will do so or that new distribution
channels will be available on satisfactory terms. If we are unable
to do so, our business will be negatively impacted.
Our U.S.
government contracts require compliance with numerous laws and
increase our risk and liability.
We are currently receiving funding from the U.S. government
related to the DPP SARS-CoV-2 Antigen System, the DPP Respiratory
Antigen Panel and DPP Zika, and our growth strategy may target
sales to U.S. government entities. As a result of our U.S.
government funding and potential product sales to the U.S.
government, we must comply with laws and regulations relating to
the award, administration and performance of U.S. government
contracts. U.S. government contracts typically contain a number of
extraordinary provisions that would not typically be found in
commercial contracts and which may create a disadvantage and
additional risks to us as compared to competitors that do not rely
on government contracts. As a U.S. government contractor, we are
subject to increased risks of investigation, criminal prosecution
and other legal actions and liabilities to which purely private
sector companies are not. The results of any such actions could
adversely impact our business and have an adverse effect on our
consolidated financial performance.
A violation of specific laws and regulations could result in
the imposition of fines and penalties or the termination of our
contracts, as well as suspension or debarment. The suspension or
debarment in any particular case may be limited to the facility,
contract or subsidiary involved in the violation or could be
applied to our entire enterprise in certain severe circumstances.
Even a narrow scope suspension or debarment could result in
negative publicity that could adversely affect our ability to renew
contracts and to secure new contracts, both with the U.S.
government and private customers, which could materially and
adversely affect our business and results of operations. Fines and
penalties could be imposed for failing to follow procurement
integrity and bidding rules, employing improper billing practices
or otherwise failing to follow rules relating to billing on
cost‑plus contracts, receiving or paying kickbacks, or filing false
claims, among other potential violations. In addition, we could
suffer serious reputational harm and the value of our common stock
could be negatively affected if allegations of impropriety related
to such contracts are made against us.
Our U.S.
government contracts are subject to future funding and the
government’s choice to exercise options, and may be terminated at
the government’s convenience.
Our contracts with the U.S. government are subject to future
funding and are subject to the right of the government to terminate
the contracts in whole or in part for its convenience. There is
pressure for the U.S. government to reduce spending. The
non‑appropriation of funds or the termination for the government’s
convenience of our contracts could negatively affect our financial
results. If levels of U.S. government expenditures and
authorizations for emerging diseases decrease or shift to programs
in areas where we do not offer products or are not developing
product candidates, or if the U.S. government otherwise declines to
exercise its options under its contracts with us, our business,
revenues and other operating results would suffer.
Risks Related to
Regulations
COVID‑19
diagnostic tests, including the COVID-19 Diagnostic Test Systems,
are subject to changes in CLIA, FDA, ANVISA and other regulatory
requirements.
Our COVID-19 Diagnostic Test Systems are subject to
regulations of the FDA and other regulatory requirements, including
ANVISA, Brazil’s health regulatory agency. The regulations
regarding the manufacture and sale of COVID-19 Diagnostic Test
Systems may be unclear and are subject to recurring change. Newly
promulgated regulations could require changes to COVID-19
Diagnostic Test Systems, necessitate additional procedures, or make
it impractical or impossible for us to market COVID-19 Diagnostic
Test Systems for certain uses, in certain markets, or at all. The
FDA and other regulatory authorities also have the ability to
impose new or additional requirements relating to the COVID-19
Diagnostic Test Systems. The implementation of such changes or new
or additional requirements may result in a substantial additional
costs and could delay or make it more difficult or complicated to
sell our products.
On February 4, 2020, the U.S. Department of Health and Human
Services issued a declaration that the threat to public health
posed by COVID-19 justify the emergency use of unapproved in vitro
diagnostics for the detection or diagnosis of SARS-CoV-2. Under
Section 564 of the Food, Drug, and Cosmetic Act, because the U.S.
Department of Health and Human Services has issued this
declaration, the Commissioner of the FDA is authorized to issue
EUAs to permit certain developers of SARS-CoV-2 diagnostics to
begin offering the tests for detection and diagnosis of COVID-19
without having completed the normally applicable FDA review and
clearance or approval process for marketing authorization. We
received an EUA for the DPP COVID-19 IgM/IgG System on April 14,
2020, which was subsequent revoked by the FDA on June 16, 2020.
Such revocation precludes the sale of DPP COVID-19 IgM/IgG Systems
in the United States unless and until a further regulatory approval
or authorization is obtained. We have not received a subsequent EUA
for any of the COVID-19 Diagnostic Test Systems, and we do not
currently have an application pending for any such EUA. Moreover,
market and regulatory requirements continue to change at a rapid
pace. The FDA has announced, for example, that it intends to update
its EUA templates with additional considerations related to the
impact of genetic variants on test performance as the FDA learns
more about the COVID-19 disease and its knowledge in this area
progresses. The time required to obtain marketing authorizations
and other approvals from regulatory authorities is unpredictable.
The standards that the FDA and its foreign counterparts use when
evaluating clinical trial data can change, and do often change,
during development, which makes it difficult to predict with any
certainty how they will be applied. If we make future submissions
to the FDA, we may also encounter unexpected delays or increased
costs due to new government regulations, including future
legislation or administrative action, or changes in FDA policy
during the period of FDA regulatory review. There can be no
assurance that if we are to make a submission of any future EUA
application, we will be successful in obtaining an EUA that would
permit us to offer and sell any COVID-19 Diagnostic Test System in
the United States.
We are subject
to governmental export controls that could impair our ability to
compete in international markets.
The U.S. and various foreign governments have imposed
controls, export license requirements and restrictions on the
export of certain products and technologies. We must export our
products in compliance with export controls in the United States,
including the Commerce Department’s Export Administration
Regulations and various economic and trade sanctions established by
the Treasury Department’s Office of Foreign Assets Controls. We may
not always be successful in obtaining necessary export licenses,
and our failure to obtain required import or export approval for
our products or limitations on our ability to export or sell our
products imposed by these laws may harm our international and
domestic sales and adversely affect our revenue. Noncompliance with
these laws could have negative consequences, including government
investigations, penalties and reputational harm.
If the U.S. government imposes restrictions on the export of
COVID-19 Diagnostic Test Systems, or any of our other products,
such restrictions could have a material impact on our ability to
sell our products to existing or potential customers outside of the
United States and harm our ability to compete internationally. Any
change in export regulations or legislation, or change in the
countries, persons or technologies targeted by export regulations,
could decrease our ability to export or sell our products outside
the United States or to existing or potential customers with
international operations. Changes in our ability to sell our
products outside the United States could negatively impact our
business prospects and adversely affect our business and results of
operations.
Because we may
not be able to obtain or maintain the necessary regulatory
approvals for some of our products, we may not generate revenues in
the amounts we expect, or in the amounts necessary to continue our
business. Our existing products as well as our manufacturing
facility must meet quality standards and are subject to inspection
by a number of domestic regulatory and other governmental and
non‑governmental agencies.
All of our proposed and existing products are subject to
regulation in the United States by the FDA, the U.S. Department of
Agriculture, and/or other domestic and international governmental,
public health agencies, regulatory bodies or non-governmental
organizations. In particular, we are subject to strict governmental
controls on the development, manufacture, labeling, distribution
and marketing of our products. The process of obtaining required
approvals or clearances varies according to the nature of, and uses
for, a specific product. These processes can involve lengthy and
detailed laboratory testing, human or animal clinical trials,
sampling activities, and other costly, time consuming procedures.
The submission of an application to a regulatory authority does not
guarantee that the authority will grant an approval or clearance
for that product. Each authority may impose its own requirements
and can delay or refuse to grant approval or clearance, even though
a product has been approved in another country.
The time taken to obtain approval or clearance varies
depending on the nature of the application and may result in the
passage of a significant period of time from the date of submission
of the application. As an example, the time required to obtain an
EUA from the FDA for COVID‑19 tests has lengthened markedly over
the past months due to, among other things, application volume.
Delays in the approval or clearance processes increase the risk
that we will not succeed in introducing or selling the subject
products, and we may determine to devote our resources to different
products.
Changes or developments in government regulations, policies or
interpretations could increase our costs and could require us to
undergo additional trials or procedures, or could make it
impractical or impossible for us to market our products for certain
uses, in certain markets, or at all. For example, on June 16, 2020,
the FDA revoked the EUA it had granted for the DPP COVID-19 IgM/IgG
System based in part on performance criteria identified after the
EUA was granted on April 14, 2020. We do not currently have an EUA
from the FDA for any of the COVID-19 Diagnostic Test Systems, and
we do not currently have an application pending for any such EUA.
Moreover, FDA regulations, policies and procedures with respect to
COVID-19 tests may be significantly impacted by the availability of
vaccines for COVID-19 and changes in the FDA’s prioritization
guidance. Similarly, the regulatory pathway to 510(k) clearance by
the FDA for COVID-19 tests is unclear in light of limited FDA
feedback resulting in part from the FDA’s constrained
resources.
Changes in government regulations may adversely affect our
financial condition and results of operations because we may have
to incur additional expenses if we are required to change or
implement new testing, manufacturing and control procedures. If we
are required to devote resources to develop such new procedures, we
may not have sufficient resources to devote to research and
development, marketing, or other activities that are critical to
our business. We are, for example, expending resources to modify
the design of the COVID-19 Diagnostic Test System to achieve
performance targets consistent with the FDA’s performance criteria
issued subsequent to the granting of our original EUA.
We can manufacture and sell our products only if we comply
with regulations and quality standards established by government
agencies such as the FDA and the U.S. Department of Agriculture as
well as by non-governmental organizations such as the International
Organization for Standardization, or ISO, and WHO. We have
implemented a quality control system that is intended to comply
with applicable regulations. Although FDA approval is not required
for the export of our products, there are export regulations
promulgated by the FDA that specifically relate to the export of
our products that require compliance with the FDA’s quality system
requirements, or QSRs, and that also require meeting certain
documentary requirements regarding the approval of the product in
export markets. We also may be subject to import regulations in
connection with international sourcing of components and materials
incorporated in the manufacturing of our products.
If we do not
comply with FDA or other regulatory requirements, we may be
required to suspend production or sale of our products or institute
a recall, which could result in higher costs and a loss of
revenues.
Regulations of the FDA and other federal, state and foreign
regulatory agencies have significant effects on many aspects of our
operations and the operations of our suppliers and distributors,
including packaging, labeling, manufacturing, adverse event
reporting, recalls, distribution, storage, advertising, promotion
and record keeping. We are subject to routine inspection by the FDA
and other agencies to determine compliance with FDA regulatory
requirements, including QSRs, in the United States and other
applicable regulations worldwide, including ISO standards. We
believe that our facilities and procedures are in material
compliance with the FDA requirements and ISO standards, but the
regulations may be unclear and are subject to change, and we cannot
be sure that the FDA or other regulators will agree with our
compliance with these requirements. The FDA and foreign regulatory
agencies may require post marketing testing and surveillance to
monitor the performance of approved or cleared products or impose
conditions on any product clearances or approvals that could
restrict the distribution or commercial applications of those
products. Regulatory agencies may impose restrictions on our or our
distributors’ advertising and promotional activities or preclude
these activities altogether if a noncompliance is believed to
exist. In addition, the subsequent discovery of previously unknown
problems with a product may result in restrictions on the product
or additional regulatory actions, including withdrawal of the
product from the market.
Our inability to comply with the applicable requirements of
the FDA can result in, among other things, 483 notices, warning
letters, administrative or judicially imposed sanctions such as
injunctions, recall or seizure of products, civil penalties,
withdrawal of product registrations, total or partial suspension of
production, refusal to grant premarket clearance for devices, a
determination that a device is not approvable, marketing clearances
or approvals, or criminal prosecution. For example, in February
2020, we received a “not approvable” letter from the FDA with
respect to our premarket approval submission on our DPP HIV
Syphilis multiplex test for commercial use in the United States, in
June 2020 we received notice from the FDA that the EUA for the DPP
COVID-19 IgM/IgG System had been revoked, and in January 2021 we
received notice from the FDA that it was declining to review the
DPP SARS CoV 2 Antigen System based on its updated prioritization
guidance, under which review of the system was not a priority. The
ability of our suppliers to supply critical components or materials
and of our distributors to sell our products could also be
adversely affected if their operations are determined to be out of
compliance. Such actions by the FDA and other regulatory bodies
could adversely affect our revenues, costs and results of
operations.
We must frequently make judgment decisions with respect to
compliance with applicable laws and regulations. If regulators
subsequently disagree with how we have sought to comply with these
regulations, we could be subjected to substantial civil and
criminal penalties, as well as product recall, seizure or
injunction with respect to the sale of our products. Our reputation
could be substantially impaired if we are assessed any civil and
criminal penalties and limit our ability to manufacture and market
our products which could have a material adverse effect on our
business.
Our inability
to respond to changes in regulatory requirements could adversely
affect our business.
We believe that our existing products and procedures are in
material compliance with all applicable FDA regulations, ISO
requirements, and other applicable regulatory requirements, but the
regulations regarding the manufacture and sale of our products and
QSR, ISO and other requirements may be unclear and are subject to
change. Newly promulgated regulations could require changes to our
products, necessitate additional clinical trials or procedures, or
make it impractical or impossible for us to market our products for
certain uses, in certain markets, or at all. The FDA and other
regulatory authorities also have the ability to change the
requirements for obtaining product approval and/or impose new or
additional requirements as part of the approval process. These
changes or new or additional requirements may occur after the
completion of substantial clinical work and other costly
development activities. The implementation of such changes or new
or additional requirements may result in additional clinical trials
and substantial additional costs and could delay or make it more
difficult or complicated to obtain approvals and sell our products.
In addition, the FDA may revoke an Emergency Use Authorization
under which our products are sold, where it is determined that the
underlying health emergency no longer exists or warrants such
authorization. Such revocation would preclude the sale of our
affected products unless and until a further regulatory approval or
authorization is obtained. For example, For example, on June 16,
2020, the FDA revoked the EUA it had granted for the DPP COVID‑19
IgM/IgG System based in part on performance criteria identified
after the Emergency Use Authorization was granted on April 14,
2020, and since that time we expended resources to design the new
COVID-19 Diagnostic Test Systems, including the DPP Respiratory
Antigen Panel. We do not currently have an EUA from the FDA for any
of the COVID-19 Diagnostic Test Systems, and we do not currently
have an application pending for any such EUA We cannot anticipate
or predict the effect, if any, that these types of changes might
have on our business, financial condition or results of
operations.
Demand for our
products may be affected by FDA regulation of laboratory developed
tests.
Regulatory responsibility over instruments, test kits,
reagents and other devices used to perform diagnostic testing by
clinical laboratories is covered by the FDA, including our Micro
Reader analyzer. The FDA has previously taken the position that it
has regulatory authority over laboratory developed tests, or LDTs,
but has exercised enforcement discretion by not regulating most
LDTs performed by high complexity CLIA certified laboratories. LDTs
are tests designed, developed, and performed in house by a
laboratory. These laboratories are subject to CLIA regulation but
such laboratories have previously not been subject to regulation by
the FDA under the agency’s medical device requirements.
The FDA announced that it would begin regulating LDTs, and in
October 2014 the FDA issued proposed guidance on the regulation of
LDTs for public comment. In November 2016, however, the FDA
announced it would not finalize the proposed guidance prior to the
end of the Obama administration. In January 2017 the FDA released a
discussion paper synthesizing public comments on the 2014 draft
guidance documents and outlining a possible approach to regulation
of LDTs. The discussion paper has no legal status and does not
represent a final version of the LDT draft guidance documents. We
cannot predict what policies the Biden administration will adopt
with respect to LDTs. If the FDA increases regulation of LDTs, it
could make it more difficult for laboratories and other customers
to continue offering LDTs that involve molecular testing. This, in
turn, could reduce demand for our products and adversely impact our
revenues.
Disruptions at
the FDA and other government agencies caused by funding shortages
or global health concerns could hinder their ability to hire,
retain or deploy key leadership and other personnel, or otherwise
prevent new or modified products from being developed, cleared,
approved, authorized, or commercialized in a timely manner or at
all, which could negatively impact our business.
The ability of the FDA and other government agencies to review
and clear, approve, or authorize new products can be affected by a
variety of factors, including government budget and funding levels,
statutory, regulatory, and policy changes, the agencies’ ability to
hire and retain key personnel and accept the payment of user fees,
and other events that may otherwise affect the agencies’ ability to
perform routine functions. Average review times at these agencies
have fluctuated in recent years as a result. In addition,
government funding of other government agencies that fund research
and development activities is subject to the political process,
which is inherently fluid and unpredictable. Disruptions at the FDA
and other agencies may also slow the time necessary for medical
devices or modifications to be cleared or approved, medical devices
to be reviewed and/or approved by necessary government agencies,
which would adversely affect our business. For example, over the
last several years, including for 35 days beginning on December 22,
2018, the U.S. government has shut down several times and certain
regulatory agencies, such as the FDA, have had to furlough critical
FDA employees and stop critical activities.
Separately, in response to the global COVID-19 pandemic, on
January 29, 2021, the FDA announced its intention to resume
inspections of manufacturing facilities and products, that would be
deemed “mission-critical.” The FDA’s assessment of whether an
inspection is mission-critical considers many factors related to
the public health benefit of U.S. patients having access to the
product subject to inspection. These factors include, but are not
limited to, whether the products have received breakthrough therapy
designation or regenerative medicine advanced therapy designation,
or are products used to diagnose, treat, or prevent a serious
disease or medical condition for which there is no other
appropriate substitute. Both for-cause and pre-approval inspections
can be deemed mission-critical. When determining whether to conduct
a mission-critical inspection, FDA takes into account concerns
about the safety of its investigators, employees at a site or
facility, and where applicable, clinical trial participants and
other patients at investigator sites. Regulatory authorities
outside the United States may adopt similar restrictions or other
policy measures in response to the COVID-19 pandemic. If a
prolonged government shutdown occurs, or if global health concerns
continue to prevent the FDA or other regulatory authorities from
conducting their regular inspections, reviews or other regulatory
activities, it could significantly impact the ability of the FDA or
other regulatory authorities to timely review and process our
regulatory submissions, which could have a material adverse effect
on our business.
In addition to
FDA requirements, we are subject to numerous other federal, state
and foreign government regulations, compliance with which could
increase our costs and affect our operations.
In addition to the FDA regulations previously described, other
federal, state and foreign laws and regulations may restrict our
ability to sell products in those jurisdictions.
We must comply with numerous laws related to safe working
conditions, environmental protection, disposal of hazardous
substances, fire hazard control, manufacturing practices and labor
or employment practices. Compliance with these laws or any new or
changed laws regulating our business could result in substantial
costs. Due to the number of laws and regulations governing our
industry, and the actions of a number of government agencies that
could affect our operations, it is impossible to reliably predict
the full nature and impact of these laws and regulations. To the
extent the costs and procedures associated with complying with
these laws and requirements are substantial or it is determined
that we do not comply, our business and results of operations could
be adversely affected.
Ongoing changes
in healthcare regulation could negatively affect our revenues,
business and financial condition.
There have been several proposed changes in the United States
at the federal and state level for comprehensive reforms regarding
the payment for, the availability of and reimbursement for
healthcare services. These proposals have ranged from fundamentally
changing federal and state healthcare reimbursement programs,
including providing comprehensive healthcare coverage to the public
under government‑funded programs, to minor modifications to
existing programs. One example is the Patient Protection and
Affordable Care or the Affordable Care Act, the Federal healthcare
reform law enacted in 2010.
Healthcare reform initiatives will continue to be proposed,
and may reduce healthcare related funding in an effort. It is
impossible to predict the ultimate content and timing of any
healthcare reform legislation and its resulting impact on us. If
significant reforms are made to the healthcare system in the United
States, or in other jurisdictions, those reforms may increase our
costs or otherwise negatively effect on our financial condition and
results of operations.
The EU landscape concerning medical devices recently evolved.
On May 25, 2017, the E.U. Medical Devices Regulation entered into
force, which repeals and replaces the Council Directive 93/42/EEC,
or E.U. Medical Devices Directive, and Directive 90/385/EEC, or
AIMDD. Unlike directives, which must be implemented into the
national laws of the EU member states, regulations are directly
applicable (i.e., without the need for adoption of E.U. member
state laws implementing them) in all E.U. member states and are
intended to eliminate current differences in the regulation of
medical devices among E.U. member states. Devices lawfully placed
on the market pursuant to the E.U. Medical Devices Directive or the
AIMDD prior to May 26, 2021 may generally continue to be made
available on the market or put into service until May 26, 2025,
provided that the requirements of the transitional provisions are
fulfilled. In particular, the certificate in question must still be
valid. However, even in this case, manufacturers must comply with a
number of new or reinforced requirements set forth in the E.U.
Medical Devices Regulation with regard to registration of economic
operators and of devices, post-market surveillance, market
surveillance and vigilance requirements.
Subject to the transitional provisions, in order to sell our
products in E.U. member states, our products must comply with the
general safety and performance requirements of the E.U. Medical
Devices Regulation, which repeals and replaces EU Medical Devices
Directive and the AIMDD. Compliance with these requirements is a
prerequisite to be able to affix the CE mark to our products,
without which they cannot be sold or marketed in the EU. To
demonstrate compliance with the general safety and performance
requirements, we must undergo a conformity assessment procedure,
which varies according to the type of medical device and its (risk)
classification. Except for low risk medical devices (Class I),
where the manufacturer can self-assess the conformity of its
products with the general safety and performance requirements
(except for any parts which relate to sterility, metrology or reuse
aspects), a conformity assessment procedure requires the
intervention of a notified body. The notified body would typically
audit and examine the technical file and the quality system for the
manufacture, design and final inspection of our devices. If
satisfied that the relevant product conforms to the relevant
general safety and performance requirements, the notified body
issues a certificate of conformity, which the manufacturer uses as
a basis for its own declaration of conformity. The manufacturer may
then apply the CE mark to the device, which allows the device to be
placed on the market throughout the E.U. If we fail to comply with
applicable laws and regulations, we would be unable to affix the CE
mark to our products, which would prevent us from selling them
within the E.U.
We must inform the notified body that carried out the
conformity assessment of the medical devices that we market or sell
in the E.U. and the EEA of any planned substantial changes to our
quality system or substantial changes to our medical devices that
could affect compliance with the general safety and performance
requirements laid down in Annex I to the E.U. Medical Devices
Regulation or cause a substantial change to the intended use for
which the device has been CE marked. The notified body will then
assess the planned changes and verify whether they affect the
products’ ongoing conformity with the E.U. Medical Devices
Regulation. If the assessment is favorable, the notified body will
issue a new certificate of conformity or an addendum to the
existing certificate attesting compliance with the general safety
and performance requirements and quality system requirements laid
down in the Annexes to the E.U. Medical Devices Regulation.
We may incur
additional costs if we do not comply with privacy, security and
breach notification regulations.
We believe that we are not a covered entity nor a business
associate of a covered entity and are not responsible for complying
with the Health Insurance Portability and Accountability Act of
1996, or HIPAA. Even though we likely are not a covered entity
under HIPAA, we do have in place administrative, technical and
physical safeguards to protect the privacy and security of
consumers’ personal information. We are required to comply with
varying state privacy, security and breach reporting laws. If we
fail to comply with existing or new laws and regulations related to
properly transferring data containing consumers’ personal
information, we could be subject to monetary fines, civil penalties
or criminal sanctions. Also, there are other federal and state laws
that protect the privacy and security of consumers’ personal
information, and we may be subject to enforcement by various
governmental authorities and courts resulting in complex compliance
issues. We could incur damages under state laws pursuant to an
action brought by a private party for the wrongful use or
disclosure of consumers’ personal information.
Failure to
comply with European and U.K. data protection requirements could
increase our costs.
The E.U. adopted a comprehensive overhaul of its data
protection regime from the prior national legislative approach to a
single European Economic Area Privacy Regulation called the General
Data Protection Regulation, or GDPR, which came into effect on May
25, 2018. The E.U. data protection regime extends the scope of the
E.U. data protection law to all foreign companies processing data
of E.U. residents. It imposes a strict data protection compliance
regime with severe penalties of up to the greater of 4% of
worldwide turnover and €20 million and includes new rights such as
the “portability” of personal data. Although the GDPR applies
across the E.U. without a need for local implementing legislation,
as had been the case under the prior data protection regime, local
data protection authorities have the ability to interpret the GDPR,
which has the potential to create inconsistencies on a
country‑by‑country basis. We have evaluated these new requirements
and have implemented a plan to ensure compliance. Complying with
the enhanced obligations imposed by the GDPR may result in
significant costs to our business and require us to amend certain
of our business practices. Further, we have no assurances that
violations will not occur, particularly given the complexity of the
GDPR, as well as the uncertainties that accompany new,
comprehensive legislation. Further, from January 1, 2021, we have
to comply with both the GDPR and the GDPR as incorporated into
United Kingdom national law, the latter regime having the ability
to separately fine up to the greater of £17.5 million or 4% of
global turnover. The relationship between the United Kingdom and
the EU in relation to certain aspects of data protection law
remains unclear, for example around how data can lawfully be
transferred between each jurisdiction, which may expose us to
further compliance risk. The European Commission has adopted an
adequacy decision in favor of the UK, enabling data transfers from
EU member states to the UK without additional safeguards. However,
the UK adequacy decision will automatically expire in June 2025
unless the European Commission re-assesses and renews/ extends that
decision.
If we are not
able to manufacture products in accordance with applicable
requirements, it could adversely affect our business.
Our products must meet detailed specifications, performance
standards and quality requirements. As a result, our products and
the materials used in their manufacture or assembly undergo regular
inspections and quality testing. Factors such as defective
materials or processes, mechanical failures, human errors,
environmental conditions, changes in materials or production
methods, and other events or conditions could cause our products or
the materials used to produce or assemble our products to fail
inspections and quality testing or otherwise not perform in
accordance with our label claims or the expectations of our
customers.
If we are not able to meet the applicable specifications,
performance standards, quality requirements or customer
expectations could adversely affect our ability to manufacture and
sell our products or comply with regulatory requirements. These
events could, in turn, adversely affect our revenues and results of
operations.
Healthcare
fraud and abuse laws could adversely affect our business and
results of operations.
There are various federal and state laws targeting fraud and
abuse in the healthcare industry to which we are subject, including
anti‑kickback laws, laws constraining the sales, false claims laws,
marketing and promotion of medical devices by limiting the kinds of
financial arrangements that manufacturers of these products may
enter into with physicians, hospitals, laboratories and other
potential purchasers of medical devices. There are other laws we
are subject to that require us to report certain transactions
between it and healthcare professionals. Violations of these laws
are punishable by criminal or civil sanctions, including
substantial fines, imprisonment and exclusion from participation in
government healthcare programs. Many of the existing requirements
are new and have not been definitively interpreted by state
authorities or courts, and available guidance is limited. We could
face enforcement action and fines and other penalties, and could
receive adverse publicity, unless and until we are in full
compliance with these laws, all of which could materially harm us.
Furthermore, changes in or evolving interpretations of these laws,
regulations, or administrative or judicial interpretations, may
require us to change our business practices or subject our business
practices to legal challenges, which could have a material adverse
effect on our business, financial condition and results of
operations.
If we expand
our international presence, it may increase our risks and expose
our business to regulatory, cultural or other challenges.
There are several of factors that could adversely affect the
performance of our business and/or cause us to incur substantially
increased costs because of our international presence and sales,
including: (1) uncertainty in the application of foreign laws and
the interpretation of contracts with foreign parties; (2) cultural
and political differences that favor local competitors or make it
difficult to effectively market, sell and gain acceptance of our
products; (3) exchange rates, currency fluctuations, tariffs and
other barriers, extended payment terms and dependence on
international distributors or representatives; (4) trade protection
measures, trade sanctions and import/export licensing requirements;
(5) our inability to obtain or maintain regulatory approvals or
registrations for our products; (6) economic conditions, political
instability, the absence of available funding sources, terrorism,
civil unrest, war and natural disasters in foreign countries; (7)
reduced protection for, or enforcement of, our patents and other
intellectual property rights in foreign countries; (8) our
inability to identify international distributors and negotiate
acceptable terms for distribution agreements; and (9) restrictions
on our ability to repatriate investments and earnings from foreign
operations.
Economic, cultural and political conditions and foreign
regulatory requirements may slow or prevent the manufacture of our
products in countries other than the United States. Interruption of
the supply of our products could reduce revenues or cause us to
incur significant additional expenses in finding an alternative
source of supply. Foreign currency fluctuations and economic
conditions in foreign countries could also increase the costs of
manufacturing our products in foreign countries.
Risks Related to Ownership of Common
Stock
Our common
stock may have limited liquidity, and investors may not be able to
sell as much common stock as they want at prevailing market prices
or at all.
The liquidity of our common stock depends on several factors,
including our financial results and overall market conditions, so
it is not possible to predict whether this level of liquidity will
continue, be sustained, or decrease. Decreased trading volume in
our stock would make it more difficult for investors to sell their
shares in the public market at any given time at prevailing prices.
Our management and larger stockholders exercise significant control
over our company.
Decreased trading volume in our stock would make it more
difficult for investors to sell their shares in the public market
at any given time at prevailing prices. Although there is no
affiliation between our management and our larger stockholders,
they could exercise significant control over our company if they
voted their shares in a similar manner.
The price of
our common stock could continue to be volatile, and existing
stockholders’ investments in our common stock could lose
value.
The price of our common stock has been volatile, subject to
rapid and substantial decreases in stock price, and may be volatile
in the future. By way of example, during the year ended December
31, 2021, our common stock has traded at a low of $1.09 and a high
of $7.97. As a result of this volatility, investors could
experience losses on their investment in our common stock.
The stock market is subject to significant price and volume
fluctuations, and the price of our common stock could fluctuate
widely in response to several factors, including, but not limited
to: our cash flows and cash position; the duration and severity of
the COVID-19 pandemic; our quarterly or annual operating results;
investment recommendations by securities analysts following our
business or our industry; additions or departures of key personnel;
changes in our business, earnings estimates or market perceptions
of our competitors; our failure to achieve operating results
consistent with securities analysts’ projections; changes in
industry, general market or economic conditions; and announcements
of legislative or regulatory change.
Overall, the stock market has experienced price and volume
fluctuations that have affected the market price of our common
stock, as well as the stock of many other similar companies. Such
price fluctuations are generally unrelated to the operating
performance of the specific companies whose stock is
affected.
Since the stock price of our common stock has fluctuated in
the past, has been recently volatile and may be volatile in the
future, investors in our common stock could incur substantial
losses. In the past, following periods of volatility in the market,
securities class-action litigation has often been instituted
against companies. Such litigation, if instituted against us, could
result in substantial costs and diversion of management’s attention
and resources, which could materially and adversely affect our
business, financial condition, results of operations and growth
prospects. We are currently subject to securities class-action
litigation as described in “—Legal Matters—Legal Proceedings”
above. There can be no guarantee that our stock price will remain
at current levels.
Securities of certain companies have recently experienced
significant and extreme volatility in stock price due to short
sellers of shares of common stock, known as a “short squeeze.”
Short squeezes have caused extreme volatility in those companies
and in the market and have led to the price per share of those
companies to trade at a significantly inflated rate that is
disconnected from the underlying value of the company. Sharp rises
in a company’s stock price may force traders in a short position to
buy the stock to avoid even greater losses. Many investors who have
purchased shares in those companies at an inflated rate face the
risk of losing a significant portion of their original investment
as the price per share has declined steadily as interest in those
stocks have abated. There can be no assurance that we will not, in
the future be, a target of a short squeeze, and stockholders may
lose a significant portion or all of their investments if they
purchase our shares at a rate that is significantly disconnected
from our underlying value.
Our stock price
may in the future not meet the minimum bid price for continued
listing on the Nasdaq Capital Market. Our ability to publicly or
privately sell equity securities and the liquidity of our common
stock could be adversely affected if we are delisted from The
Nasdaq Capital Market.
Nasdaq Listing Rule 5450(a)(1), which we refer to as the
Minimum Bid Price Rule, provides that the closing bid price for our
common stock may not be below $1.00 per share for any period of 30
consecutive trading days to maintain our continued listing on The
Nasdaq Capital Market. As of March 1, 2022, the closing bid price
for our common stock was $0.97. Although we are currently in
compliance with the Minimum Bid Price Rule, there can be no
assurance that our common stock will continue to satisfy this rule.
If we were to fail to comply with the Minimum Bid Price Rule in the
future and became subject to delisting, such delisting from Nasdaq
would adversely affect our ability to raise additional financing
through the public or private sale of equity securities, would
significantly affect the ability of investors to trade our
securities and would negatively affect the value and liquidity of
our common stock. Delisting also could have other negative results,
including the potential loss of confidence by employees, the loss
of institutional investor interest and fewer business development
opportunities.
Our common
stock may become the target of a “short squeeze.”
Securities of certain companies have increasingly experienced
significant and extreme volatility in stock price due to short
sellers of shares of common stock, known as a “short squeeze.”
Short squeezes have caused extreme volatility in those companies
and in the market and have led to the price per share of those
companies to trade at a significantly inflated rate that is
disconnected from the underlying value of the company. Sharp rises
in a company’s stock price may force traders in a short position to
buy the stock to avoid even greater losses. Many investors who have
purchased shares in those companies at an inflated rate face the
risk of losing a significant portion of their original investment
as the price per share has declined steadily as interest in those
stocks have abated. There can be no assurance that we will not, in
the future be, a target of a short squeeze, and you may lose a
significant portion or all of your investment if you purchase our
shares at a rate that is significantly disconnected from our
underlying value.
You may
experience future dilution as a result of future equity offerings,
exercises of outstanding options and vesting of options and
restricted and performance stock units.
On July 19, 2021, we entered into the ATM Agreement, pursuant
to which we may sell from time to time, at our option, up to an
aggregate of $60,000,000 of shares of common stock through
Craig-Hallum, as sales agent. As of the filing date of this report,
we have issued and sold pursuant to the ATM Agreement a total of
9,709,328 shares of common stock at a volume-weighted average price
of $4.2011 per share for gross proceeds of $40.8 million and net
proceeds, after giving effect to placement fees and other
transaction costs, of $38.8 million. For additional information
about the at-the-market offerings pursuant to the ATM Agreement,
see “Part II, Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations”.
In order to raise additional capital, we may seek to offer
pursuant to the ATM Agreement additional shares of common stock for
up to $19.2 million in gross proceeds and we may in the future
offer additional shares of our common stock or other securities
convertible into or exchangeable for our common stock. There can be
no assurance that we will be able to sell additional shares in
at-the-market offerings made pursuant to the ATM Agreement, or in
any other offering, at a price per share that is equal to or
greater than the price per share paid by existing stockholders.
Investors purchasing securities in other offerings in the future
could have rights superior to existing stockholders.
As of the close of business on March 1, 2022, our market
capitalization was approximately $29.2 million. Existing
stockholders may experience significant dilution in connection with
our issuance and sale of up to $21.2 million of additional shares
of common stock pursuant to the ATM Agreement. In addition, as of
December 31, 2021, 3,386,393 shares of common stock were reserved
for future issuance under our 2019 Omnibus Incentive Plan,
1,600,372 shares were subject to outstanding options, and 705,325
shares were subject to outstanding restricted and performance stock
units. Stockholders will incur dilution upon vesting of restricted
and performance stock units, and they may incur dilution upon
exercises of stock options.
Management will
have broad discretion as to the use of any net proceeds of the
offering made pursuant to the ATM Agreement, and we may not use
those net proceeds effectively.
Our management will have broad discretion in the application
of the net proceeds of this offering made pursuant to the ATM
Agreement and could spend the proceeds in ways that do not improve
our results of operations or enhance the value of our common stock.
Our failure to apply these funds effectively could have a material
adverse effect on our business and could cause the price of our
common stock to decline.
Any future
issuances of shares of our common stock by us could harm the price
of our common stock and our ability to raise funds in new equity
offerings.
Any future sales of a substantial number of our shares of
common stock or other equity‑related securities, or the perception
that such sales may occur, could adversely affect the price of our
common stock, and could impair our ability to raise capital through
future offerings of equity or equity‑related securities.
Sales of our
common stock by existing stockholders, executive officers or
directors could depress the market price of our common stock.
If our existing stockholders, officers or directors sell our
common stock in the public market, or the perception that such
sales may occur, it could negatively affect the price of our common
stock. We are unable to estimate the number of shares of our common
stock that may actually be resold in the public market since this
will depend on the market price for our common stock, the
individual circumstances of the sellers and other factors.
Institutional stockholders own significant amounts of our
common stock. If one or more of these stockholders sell large
portions of their holdings in a relatively short time, the
prevailing price of our common stock could be negatively affected.
In addition, it is possible that one or more of our executive
officers or non‑employee members of our Board of Directors could
sell shares of our common stock during an open trading window.
These transactions and the perceived reasons for these transactions
could have a negative effect on the prevailing market price of our
common stock.
We do not
intend to pay cash dividends on our common stock.
We do not expect to pay any cash dividends on our common stock
and currently intend to retain our earnings, if any, to finance the
expansion of our business. Therefore, the success of an investment
in our common stock will depend entirely upon any future increase
in value of our common stock. There is no guarantee that our common
stock will gain value or even maintain the price at which investors
purchased their shares.
General Risk Factors
We may not
generate the expected benefits of future strategic transactions or
investments, and they could disrupt our ongoing business, distract
our management, increase our expenses and negatively affect our
business.
As a way for us to grow our business, we may pursue strategic
transactions or investments. These activities, and their impact on
our business, are subject to many risks, including the following:
(1) the benefits expected to be derived from a transaction or
investment may not materialize and could be affected by numerous
factors, such as regulatory developments, insurance reimbursement,
our inexperience with new businesses or markets, general economic
conditions and increased competition; (2) we may be unable to
successfully integrate with a partner company’s personnel, assets,
management, information technology systems, accounting policies and
practices, products and/or technology into our business; (3) we may
not be able to accurately forecast the performance or ultimate
impact of a partner business; and (4) a strategic transaction may
result in the incurrence of unexpected expenses, stockholder
lawsuits, the dilution of our earnings or our existing
stockholders’ percentage ownership, or potential losses from
undiscovered liabilities not covered by an indemnification from the
seller(s) of the partner business.
If these factors occur, we may be unable to achieve all or a
significant part of the benefits expected from a strategic
transaction or investment. This may adversely affect our financial
condition, results of operations and ability to grow our business
or otherwise achieve our financial and strategic objectives.
Our compliance
with regulations governing public companies is complex and
expensive.
Public companies are subject to various laws and regulations,
which have increased the scope, complexity and cost of corporate
governance, reporting and disclosure practices. For example, we are
subject to the Sarbanes‑Oxley Act of 2002, The Dodd‑Frank Wall
Street Reform and Consumer Protection Act and the requirements of
the Nasdaq Capital Market. The implementation of certain aspects of
these laws and regulations has required and will continue to
require substantial management time and oversight and may require
us to incur significant additional accounting and legal costs. We
continually review changes with respect to new and proposed rules
and cannot predict or estimate the amount of additional costs, and
the timing of such costs, we may incur. There are several
interpretations of these laws and regulations, in many cases due to
their lack of specificity, and as a result, their application in
practice may change as new guidance is provided by regulatory and
governing bodies. This may result in continuing uncertainty
regarding compliance matters and higher costs. We are committed to
maintaining high standards of corporate governance and public
disclosure, but if we fail to comply with any of these
requirements, legal proceedings may be initiated against us, which
may adversely affect our business.
Our business
may be negatively affected by terrorist attacks or natural
disasters.
Terrorist attacks or natural disasters could cause economic
instability. These events could negatively affect economic
conditions both within and outside the United States and harm
demand for our products. The operations of our customers and
suppliers could be negatively impacted and eliminate, reduce or
delay our customers’ ability to purchase and use our products and
our suppliers’ ability to provide raw materials and finished
products.
Our facilities, including some pieces of manufacturing
equipment and our computer systems, may be difficult to replace.
Various types of disasters, including fires, earthquakes, floods
and acts of terrorism, may affect our facilities and computer
systems. In the event our existing facilities or computer systems
are affected by man‑made or natural disasters, we may have
difficulty operating our business and may be unable to manufacture
products for sale or meet customer demands or sales projections. If
our manufacturing operations were curtailed or shut down entirely,
it would seriously harm our business
Our U.S. manufacturing, administrative offices, and research
facilities are located in leased space in Medford, New York,
pursuant to a lease covering approximately 39,650 square feet and
expiring on June 30, 2022, with an option to renew each year.
On February 5, 2019, we entered into a commercial real estate
lease for new corporate headquarters comprised of 70,000 square
feet of office, research and development, and warehouse space
located in Hauppauge, New York. The lease has an initial term of
eleven years that can be extended, at our option, for two
additional terms of five years each. Rent under the lease, which is
payable in monthly installments, totals approximately $900,000 for
the initial year and then increases by approximately three percent
each succeeding year.
Our European headquarters and Center of Excellence for Optical
Technology is located in leased office and manufacturing space in
Berlin, Germany. Our Southeast Asia manufacturing, warehouse, and
commercial facilities are located in leased space in Kuala Lumpur,
Malaysia and is currently inactive. Our Latin America
manufacturing, warehouse, and commercial facilities are located in
Rio de Janeiro, Brazil. We regularly review our real estate
portfolio and develop footprint strategies to support our
customers’ global plans, while at the same time supporting our
technical needs and controlling operating expenses.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
This information is set forth under “Note 12 – Commitments,
Contingencies And Concentrations – Litigation” to the Consolidated
Financial Statements of this Annual Report on Form 10-K is
incorporated herein by reference.
PART II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
|
Listing
Information
Our stock is listed on the NASDAQ Global Select Market
of the NASDAQ Stock Market LLC under the symbol “CEMI.”
Holders
As of February 23, 2022, there were 71 record owners of our
Common Stock (including nominee holders such as banks and brokerage
firms who hold shares for beneficial owners).
Recent Sales of
Unregistered Securities
During the year ended December 31, 2021, we issued
unregistered securities in connection with the 2020 Amended and
Restated Agency & Commission Agreement from November
2020.
Issuer Purchases of Equity
Securities
We did not repurchase any of our
equity securities during the year ended December 31, 2021.
ITEM
7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
We develop and
commercialize point-of-care diagnostic tests used for the rapid
detection and diagnosis of infectious diseases, including sexually
transmitted disease, insect vector and tropical disease, COVID-19
and other viral and bacterial infections, enabling expedited
treatment.
Our product
portfolio is based upon our proprietary DPP technology, a
diagnostic platform that provides high-quality, cost-effective
results in 15 to 20 minutes using fingertip blood, nasal swabs and
other sample types. The DPP technology platform addresses the rapid
diagnostic test market, which includes infectious diseases, cardiac
markers, cholesterol and lipids, pregnancy and fertility, and drugs
of abuse. Compared with traditional lateral flow technology, the
DPP technology platform can provide enhanced sensitivity and
specificity, advanced multiplexing capabilities and, with the DPP
Micro Reader, quantitative results.
We target the market for rapid diagnostic test solutions for
infectious diseases, which is driven by the high prevalence of
infectious diseases globally, an increase in the geriatric
population, growing demand for rapid test results, and advancements
in multiplexing. We have a broad portfolio of infectious disease
products, which prior to 2020 were focused principally on sexually
transmitted disease and fever and tropical disease. In February
2020 we began the process of shifting substantially all of our
resources to seek to leverage the DPP technology platform to
address the acute and escalating need for diagnostic testing for
COVID-19. We are continuing to pursue:
•
|
an
emergency use authorization, or EUA, from the U.S. Food and Drug
Administration, or FDA, as well as 510(k) clearance from the FDA,
for the DPP SARS-CoV-2 Antigen test system;
|
•
|
an EUA
from the FDA for the DPP Respiratory Panel; and
|
•
|
a
Clinical Laboratory Improvement Amendment, or CLIA, waiver from the
FDA for the DPP HIV-Syphilis test system.
|
Our products
are sold globally, directly and through distributors, to medical
laboratories and hospitals, governmental and public health
entities, nongovernmental organizations, medical professionals, and
retail establishments. We continue to seek to expand our commercial
distribution channels.
Global Competitiveness
Program
We have achieved significant revenue growth in recent years
while profitability has not been at levels as expected. We have
taken steps including investments in automation to mitigate
headwinds including labor availability, volatile capacity planning
and implementation of operational efficiency targets to proactively
monitor production with the overarching goal for profitable growth.
To further accelerate and aggressively execute towards this goal to
improve profitability, in the first quarter of 2022 we have
initiated a Global Competitiveness Program. Our Global
Competitiveness Program has been developed with the support of the
Company’s executive leadership team to ensure cross-functional
alignment, commitment and accountability throughout the
organization. The main pillars of the Global Competitiveness
Program include the following:
|
•
|
Focus on higher margin business in growth
markets: Our pursuit of growth in markets with higher
selling prices remains unchanged. We have recently completed an
in-depth analysis of our product portfolio and profitability on
both a product and regional basis. With this increased transparency
at a product-level, we now have visibility to support customer
pricing, marketing strategies and evaluate opportunities to
increase prices. Furthermore, focus will be on recurring revenue
streams of our core business by leveraging more recently
established distributor and direct customer channels in the US and
other key markets.
|
|
•
|
Lower manufacturing costs: Automation
and labor management is essential to scale unit volumes while also
seeking additional ways to drive our manufacturing costs down. With
improved visibility on our labor and material costs at a
product-level, we will primarily target optimization of our lower
margin business.
|
|
•
|
Reduce infrastructure costs: This
includes an in-depth evaluation of all support functions and
external spend to reduce costs. Research & Development will be
further aligned with our future innovation centered on core
strategy, including DPP and expansion of product pipeline with a
more disciplined approach to cost-benefit analysis, target markets,
and competitor landscape.
|
|
•
|
Strategic review of non-core businesses and
assets: Our prior acquisitions have not achieved the
business plans as originally planned. More specifically, emphasis
will be on both our German and Brazilian subsidiaries with a
reorientation for those businesses to achieve an independent path
to profitability and alignment with the long-term strategic
roadmap.
|
While these pillars establish a framework to improve our
profitability, successful execution is dependent on many factors
including future regulatory approvals, key relationships with long
term customers and expansion in large markets including the US. We
plan to aggressively implement these actions that underpin
fundamentals for long-term profitable growth and sustainable
shareholder value.
Substantial Doubt as to Going Concern
Status
Factors and considerations with respect to our liquidity raised
substantial doubt as to our ability to continue as a going concern
through one year after the date that our financial statements are
being issued.
Revenues during the twelve months ended December 31, 2021 did
not meet our expectations. Our increase in cash and cash
equivalents over the year reflected our issuance of common stock in
at-the-market offerings for net proceeds of $38.8 million (see
“Note 9 - Stockholder’s Equity” to the Consolidated Financial
Statements of this Annual Report on Form 10-K is incorporated
herein by reference).
We continued to experience market, clinical trial and
regulatory complications in seeking to develop and commercialize a
portfolio of COVID-19 test systems during the continuing, but
evolving, uncertainty of the COVID‑19 pandemic. In the year ending
on December 31, 2021, we continued to incur significant expenses in
connection with pending legal matters (see “Note 12 – Commitments,
Contingencies, and Concentrations: Litigation” to the Consolidated
Financial Statements of this Annual Report on Form 10-K is
incorporated herein by reference), delayed achievement of
milestones associated with government grant income, investments in
inventory, and the continuing automation of manufacturing.
During the twelve months ended December 31, 2021, we undertook
measures to increase our total revenues and improve our liquidity
position. These measures included:
•
|
On July 19, 2021, we entered into
an At the Market Offering Agreement, or the ATM Agreement, with
Craig‑Hallum Capital Group LLC, or Craig‑Hallum, pursuant to which
we may sell from time to time, at our option, up to an aggregate of
$60,000,000 of shares of common stock through Craig‑Hallum, as
sales agent. As of the filing date of this report, we have
issued and sold pursuant to the ATM Agreement a total of 9,709,328
shares of common stock at a volume-weighted average price of $4.20
per share for gross proceeds of $40.8 million and net proceeds,
after giving effect to placement fees and other transaction costs,
of $38.8 million.
|
•
|
We also received significant
purchase orders from two customers, which we refer to as the July
Purchase Orders. We had pursued the July Purchase Orders for an
extended period of time. The July Purchase Orders consist of the
following:
|
|
o
|
On July 20, 2021, we received a
$28.3 million purchase order from Bio-Manguinhos for the purchase
of DPP SARS-CoV-2 Antigen tests for delivery during 2021 to support
the needs of Brazil’s Ministry of Health in addressing the COVID-19
pandemic. Bio-Manguinhos is responsible for the development and
production of vaccines, diagnostics, and biopharmaceuticals,
primarily to meet demands of Brazil’s national public health
system. As of December 31, 2021 $16.8 million was recognized in
connection with this order.
|
|
o
|
On July 22, 2021, we received a
$4.0 million purchase order from the Partnership for Supply Chain
Management, supported by The Global Fund, for the purchase of HIV
1/2 STAT-PAK Assays for shipment to Ethiopia into early 2022. As of
December 31, 2021 $1.2 million was recognized in connection with
this order.
|
These measures and other plans and initiatives have been
designed to provide us with adequate liquidity to meet our
obligations for at least the twelve-month period following the
filing date of this report, when the Accompanying Financial
Statements are being issued. Our execution of those measures and
our other plans and initiatives continue to depend, however, on
factors that are beyond our control, or that may not be addressable
on terms acceptable to us or at all. We have considered in
particular how:
•
|
The ongoing healthcare and economic
impacts of the COVID-19 pandemic on the global customer base for
our non‑COVID-19 products continue to negatively affect the timing
and rate of recovery of our revenues from those products by, for
example, decreasing the allocation of funding for HIV testing,
thereby continuing to adversely affect our liquidity.
|
•
|
Although we have entered into
agreements to distribute third-party COVID-19 products in the
United States, our ability to sell those products could be
constrained because of staffing and supply chain limitations
affecting the suppliers of those products.
|
We further considered how these factors and uncertainties could
impact our ability over the next year to meet the obligations
specified in the Credit Agreement and Guaranty, or the Credit
Agreement, that we and certain of our subsidiaries, as guarantors,
entered into with Perceptive Credit Holdings II, LP, or the Lender.
Those obligations include (a) covenants requiring: i) minimum
cash balance of $3 million and ii) minimum total revenue amounts
for the twelve months preceding each quarter end. For the next
year, the minimum total revenue requirements range from
$42.0 million for the twelve months ending March 31, 2022
to $47.4 million for the twelve months ending December 31,
2022 and (b) an obligation requiring the payment of principal
installments, commencing with the payment of $300,000 on September
30, 2022. Upon an event of default under the Credit Agreement, the
Lender could elect to declare all amounts outstanding thereunder,
together with accrued interest, to be immediately due and payable.
In such an event, there can be no assurance that we would have
sufficient liquidity to fund payment of the amounts that would be
due under the Credit Agreement or that, if such liquidity were not
available, we would be successful in raising additional capital on
acceptable terms, or at all, or in completing any other endeavor to
continue to be financially viable and continue as a going concern.
Our inability to raise additional capital on acceptable terms in
the near future, whether for purposes of funding payments required
under the Credit Agreement or providing additional liquidity needed
for our operations, could have a material adverse effect on our
business, prospects, results of operations, liquidity and financial
condition.
Accordingly, management determined we could not be certain
that our plans and initiatives would be effectively implemented
within one year after the filing date of this report, when the
Accompanying Financial Statements are being issued. Without giving
effect to the prospect of raising additional capital pursuant to
our at-the-market offerings, increasing product revenue in the near
future or executing other mitigating plans, many of which are
beyond our control, it is unlikely that we will be able to generate
sufficient cash flows to meet our required financial obligations,
including our debt service and other obligations due to third
parties. The existence of these conditions raises substantial doubt
about our ability to continue as a going concern for the
twelve-month period following the filing date of this report.
The Accompanying Financial Statements have been prepared
assuming we will continue as a going concern, which contemplates
continuity of operations, realization of assets and the
satisfaction of liabilities in the normal course of business for
the twelve-month period following the date the accompanying
consolidated financial statements are issued. As such, the
Accompanying Financial Statements do not include any adjustments
relating to the recoverability and classification of assets and
their carrying amounts, or the amount and classification of
liabilities that may result should we be unable to continue as a
going concern.
Consolidated Results of
Operations
The results of operations for the years ended December 31,
2021 and 2020 were as follows:
|
|
Year
Ended December 31,
|
|
|
|
(in
thousands)
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES
|
|
$
|
47,818
|
|
|
|
100
|
%
|
|
$
|
32,470
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
product sales
|
|
|
34,496
|
|
|
|
72
|
%
|
|
|
23,874
|
|
|
|
74
|
%
|
Research and development expenses
|
|
|
12,487
|
|
|
|
26
|
%
|
|
|
9,509
|
|
|
|
29
|
%
|
Selling, general and administrative expenses
|
|
|
24,841
|
|
|
|
52
|
%
|
|
|
21,038
|
|
|
|
65
|
%
|
Impairment, restructuring, severance and related costs
|
|
|
7,048
|
|
|
|
15
|
%
|
|
|
1,122
|
|
|
|
3
|
%
|
Acquisition costs
|
|
|
-
|
|
|
|
0
|
%
|
|
|
63
|
|
|
|
0
|
%
|
|
|
|
78,872
|
|
|
|
|
|
|
|
55,606
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(31,054
|
)
|
|
|
|
|
|
|
(23,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) / INCOME
|
|
|
(2,912
|
)
|
|
|
|
|
|
|
(2,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAX BENEFIT
|
|
|
(33,966
|
)
|
|
|
|
|
|
|
(25,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
62
|
|
|
|
|
|
|
|
457
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(33,904
|
)
|
|
|
(71
|
%)
|
|
$
|
(25,521
|
)
|
|
|
(79
|
%)
|
Percentages in the table reflect the
percent of total revenues.
Total Revenues
Total revenues during 2021 were $47.8 million, an increase of
$15.3 million, or 47.3%, compared to 2020. The increase in total
revenues reflected a $10 million, or 40.3%, increase in net
product sales, which was principally comprised of (a) higher
sales in Latin America, US and Africa, offset by lower sales in
Europe and Asia; (b) decrease in R&D revenue of $3.7 million
due to the completion of agreements in the early part of 2021; and
(c) increase in grant income related to the BARDA $12.7 million
agreement in the amount of $8.9 million.
Gross Product Margin
Cost of product sales is primarily comprised of material,
labor, manufacturing overhead, depreciation and amortization, and
freight and distribution costs. Gross product margin is net product
sales less cost of product sales, and gross product margin
percentage is gross product margin as a percentage of net product
sales.
Gross product margin decreased by $0.7 million, or 73%
compared to 2020. The following schedule calculates gross product
margin:
|
For
the years ended December 31
|
|
Favorable/
|
|
|
|
|
2021
|
|
|
2020
|
|
(unfavorable)
|
|
%
Change
|
|
|
(in
thousands)
|
|
|
|
|
|
Net
product sales
|
|
$
|
34,737
|
|
|
$
|
24,767
|
|
|
$
|
9,970
|
|
|
|
40.3
|
%
|
Less: Cost of product sales
|
|
|
(34,496
|
)
|
|
|
(23,874
|
)
|
|
|
(10,622
|
)
|
|
|
44.5
|
%
|
Gross product margin
|
|
$
|
241
|
|
|
$
|
893
|
|
|
$
|
(652
|
)
|
|
|
(73.0
|
)%
|
Gross product margin %
|
|
|
0.7
|
%
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
In 2021, we invested in developing and offering products to address
the COVID-19 pandemic, which we expected to have average selling
prices greater than those of our legacy products. We also continued
to invest in automation in order to reduce our reliance on manual
labor and improve our product margins. The $0.7 million decrease in
gross product margin was comprised of (a) $1.0 million from
unfavorable product margins offset by (b) $0.3 million
favorable product sales volume as described under “—Total Revenues”
above. The $1.0 million decrease from unfavorable product margins
principally reflected the increased labor and overhead costs and
unfavorable mix of average selling prices.
Research and Development
This category includes costs incurred for clinical and
regulatory affairs and other research and development, as
follows:
|
For
the years ended December 31
|
|
Favorable/
|
|
|
|
|
2021
|
|
|
2020
|
|
(unfavorable)
|
|
%
Change
|
|
|
(in
thousands)
|
|
|
|
|
|
Clinical and regulatory affairs
|
|
$
|
5,109
|
|
|
$
|
1,061
|
|
|
$
|
(4,048
|
)
|
|
|
(381.5
|
)%
|
Other research and development
|
|
|
7,378
|
|
|
|
8,448
|
|
|
|
1,070
|
|
|
|
12.7
|
%
|
Total research and development
|
|
$
|
12,487
|
|
|
$
|
9,509
|
|
|
$
|
(2,978
|
)
|
|
|
(31.3
|
)%
|
The increase in clinical and regulatory affairs costs for 2021
as compared to 2020 was primarily associated with increased
clinical trial costs related to the BARDA $12.7 million agreement
which was completed on December 2, 2021. The decrease in other
research and development costs was primarily related to the
completion of R&D agreements in the early part of 2021.
Selling, General and
Administrative Expense
Selling, general and administrative expenses include
administrative expenses, sales and marketing costs (including
commissions), and other corporate items. The $3.8 million, or
18.1%, increase in selling, general and administrative expenses for
2021 as compared to 2020 primarily reflected increased legal costs
associated with the ongoing litigations, recruiting fees due to the
ramp up in production that took place in the later part of 2021 and
higher insurance costs.
Impairment, restructuring.
severance and related costs
The Company recorded an impairment loss of $1.3 million during
the second quarter of 2021, as the result of its write-off of the
intangible assets, net, leasehold improvements, net and
right-of-use assets for leases, net associated with its Malaysian
operations that underwent a retrenchment during the second quarter
of 2020.
In addition, the Company recorded an impairment loss of $4.6
million during the fourth quarter of 2021, as the result of a write
down of finite-lived intangible assets ($2.0 million) and goodwill
($2.6 million) due to the substantial decrease in share price as of
December 31, 2021. The low price per share value on December
31, 2021 caused the book value of the Company to exceed its market
cap.
In light of the uncertainty of the timing and any receipt of
those regulatory approvals, the timing of progress on and results
of clinical trial programs, and the timing and any receipt of
product orders from the commercialization of the COVID-19
Diagnostic Test Systems and other diagnostic test systems both
within and outside the United States, during the second quarter of
2021, the Company engaged the services of an independent financial
advisory firm (the “Financial Advisor”). The Financial Advisor
worked with management to develop a forecast model to assess the
amount and timing of the Company’s liquidity needs, assuming
various business cases, and together with legal counsel advised the
Company regarding alternative approaches to enhancing its liquidity
position, participating in discussions with the Lender, and related
matters. During the year ended December 31, 2021 and 2020, the
Company incurred $1.1 and $0.4 million, respectively, related to
these restructuring matters.
In order to address challenging economic conditions and
implement its business strategy, in the first quarter of 2021 the
Company continued to execute a program to reduce operating expenses
and better align its costs with revenues, including by eliminating
positions that were no longer aligned with its strategy, and
recognized severance charges of $0.1 million.
Acquisition Costs
Acquisition costs include legal, due diligence, audit, and
related costs associated with acquisitions. The $0.1 million
decrease in acquisition costs for 2021 as compared to 2020
reflected the fact that we completed acquisitions in 2020.
Other (Expense) / Income
Other (expense) / income was principally comprised of
interest expense net of interest income. Interest expense increased
by $0.1 million for 2021 as compared to 2020, due to the interest
paid on the term loan debt we incurred in September 2019.
Income Tax Benefit
For 2021 we recognized a tax benefit of $0.1 primarily
attributable to the loss generated by Chembio Diagnostics Germany.
As of December 31, 2021 and 2020, the Company recorded a full
valuation allowance against its net deferred tax assets.
Liquidity and Capital
Resources
Our cash and
cash equivalents totaled $28.8 million at December 31, 2021, an
increase of $5.7 million from $23.1 million at December 31,
2020. We are obligated to maintain aggregate unrestricted cash of
not less than $3,000,000 at all times under a covenant in the
Credit Agreement.
During the year ended December 31, 2021, we funded our
business operations, including capital expenditures and working
capital requirements, principally from cash and cash equivalents
and issuance of common stock in at-the-market offerings. Our
operations used $30.9 million of cash during the twelve months
ended December 31, 2021. In the first half of 2021, revenues did
not meet our expectations, and the shortfall in revenues from the
first two quarters was one of the principal reasons we issued
common stock in the at-the-market offerings during the year ended
December 31, 2021, which provided us with net proceeds of $38.8
million. This increase in cash and cash equivalents was offset in
part as the result of (a) market, clinical trial and
regulatory complications we faced in seeking to develop and
commercialize a portfolio of COVID‑19 test systems during the
continuing, but evolving, uncertainty of the COVID‑19 pandemic and
(b) significant continuing expenses incurred in connection
with pending legal matters (see “Note 12(e) – Commitments,
Contingencies, and Concentrations – Litigation” in the Accompanying
Financial Statements), delayed achievement of milestones associated
with government grant income, investments in inventory, and, the
continuing automation of U.S. manufacturing.
In light of the uncertainty of the timing and any receipt of
regulatory approvals, the timing of progress on and results of
clinical trial programs, and the timing and any receipt of product
orders from the commercialization of our COVID‑19 and other
diagnostic test systems both within and outside the United States,
during the year we engaged the services of an independent financial
advisory firm. The financial advisory firm worked with management
to develop a forecast model to assess the amount and timing of our
liquidity needs, assuming various business cases and, together with
legal counsel, advised us regarding alternative approaches to
enhancing our liquidity position, participating in discussions with
the Lender under our credit facility and related matters. We
incurred fees related to these restructuring matters totaling $1.1
million in during the year.
Factors and considerations with respect to our liquidity raised
substantial doubt as to our ability to continue as a going concern
through one year after the date that the Accompanying Financial
Statements are being issued. See “—Substantial Doubt as to Going
Concern Status” above.
We have undertaken plans and initiatives, including
fulfillment of the July Purchase Orders (see “— Substantial Doubt
as to Going Concern Status” above) and fundraising through
“at-the-market” offerings (see “—Substantial Doubt as to Going
Concern Status” above), designed to provide us with adequate
liquidity to meet our obligations for at least the twelve-month
period following the filing date of this report, when the
Accompanying Financial Statements are being issued. Our execution
of those plans and initiatives is dependent, however, on a number
of operational performance factors, such as the effectiveness of
our automated manufacturing operations, as well as numerous other
factors that are beyond our control or that may not be addressable
on terms acceptable to us, or at all. We have considered how the
uncertainties around the delivery of the full number of tests
covered by customer orders may be affected by limitations of our
staffing, supply chain and liquidity, uncertainties regarding the
achievement of milestones and related recognition of revenue under
government grants from BARDA, and other matters outside our
control. We further considered how those uncertainties could impact
our ability to meet the obligations specified in the Credit
Agreement over the next twelve months, which include (a) a
covenant requiring minimum total revenues for the twelve months
preceding each quarter end, which requirements range from
$40.3 million for the twelve months ending December 31, 2021
to $47.4 million for the twelve months ending December 31, 2022 and
(b) an obligation requiring the payment of principal installments,
commencing with the payment of $300,000 on September 30, 2022. Upon
an event of default under the Credit Agreement, the Lender could
elect to declare all amounts outstanding thereunder, together with
accrued interest, to be immediately due and payable. In such an
event, there can be no assurance that we would have sufficient
liquidity to fund payment of the amounts that would be due under
the Credit Agreement or that, if such liquidity were not available,
we would be successful in raising additional capital on acceptable
terms, or at all, or in completing any other endeavor to continue
to be financially viable and continue as a going concern. Our
inability to raise additional capital on acceptable terms or to
otherwise generate cash in the near future, whether for purposes of
funding payments required under the Credit Agreement or providing
additional liquidity needed for our operations, could have a
material adverse effect on our business, prospects, results of
operations, liquidity and financial condition.
We cannot be certain that our plans and initiatives would be
effectively implemented within one year after the filing date of
this report, when the Accompanying Financial Statements are being
issued. Without giving effect to the prospect of raising additional
capital pursuant to our at-the-market offerings, increasing product
revenue in the near future or executing other mitigating plans,
many of which are beyond our control, it is unlikely that we will
be able to generate sufficient cash flows to meet our required
financial obligations, including our debt service and other
obligations due to third parties. The existence of these conditions
raises substantial doubt about our ability to continue as a going
concern for the twelve-month period following the date of this
report.
Please see note 2 to the Accompanying Financial Statements for
additional information regarding our going concern assessment in
connection with the Accompanying Financial Statements. You are
urged to read carefully the information provided in “Because of our
liquidity limitations, we have concluded there is a substantial
doubt about our ability to continue as a going concern and we may
require additional capital to fund our operations, which capital
may not be available to us on acceptable terms or at all,” “Because
of our liquidity and operational limitations, including the
availability of staffing and supply chain resources that are
necessary but outside of our control, we may not be able to timely
fulfill some of the requirements of the July Purchase Orders
without additional capital to fund our operations, which capital
may not be available to us on acceptable terms, or at all,” and
“The failure to comply with the terms of the Credit Agreement could
result in a default under its terms and, if uncured, could result
in action against our pledged assets and dilution of our
stockholders” under “Item 1A. Risk Factors” of Part I of this
report.
We currently intend to retain all available funds and any
future earnings for use in the operation of our business and do not
anticipate paying any cash dividends. We have not entered into, and
do not expect to enter into, investments for trading or speculative
purposes. Our accounts receivable, accounts payable and inventory
balances fluctuate from period to period, which affects our cash
flow from operating activities. The amounts of these fluctuations
vary depending on cash collections, client mix, raw material lead
times, the mix of vendor terms, the timing of shipment of our
products and the invoicing of our research and development
activities. As of December 31, 2021, we did not have any
off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of
Regulation S-K under the Securities Exchange Act of 1934.
We continually evaluate our liquidity requirements, capital
needs and availability of capital resources based on our operating
needs and our planned growth initiatives. Our future working
capital needs will depend on many factors, including the rate of
our business and revenue growth, the availability and cost of
human, material and other resources required to build and deliver
products in accordance with our existing or future product orders,
the timing of our continuing automation of U.S. manufacturing, and
the timing of our investment in research and development as well as
sales and marketing. If we are unable to increase our revenues and
manage our expenses in accordance with our operating plan, we may
need to reduce the level or slow the timing of the growth plans
contemplated by our operating plan, which would likely curtail or
delay the growth in our business contemplated by our operating plan
and could impair or defer our ability to achieve profitability and
generate cash flow, or to seek to raise additional funds through
debt or equity financings, strategic relationships, or other
arrangements. There can be no assurance that we would be able to
complete any proposed financing on terms acceptable to us, or at
all, or that we otherwise will be successful in any of our other
endeavors to continue to be financially viable and continue as a
going concern. Our inability to raise additional capital on
acceptable terms could have a material adverse effect on our
business, prospects, results of operations, liquidity and financial
condition. If we were to raise additional funds through the
issuance of equity or convertible securities, the issuance could
result in substantial dilution to existing stockholders, and the
holders of those new securities may have rights, preferences and
privileges senior to those of the holders of common stock.
Furthermore, any decline in the market price of our common stock
could make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we
deem appropriate.
Sources of Funds
Equity and Equity-Related
Securities. On July 19, 2021, we entered into the ATM
Agreement with Craig‑Hallum, pursuant to which we may sell from
time to time, at our option, up to an aggregate of $60,000,000 of
shares of common stock through Craig‑Hallum, as sales agent. Any
sales of shares made pursuant to the ATM Agreement will be made
pursuant to our shelf registration statement on Form S‑3
(File No. 333‑254261) and the related prospectus
previously declared effective by the SEC on May 5, 2021, as
supplemented by a prospectus supplement dated July 19, 2021 that we
filed with the SEC, pursuant to Rule 424(b)(5) under the Securities
Act, on July 19, 2021, as such prospectus supplement may be amended
or supplemented from time to time.
Prior to any sale of shares of common stock under the ATM
Agreement, we may deliver a sales notice to Craig-Hallum that will
set the parameters for such sale, including the number of shares to
be issued and sold, the time period during which such sale is
requested to be made, any limitation on the number of shares that
may be sold in any one trading day and any minimum price below
which sales may not be made. Under the ATM Agreement, Craig-Hallum
is required to use commercially reasonable efforts consistent with
its normal trading and sales practices to sell shares in accordance
with the terms of the ATM Agreement and any applicable sales
notice.
Subject to the terms and conditions of the ATM Agreement,
Craig-Hallum may sell any shares of common stock only by methods
deemed to be an “at the market” offering as defined in Rule 415
under the Securities Act, including sales made directly through the
Nasdaq Capital Market, by means of ordinary brokers’ transactions,
in negotiated transactions, to or through a market maker other than
on an exchange or otherwise, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices,
or at negotiated prices and/or any other method permitted by law.
If any sale of shares pursuant to the ATM Agreement is not made
directly on the Nasdaq Capital Market or any other existing trading
market for common stock at market prices at the time of sale,
including a sale to Craig-Hallum acting as principal or a sale in a
privately negotiated transaction, we must file a prospectus
supplement describing the terms of such sale, the number of shares
sold, the price of the shares, the applicable compensation, and
such other information as may be required pursuant to Rules 424 and
430B under the Securities Act, as applicable, within the time
required by Rule 424 under the Securities Act.
Under the terms of the ATM Agreement, we are to pay
Craig-Hallum a placement fee of 3.5% of the gross sales price of
shares of common stock sold, unless Craig-Hallum acts as principal,
in which case we may sell the shares to Craig-Hallum as principal
at a price we agree upon with Craig-Hallum. We are obligated to
reimburse Craig-Hallum for certain expenses incurred in connection
with the ATM Agreement, and we have provided Craig-Hallum with
customary indemnification and contribution rights with respect to
certain liabilities, including liabilities under the Securities Act
and the Securities Exchange Act of 1934.
The offering of shares of common stock pursuant to the ATM
Agreement will terminate upon the earliest of (a) the sale of all
of the shares registered for purposes of the offering pursuant to
the ATM Agreement, (b) our mutual written agreement with
Craig-Hallum, (c) written notice from Craig-Hallum, in its sole
discretion, to us, and (d) five business days’ prior written notice
from us, in our sole discretion, to Craig-Hallum.
As of the filing date of this report, we have issued and sold
pursuant to the ATM Agreement a total of 9,709,328 shares of common
stock at a volume-weighted average price of $4.20 per share for
gross proceeds of $40.8 million and net proceeds, after giving
effect to placement fees and other transaction costs, of $38.8
million. Additional shares of common stock may be issued and sold
pursuant to the ATM Agreement for gross proceeds of up to $19.2
million, but we cannot provide any assurance that will be able to
issue any additional shares under the ATM Agreement at an
acceptable price or at all.
Credit Agreement. The
following description summarizes certain key provisions of the
Credit Agreement:
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•
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Principal Amount. The Credit Agreement
provides for a $20,000,000 senior secured term loan credit
facility, which was drawn in full on September 4, 2019. Under the
terms of the Credit Agreement, we may use the proceeds (a) for
general working capital purposes and other permitted corporate
purposes, (b) to refinance certain of our existing indebtedness and
(c) to pay fees, costs and expenses incurred in connection with the
Credit Agreement, including the Lender’s closing cost amount of
$550,000, which was netted from the proceeds, and a financing fee
of $600,000 (3.0% of gross proceeds) payable to Craig-Hallum, our
financial advisor for the financing.
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|
•
|
Interest Rate. Principal outstanding
under the Credit Agreement bears interest at a rate per annum equal
to the sum of (a) the greater of the one month London Interbank
Offered Rate and 2.5% plus (b) 8.75%. At any time at which an event
of default (as described under “—Default Provisions” below) has
occurred and is continuing, the interest rate will increase by
4.0%. Accrued interest is payable on a monthly basis. On December
31, 2021 the interest rate was 11.25%.
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|
•
|
Scheduled Repayment. No principal
repayments are due prior to September 30, 2022, unless we elect to
prepay principal as described under “— Optional Prepayment” below
or principal is accelerated pursuant to an event of default as
described under “—Default Provisions” below. Principal installments
in the amount of $300,000 are payable on the last day of each of
the eleven months from September 2022 through July 2023, and all
remaining principal is payable at maturity on September 3,
2023.
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|
•
|
Optional Prepayment. We may prepay
outstanding principal from time to time, subject to payment of a
premium on the prepaid principal amount equal to 4% through
September 3, 2022. No premium will be due with respect to any
prepayment made on or after September 4, 2022.
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|
•
|
Guarantees. Our subsidiaries Chembio
Diagnostic Systems Inc. and Chembio Diagnostics Malaysia Sdn Bhd.
have guaranteed, and the Lender from time to time may require our
other subsidiaries to guarantee, our obligations under the Credit
Agreement.
|
|
•
|
Security. Our obligations under the
Credit Agreement are secured by a first priority, perfected lien on
substantially all of our property and assets, including our equity
interests in our subsidiaries. Our subsidiary Chembio Diagnostic
Systems Inc. has secured its guarantee of our Credit Agreement
obligations with a lien on substantially all of its assets, and the
Lender from time to time may require Chembio Diagnostics Malaysia
Sdn Bhd. and any of our other subsidiaries that has guaranteed our
Credit Agreement obligations to do the same.
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|
•
|
Representations and Warranties. Financial and Other
Covenants. In the Credit Agreement we made customary
representations and warranties as well as customary affirmative and
negative covenants, including covenants limiting additional
indebtedness, liens, guarantees, mergers and acquisitions,
substantial asset sales, investments and loans, sale and
leasebacks, transactions with affiliates, and fundamental changes.
The Credit Agreement also contains financial covenants requiring
that (a) we maintain aggregate unrestricted cash of not less than
$3,000,000 at all times and (b) we achieve specified minimum total
revenue requirements for the twelve months preceding each quarter
end. The minimum total revenue amounts range from $32.0 million to
$50.1 million and, for the next year, range from $42.0 million for
the twelve months ending March 31, 2022 to $47.4 million for the
twelve months ending December 31, 2022. The minimum total revenue
requirements were developed for purposes of the Credit Agreement
and do not reflect the internal estimates and plans used by our
management and board of directors to understand and evaluate our
operating performance, to establish budgets, and to establish
operational goals for managing our business. We therefore do not
believe that the covenant requirements provide useful information
to investors or others in enhancing an understanding of our future
prospects.
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|
•
|
Default Provisions. The Credit
Agreement provides for customary events of default, including
events of default based on non-payment of amounts due under the
Credit Agreement, defaults on other debt, misrepresentations,
covenant breaches, changes of control, insolvency, bankruptcy and
the occurrence of a material adverse effect on our company. Upon an
event of default resulting from a voluntary or involuntary
proceeding for bankruptcy, insolvency or receivership, the amounts
outstanding under the Credit Agreement will become immediately due
and payable and the Lender’s commitments will be automatically
terminated. Upon the occurrence and continuation of any other event
of default, the Lender may accelerate payment of all obligations
and terminate its commitments under the Credit Agreement.
|
Research and Development
Awards. Under a contract we entered into with BARDA on
December 2, 2020, a total of up to $12.7 million of awards were
available from BARDA to assist us in (a) developing, and pursuing
an EUA from the FDA for, the DPP Respiratory Antigen Panel and (b)
performing the clinical trials for and submitting the DPP
SARS-CoV-2 Antigen test system to the FDA for 510(k) clearance. Of
the total awards available under this contract, we recognized
government grant income totaling $10.9 million during the year
ended December 31, 2021. The completion of milestones to earn the
remaining awards are outside our control, and contingent to the EUA
approval by the FDA.
Working
Capital. The
following table sets forth selected working capital
information:
|
|
December 31,
2021
|
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
|
$
|
28,773
|
|
Accounts receivable, net
|
|
|
11,441
|
|
Inventories, net
|
|
|
12,920
|
|
Prepaid
expenses and other current assets
|
|
|
1,710
|
|
Total
current assets
|
|
|
54,844
|
|
Less:
Total current liabilities
|
|
|
(15,282
|
)
|
Working capital
|
|
$
|
39,562
|
|
Our cash and cash equivalents at December 31, 2021, were held
for working capital purposes. We currently intend to retain all
available funds and any future earnings for use in the operation of
our business and do not anticipate paying any cash dividends. We
have not entered into, and do not expect to enter into, investments
for trading or speculative purposes. Our accounts receivable and
inventory balances fluctuate from period to period, which affects
our cash flow from operating activities. Fluctuations vary
depending on cash collections, client mix, raw material lead times,
the mix of vendor terms, and the timing of shipment of our products
and the invoicing of our research and development activities.
Uses of
Funds
Cash Flow Used in Operating
Activities. Our
operations used $30.9 million of cash during the year ended
December 31, 2021, primarily due to the net loss adjusted for
non-cash items of $18.8 million. Those uses of cash were the result
of $8.0 million increase in accounts receivable, a $4.5 million
increase in inventory, $1.6 million decrease in deferred revenue
and $0.9 million decrease in Prepaid and other current assets,
offset in part by a $3.1 million increase in accounts payable and
other accrued liabilities.
Credit Agreement.
Principal installments in the amount of $300,000 are payable under
the Credit Agreement on the last day of each of the eleven months
from September 2022 through July 2023, and all remaining principal
is payable at maturity on September 3, 2023. Upon an event of
default under the Credit Agreement, the Lender could elect to
declare all amounts outstanding thereunder, together with accrued
interest, to be immediately due and payable, as further described
“—Sources of Funds—Credit Agreement—Default Provisions” above. In
addition, we could determine to prepay from time to time
outstanding principal under the Credit Agreement (see “—Sources of
Funds—Credit Agreement—Optional Prepayment” above) or to make other
payments under the Credit Agreement that may not be then due or
otherwise required under the Credit Agreement, although, as of the
date of the filing of this report, we do not intend to make any
such prepayments or other payments.
Capital Expenditures.
Our capital expenditures totaled $1.9 million in the year ended
December 31, 2021, all of which related to investments in automated
manufacturing equipment, facilities, and other fixed assets. As of
December 31, 2021, we had capital purchase obligations of $1.5
million related to additional automated manufacturing equipment,
with payments expected to come due during 2022 based on vendor
performance milestones.
Significant Accounting Policies and
Critical Accounting Estimates
Our significant accounting policies are described in Note 2 –
Significant Accounting Policies to the audited consolidated
financial statements included herein. Certain of our accounting
policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating
financial estimates. By their nature, these judgments are subject
to an inherent degree of uncertainty. These judgments are based on
our historical experience, terms of existing contracts, our
evaluation of trends in the industry, information provided by our
customers and information available from other outside sources, as
appropriate. We consider an accounting estimate to be critical if
(a) it requires us to make assumptions about matters that were
uncertain at the time we were making the estimate and
(b) changes in the estimate or different estimates that we
could have selected would have had a material impact on our
financial condition or results of operations.
The following listing is not intended to be a comprehensive
list of all of our accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United
States, with no need for management’s judgment in their
application. There are also areas in which management’s judgment in
selecting any viable alternative would not produce a materially
different result.
Revenue Recognition
We recognize revenue for product sales in accordance with
Financial Accounting Standards Board Accounting Standards
Codification, or ASC, 606, Revenue from Contracts with Customers.
Revenues from product sales are recognized when the customer
obtains control of our product, which occurs at a point in time,
typically upon tendering to the customer. We expense incremental
costs of obtaining a contract as and when incurred because the
expected amortization period of the asset that it would have
recognized is one year or less or the amount is immaterial. Freight
and distribution activities on products are performed after the
customer obtains control of the goods. We have made an accounting
policy election to account for shipping and handling activities
that occur either when or after goods are tendered to the customer
as a fulfillment activity, and therefore recognizes freight and
distribution expenses in cost of product sales. We exclude certain
taxes from the transaction price (e.g., sales, value added and some
excise taxes).
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 us, taking into consideration the type
of customer, the type of transaction, market events and trends, and
the specific facts and circumstances of each arrangement.
For applicable contracts, we recognize revenue from research
and development, milestone and grant revenues when earned.
Grants are invoiced after expenses are incurred. Revenues from
projects or grants funded in advance are deferred until earned. For
certain collaborative research projects, we recognize revenue by
defining milestones at the inception of the agreement and applying
judgment and estimates in recognizing revenue for relevant
contracts.
From time to time the Company engages in bill-and-hold
arrangements, whereby the Company manufactures and sells its
product and at the customer’s request stores the product at the
Company’s warehouse. Even
though the product remains in the Company’s possession, a sale is
recognized at the point in time when the customer obtains control
of the product. Control is transferred to the customer in bill and
hold transactions when: customer acceptance specifications have
been met, legal title has transferred, the customer has a present
obligation to pay for the product and the risk and rewards of
ownership have transferred to the customer. Additionally, all
the following bill and hold criteria would have to be met in order
for control to be transferred to the customer:
(a)
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The reason for the bill-and-hold arrangement must be substantive
(for example, the customer has requested the arrangement).
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(b)
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The product must be identified separately as belonging to the
customer.
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(c)
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The product currently must be ready for physical transfer to the
customer.
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(d)
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The entity cannot have the ability to use the product or to direct
it to another customer.
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Goodwill
We periodically review goodwill for impairment indicators. We
review goodwill for impairment annually in the fourth quarter or
more frequently if events or changes in circumstances indicate that
goodwill might be impaired. We perform the goodwill impairment
review at the reporting unit level. We perform a qualitative
assessment of whether it is more likely than not that a reporting
unit’s fair value is less than its carrying amount. If not, no
further goodwill impairment testing is performed. If so, we perform
the step discussed hereafter. Our qualitative assessment involves
significant estimates, assumptions, and judgments, including,
macroeconomic conditions, industry and market conditions, our
financial performance, reporting unit specific events and changes
in our share price.
If the fair value of the reporting unit is greater than its carrying amount,
goodwill is not considered to be impaired. We would recognize an
impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value, provided the impairment
charge does not exceed the total amount of goodwill allocated to
the reporting unit.
The company operates as a single operating segment and has one
reporting unit. During the year ended December 31, 2021, the
Company performed a quantitative analysis and determined that the
carrying value exceeded its fair value by $2.6 million, on December
31, 2021.
Recently Issued Accounting
Pronouncements
Refer to Note 2 – Significant Accounting Policies to the
audited consolidated financial statements included herein for a
complete description of recent accounting standards that we have
not yet been required to implement which may be applicable to our
operations. Additionally, the significant accounting standards that
have been adopted during the year ended December 31, 2021 are
described.
ITEM
8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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The Consolidated Financial Statements and schedules that
constitute Item 8 are attached at the end of this report. An
index to the Consolidated Financial Statements and supplemental
schedules are also included on page F-1 of this report.
ITEM
9A.
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Controls and Procedures
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Evaluation of Disclosure Controls
and Procedures
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures, as defined by Rules
13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31,
2021. Based on the evaluation of our disclosure controls and
procedures, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were
effective as of December 31, 2021 at the reasonable assurance
level.
Management’s Report on Internal
Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rules 13a-15(f) and
15d-15(f) promulgated under the Securities Exchange Act of 1934 as
a process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer and effected by the
board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
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•
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pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the
company;
|
|
•
|
provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made in accordance with authorizations of
management and directors of the company; and
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•
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provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could
have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. As a
result, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement
preparation and presentation. Projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, our management
evaluated the effectiveness of our internal control over financial
reporting as of December 31, 2021. In making their assessment of
internal control over financial reporting, our management used the
criteria described in the 2013 Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Our evaluation included documenting,
evaluating and testing of the design and operating effectiveness of
our internal control over financial reporting. Based on this
evaluation, we concluded that our controls over financial reporting
were effective as of December 31, 2021.
Previously Identified Material
Weaknesses in Internal Control Over Financial Reporting
None.
Changes in
Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting identified in management’s evaluation pursuant to Rules
13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934
during the period covered by this Annual Report on Form 10-K that
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Inherent
Limitations of Internal Control
Management, including the Company’s Chief Executive Officer
and Chief Financial Officer, does not expect that the Company’s
internal controls will prevent or detect all errors and all fraud.
A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of internal control can provide
absolute assurance that all control issues and instances of fraud,
if any, have been detected. Also, any evaluation of the
effectiveness of internal controls in future periods are subject to
the risk that those internal controls may become inadequate because
of changes in business conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
ITEM
9B.
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Other
Information
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None.
PART III
ITEM
10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required in response to this Item 10 is
incorporated herein by reference to our Definitive Proxy Statement
to be filed with the SEC pursuant to Regulation 14A of the Exchange
Act not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
ITEM
11.
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EXECUTIVE COMPENSATION
|
The information required in response to this Item 11 is
incorporated herein by reference to our Definitive Proxy Statement
to be filed with the SEC pursuant to Regulation 14A of the Exchange
Act not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
ITEM
12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required in response to this Item 12 is
incorporated herein by reference to our Definitive Proxy Statement
to be filed with the SEC pursuant to Regulation 14A of the Exchange
Act not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
The information required in response to this Item 13 is
incorporated herein by reference to our Definitive Proxy Statement
to be filed with the SEC pursuant to Regulation 14A of the Exchange
Act not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
ITEM
14.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The information required in response to this Item 14 is
incorporated herein by reference to our Definitive Proxy Statement
to be filed with the SEC pursuant to Regulation 14A of the Exchange
Act not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
ITEM
15.
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EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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(a) See “Item 8.
Financial Statements and Supplementary Data – Index to Consolidated
Financial Statements” above.
(b)
Exhibits
Exhibit No.
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Description
|
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Articles of Incorporation, as amended, of Chembio Diagnostics, Inc.
(incorporated herein by reference to Exhibit 3.1 to the Quarterly
Report on Form 10-Q filed on July 29, 2010)
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Amended and Restated Bylaws, of Chembio Diagnostics, Inc.
(incorporated herein by reference to Exhibit 3.2 to the Current
Report on Form 8-K filed on September 17, 2018)
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Warrant to Purchase Common Stock dated as of September 3, 2019,
issued by Chembio Diagnostics, Inc. to Perceptive Credit Holdings
II, LP (incorporated herein by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed on September 5, 2019)
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4.2
|
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Description of Securities (incorporated herein by reference to
Exhibit 4.2 to the Annual Report on Form 10-K filed on March 11,
2021)
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2008 Stock Incentive Plan, as amended (incorporated herein by
reference to Attachment B to the Proxy Statement on Form DEF 14A
filed on 2012)
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Form of Option for 2008 Stock Incentive Plan (incorporated herein
by reference to Exhibit 4.4 to the Quarterly Report on Form 10-Q
filed on May 8, 2014)
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2014 Stock Incentive Plan (incorporated herein by reference to
Attachment A to the Proxy Statement on Form DEF 14A filed on April
29, 2014)
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Form of Option for 2014 Stock Incentive Plan (incorporated herein
by reference to Exhibit 4.7 to the Quarterly Report on Form 10-Q
filed on August 7, 2014)
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2019 Omnibus Incentive Plan (incorporated herein by reference to
Exhibit 10.3 to the Annual Report on Form 10-K filed on March 13,
2020)
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Restated Annual Incentive Bonus Plan of Chembio Diagnostics, Inc.,
adopted as of March 15, 2019 (incorporated herein by reference to
Exhibit 10.3 to the Annual Report on Form 10-K filed on March 18,
2019)
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Outside Director Compensation Policy of Chembio Diagnostics,
adopted as of December 15, 2020 (incorporated herein by reference
to Exhibit 10.1 to the Current Report on Form 8-K filed on December
17, 2020)
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Employment Agreement, dated as of March 4, 2020 and effective as of
March 16, 2020 between Chembio Diagnostics, Inc. and Richard L.
Eberly (incorporated herein by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed on March 20, 2020)
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|
|
Amendment No. 1 dated February 9, 2022 between Chembio Diagnostics,
Inc. and Richard L. Eberly, amending the Employment Agreement dated
March 4, 2020 (incorporated herein by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed on February 14, 2022)
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|
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Employment Agreement dated March 5, 2016 between Chembio
Diagnostics, Inc. and Javan Esfandiari (incorporated herein by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed
on March 14, 2016)
|
10.7(b)*
|
|
Amendment No. 1 dated March 20, 2019 between Chembio Diagnostics,
Inc. and Javan Esfandiari, amending the Employment Agreement dated
March 5, 2016 (incorporated herein by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed on March 25, 2019)
|
10.7(c)*
|
|
Amendment No. 2 dated November 30, 2021 between Chembio
Diagnostics, Inc. and Javan Esfandiari, amending the Employment
Agreement dated March 5, 2016 (incorporated herein by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed on December 6,
2021)
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Employment Agreement dated December 18, 2017 between Chembio
Diagnostics, Inc. and Neil A. Goldman (incorporated herein by
reference to Exhibit 10.4 to the Annual Report on Form 10-K filed
on March 8, 2018).
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|
Amendment No. 1 dated January 21, 2019 between Chembio Diagnostics,
Inc. and Neil A. Goldman, amending Employment Agreement dated
December 18, 2017 (incorporated herein by reference to Exhibit
10.01 to the Current Report on Form 8-K filed on January 25,
2019)
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Employment Agreement, dated as of December 30, 2021 and effective
as of January 5, 2022, between Chembio Diagnostics, Inc. and
Lawrence J. Steenvoorden (incorporated herein by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed on January 6,
2022)
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|
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Offer Letter dated October 19, 2016 between Worldwide Workplace
Ireland and Robert Passas, with respect to employment by Chembio
Diagnostics Systems, Inc. (incorporated herein by reference to
Exhibit 10.4 to the Current Report on Form 8-K filed on October 22,
2018)
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Separation and Release Agreement, dated January 7, 2020, between
Chembio Diagnostics, Inc. and John J. Sperzel III (incorporated
herein by reference to Exhibit 10.1 to the Current Report on Form
8-K filed on January 9, 2020)
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Lease Agreement, dated February 15, 2017, between Horseblock
Associates and Chembio Diagnostics, Inc. with respect to 3661
Horseblock Road, Medford, New York, as amended (incorporated herein
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed on October 22, 2018)
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Agreement of Sublease dated February 5, 2019 between Chembio
Diagnostic Systems Inc., as sublessor, and Reliance Communications
of New Jersey, LLC, as sublessee, with respect to 3661 Horseblock
Road, Medford, New York, as amended (incorporated herein by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed
on February 11, 2019)
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Lease Agreement, dated February 4, 2013, between Sherwood Corporate
Center LLC and Chembio Diagnostics, Inc. with respect to 91-1A
Colin Drive, Holbrook, New York, as amended on September 19, 2017
(incorporated herein by reference to Exhibit 10.2 to the Current
Report on Form 8-K filed on October 22, 2018)
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Lease Agreement dated February 5, 2019 between Myra Properties,
LLC, as lessor, and Chembio Diagnostic Systems Inc., as lessee,
with respect to 555 Wireless Boulevard, Hauppauge, New York
(incorporated herein by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed on February 11, 2019)
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10.15† |
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Credit Agreement and Guaranty dated as of September 3, 2019, among
Chembio Diagnostics, Inc., as the Borrower, the Guarantors from
time to time party thereto, and Perceptive Credit Holdings II, LP
and its successors and assigns party thereto, as Administrative
Agent and as a Lender (incorporated herein by reference to Exhibit
10.1 to the Current Report on Form 8-K filed on September 5,
2019)
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10.16
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At the Market Offering Agreement, dated July 19, 2021, between
Chembio Diagnostics, Inc. and Craig-Hallum Capital Group LLC
(incorporated herein by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed on July 19, 2021)
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|
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Ethics Policy (incorporated herein by reference to Exhibit 14.1 to
the Annual Report on Form 10-KSB filed on March 30, 2006)
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|
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List of Subsidiaries of Chembio Diagnostics, Inc.
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23.1
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Consent of EY, Independent Registered Public Accounting
Firm
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|
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Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
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|
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Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
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|
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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101.INS
|
|
XBRL
Instance Document
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
|
XBRL
Taxonomy Definition Linkbase Document
|
101.LAB
|
|
XBRL
Taxonomy Label Linkbase Document
|
101.PRE
|
|
XBRL
Taxonomy Presentation Linkbase Document
|
*
|
Indicates management contract or
compensatory plan.
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†
|
Certain exhibits and schedules have
been omitted pursuant to Item 601(a)(5) of Regulation S-K. We
hereby undertake to furnish copies of the omitted exhibits and
schedules upon request by the Securities and Exchange Commission,
provided that we may request confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 for the exhibits
and schedules so furnished.
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**
|
The certifications attached as Exhibit 32.1 accompany the
Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
and shall not be deemed “filed” by the registrant for purposes of
Section 18 of the Securities Exchange Act of 1934, as
amended.
|
In accordance with Section 13 or
15(d) of the Exchange Act, the registrant has caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
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CHEMBIO DIAGNOSTICS, INC.
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March 3, 2022
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By
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/s/ Richard L. Eberly
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|
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Richard L. Eberly
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|
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Chief Executive Officer and
President
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|
In accordance with the requirements
of the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signatures
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Title
|
|
Date
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|
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/s/ Richard L. Eberly
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Chief Executive Officer and
President
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March 3, 2022
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Richard L. Eberly
|
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(Principal Executive
Officer)
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|
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/s/ Lawrence J.
Steenvoorden
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Chief Financial Officer
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March 3, 2022
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Lawrence J. Steenvoorden
|
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(Principal Financial &
Accounting Officer)
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Chair of the Board
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Katherine L. Davis
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/s/ David W. K. Acheson
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Director
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March 3, 2022
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David W. K. Acheson
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/s/ David W. Bespalko
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Director
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March 3, 2022
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David W. Bespalko
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/s/ John G. Potthoff
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Director
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March 3, 2022
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John G. Potthoff
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