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ITEM 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The following discussion and analysis should be read in conjunction
with our unaudited condensed consolidated financial statements and
related notes, or the accompanying financial statements, included
elsewhere in this report. In addition to historical information,
the following discussion contains forward-looking statements that
involves risks, uncertainties and assumptions. See "Forward-Looking
Statements" above. Please read Part II, Item 1A. “Risk Factors" of
this report for a discussion of factors that could cause our actual
results to differ materially from our expectations.
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:
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•
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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;
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•
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an EUA from the FDA for the DPP Respiratory Panel; and
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•
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a
Clinical Laboratory Improvement Amendment, or CLIA, waiver from the
FDA for the DPP HIV-Syphilis test system.
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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.
Going Concern
Considerations
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 COVID‑19. For the three months ended March 31, 2022, we
continued to incur significant expenses in connection with pending
legal matters (see Note 6 – Commitments, Contingencies, and
Concentrations: Litigation).
We performed an assessment to determine whether there were
conditions or events that, considered in the aggregate, raised
substantial doubt about our ability to continue as a going concern
within one year after the filing date of this report, when the
accompanying
financial
statements
are being issued. Initially, this assessment did not consider the
potential mitigating effect of management’s plans that had not been
fully implemented. Because, as described below, substantial doubt
was determined to exist as the result of this initial assessment,
management then assessed the mitigating effect of our plans to
determine if it is probable that the plans (1) would be effectively
implemented within one year after the filing date of this report
and (2) when implemented, would mitigate the relevant conditions or
events that raise substantial doubt about our
ability to continue as a going concern
We achieved significant revenue growth in recent years although
profitability has not been at our targeted levels. We have taken
steps, including investments in automation, to mitigate headwinds
such as labor availability, volatile capacity planning and
implementation of operational efficiency targets to proactively
monitor production with the overarching goal for profitable growth.
During the three months ended March 31, 2022, we undertook measures
to increase its total revenues and improve its liquidity position
by implementing a Global Competitiveness Program. The main pillars
of the Global Competitiveness Program include the following:
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Focus on higher margin business in growth markets
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•
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Lower manufacturing costs
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•
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Reduce infrastructure costs
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•
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Strategic review of non-core businesses and assets:
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In addition, we will continue to focus on regulatory approvals for
its DPP SARS-CoV-2 Antigen test system, DPP Respiratory Antigen
Panel, and DPP HIV-Syphilis test system. 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. Our
execution of those measures and our other plans and initiative
continue to depend, however, on factors and uncertainties that are
beyond our control, or that may not be addressable on terms
acceptable to us or at all. We considered in particular how:
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The ongoing healthcare and economic impacts of COVID-19 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.
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•
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Although we 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
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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 with the Lender (as defined in Note 7 – Long-Term
Debt). Those obligations include covenants requiring: i) minimum
cash balance of $3.0 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 $43.8
million for the twelve months ending June 30, 2022, and $ 48.8
million for the twelve months ending March 31, 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. 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 its operations, could have a material adverse effect on its
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. Without giving effect to
the prospect of raising additional capital pursuant to our
At the Market Offering Agreement dated July 19, 2021 with
Craig-Hallum Capital Group LLC or 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.
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.
Consolidated Results of Operations
Three Months Ended March 31, 2022 versus Three Months Ended March
31, 2021
The results of operations for the three months ended were as
follows (dollars in thousands):
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March 31, 2022
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March 31, 2021
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TOTAL REVENUES
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$
|
18,817
|
|
|
|
100
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%
|
|
$
|
8,724
|
|
|
|
100
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%
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|
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|
|
|
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|
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|
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OPERATING COSTS AND EXPENSES:
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|
|
|
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|
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Cost of product sales
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15,224
|
|
|
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81
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%
|
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3,548
|
|
|
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41
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%
|
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Research and development expenses
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1,654
|
|
|
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9
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%
|
|
|
2,863
|
|
|
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33
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%
|
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Selling, general and administrative expenses
|
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6,946
|
|
|
|
37
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%
|
|
|
6,086
|
|
|
|
70
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%
|
|
Severance and other related costs
|
|
|
3,043
|
|
|
|
16
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%
|
|
|
83
|
|
|
|
1
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%
|
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TOTAL OPERATING COSTS AND EXPENSES
|
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26,867
|
|
|
|
|
|
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|
12,580
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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LOSS FROM OPERATIONS
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|
|
(8,050
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)
|
|
|
|
|
|
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(3,856
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)
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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OTHER (EXPENSE) INCOME, NET
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(734
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)
|
|
|
|
|
|
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(712
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)
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|
|
|
|
|
|
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|
|
|
|
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LOSS BEFORE INCOME TAXES
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(8,784
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)
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|
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(47
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)%
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(4,568
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)
|
|
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(52
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)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income tax (expense) benefit
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(6
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)
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|
|
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|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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NET LOSS
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|
$
|
(8,790
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)
|
|
|
|
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$
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(4,500
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)
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|
|
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Percentages in the table reflect the percent of total
revenues.
Total Revenues
Total revenues during the quarter ended March 31, 2022 were $18.8
million, an increase of $10.1 million, or 116%, compared to the
quarter ended March 31, 2021. The increase in total revenues is
primarily due to higher sales in Latin America, primarily to
Bio-Manguinhos for DPP SARS-CoV-2 Antigen tests, and in the United
States, partially offset by lower sales volume in our other
regions.
Gross Product Margin
Cost of product sales is primarily composed of material, labor,
manufacturing overhead, depreciation and amortization, and freight
and distribution costs. Gross product margin is net product revenue
less cost of product revenue, and gross product margin percentage
is gross product margin as a percentage of net product
revenue.
Gross product margin increased by $2.8 million, or 592% compared to
the quarter ended March 31, 2021. The following schedule calculates
gross product margin (dollars in thousands):
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For the three months
ended March 31
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Favorable/(unfavorable)
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|
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2022
|
|
|
2021
|
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$ Change
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|
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% Change
|
|
|
Net product sales
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|
$
|
18,527
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|
|
$
|
4,025
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|
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$
|
14,502
|
|
|
|
360
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%
|
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Less: Cost of product sales
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|
|
(15,224
|
)
|
|
|
(3,548
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)
|
|
|
(11,676
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)
|
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|
329
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%
|
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Gross product margin
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|
$
|
3,303
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|
$
|
477
|
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|
$
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2,826
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|
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|
592
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%
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Gross product margin percentage
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18
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%
|
|
|
12
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%
|
|
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|
|
|
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The $2.8 million increase in gross product margin was comprised of
(a) $1.1 million from favorable product margins and the
impact of fixed manufacturing overhead, and (b) $1.7 million from
favorable product sales volume as described under “Total Revenues”
above.
Research and Development
This category includes costs incurred for clinical and regulatory
affairs and other research and development, as follows (dollars in
thousands):
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|
For the three months
ended March 31
|
|
|
Favorable/(unfavorable)
|
|
| |
|
2022
|
|
|
2021
|
|
|
$ Change
|
|
|
% Change
|
|
|
Clinical and regulatory affairs
|
|
$
|
295
|
|
|
$
|
765
|
|
|
$
|
(470
|
)
|
|
$
|
(61
|
)%
|
|
Other research and development
|
|
|
1,359
|
|
|
|
2,098
|
|
|
|
(739
|
)
|
|
|
(35
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)%
|
|
Total research and development
|
|
$
|
1,654
|
|
|
$
|
2,863
|
|
|
$
|
(1,209
|
)
|
|
|
(42
|
)%
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The decrease in research and development costs for the three months
ended March 31, 2022 compared to the three months ended March 31,
2021 was primarily associated with work related to pursuing an EUA
and 510(k) from the FDA for the DPP SARS-CoV-2 Antigen test system,
and an EUA for the DPP Respiratory Panel, each pursuant to awards
from the Biomedical Advanced Research and Development Authority, or
BARDA (part of the U.S. Department of Health and Human Services’
Office of the Assistant Secretary for Preparedness and
Response).
Selling, General and Administrative Expense
Selling, general and administrative expense includes administrative
expenses, sales and marketing costs (including commissions), and
other corporate items.
The $0.9 million, or 14%, increase in selling, general and
administrative expense for the three months ended March 31, 2022
compared to the three months ended March 31, 2021 principally due
to increased costs associated with insurance, commissions and
professional fees.
Impairment, restructuring, severance and related costs
Impairment, restructuring, severance and related costs include an
impairment loss of $3.0 million during the first quarter of 2022 as
a result of an impairment of goodwill due to the substantial
decrease in our share price at March 31, 2022. The low price per
share value at March 31, 2022 caused our book value to exceed our
fair value. In the first quarter of 2021, severance charges of $0.1
million were recorded attributable to the elimination of
positions.
Other Income (Expense), net
Other income (expense), net consists principally of interest
expense, net of interest income earned on our deposits on long-term
debt incurred under the Credit Agreement on September 3, 2019, of
which $20 million (carrying value of $18.9 million) was outstanding
at March 31, 2022. For a description of Credit Agreement, please
see “Liquidity and Capital Resources—Sources of Funds—Credit
Agreement” below
Liquidity and Capital Resources
Our cash and cash equivalents totaled $24.4 million at March 31,
2022. 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 three months ended March 31, 2022, we funded our
business operations, including capital expenditures and working
capital requirements, principally from cash and cash equivalents
and our operations used $4.4 million of cash.
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 “Going Concern Considerations”
above.
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 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 $43.8 million for the twelve months ending June 30, 2022
to $48.8 million for the twelve months ending March 31, 2023 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 filing
date of this report, when the accompanying financial statements are
being issued.
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”
under
Part II, Item 1A, “Risk Factors” of this report 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 Part I,
Item 1A, “Risk Factors” of our 2021 Form 10-K.
On April 5, 2022, we received a deficiency letter from the Listing
Qualifications Department of The Nasdaq Stock Market notifying us
that, because the bid price for shares of our common stock had
closed below the $1.00 per share minimum bid price requirement for
thirty consecutive business days or the Bid Price Requirement, our
common stock may be subject to delisting by as early as October 3,
2022 if we have been unable to regain compliance with the Bid Price
Requirements or to qualify for an additional period to regain
compliance by such date, all as described in more detail in the
Current Report on Form 8-K we filed with the SEC on April 7, 2022.
There can be no assurance that we will be able to regain compliance
with the Bid Price Requirement. Our inability to regain compliance
with the Bid Price Requirement would, and the existence of the
pending deficiency letter could, materially impair our ability to
raise capital.
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 March 31, 2022, 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 financing, 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
Credit Agreement. The
following description summarizes certain key provisions of the
Credit Agreement:
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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 (i) for general working capital purposes and
other permitted corporate purposes, (ii) to refinance certain of
our existing indebtedness and (iii) 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 Capital Group LLC, our financial advisor
for the financing.
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•
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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 March 31, 2022, the
interest rate was 11.25%.
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•
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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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•
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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 10% through September 3, 2020, 8%
from September 4, 2020 through September 3, 2021, and 4% from
September 4, 2021 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.
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|
•
|
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 (i) we maintain
aggregate unrestricted cash of not less than $3,000,000 at all
times and (ii) we achieve specified minimum rolling four-quarter
(“last twelve month”) total revenue amounts as of September 30,
2019 and the last day of each calendar quarter thereafter. For the
next year, the minimum total revenue requirements range from $43.8
million for the twelve months ending June 30, 2022, and $ 48.8
million for the twelve months ending March 31, 2023. The minimum
total revenue amounts 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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•
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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.
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Equity and Equity-Related
Securities. On July 19, 2021, we and Craig‑Hallum Capital
Group LLC, or Craig-Hallum, 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. 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.
We are currently subject to General Instruction I.B.6 to Form S-3,
or the Baby Shelf Rule, and the amount of funds we can raise
through primary public offerings of securities in any twelve-month
period using our existing registration statement on Form S-3 is
limited to one-third of the aggregate market value of the voting
and non-voting common equity held by non-affiliates. We will be
limited by the Baby Shelf Rule until such time as our public float
exceeds $75 million.
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, 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.
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, no government grant
income was recognized during the three months ended March 31, 2022.
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:
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March 31,
2022
|
|
| |
|
(in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
24,399
|
|
|
Accounts receivable, net of allowance for doubtful amounts
|
|
|
9,880
|
|
|
Inventories, net
|
|
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11,844
|
|
|
Prepaid expenses and other current assets
|
|
|
2,097
|
|
|
Total current assets
|
|
|
48,220
|
|
|
Less: Total current liabilities
|
|
|
(13,632
|
)
|
|
Working capital
|
|
$
|
34,588
|
|
Our cash and cash equivalents at March 31, 2022, 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 $4.4 million of cash during the three months ended
March 31, 2022, primarily due to a $2.6 million decrease in
accounts payable and other accrued liabilities, and a $1.1 million
increase in inventory. Those uses of cash were partially
offset by a $1.6 million increase in accounts receivable.
Capital
Expenditures. Our
capital expenditures totaled $0.3 million in the three months ended
March 31, 2022 compared to $1.2 million in prior year period, which
were primarily attributable to investments in automated
manufacturing equipment, facilities, and other
fixed assets.
We have 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
There were no significant changes in our accounting policies or
critical accounting estimates during the three months ended March
31, 2022 to augment the significant accounting policies or critical
accounting estimates disclosed under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” in our 2021 Form 10-K, other than those described in
the notes to the condensed consolidated financial statements
included elsewhere in this report.
Recently Issued Accounting Pronouncements
A discussion of recent
accounting pronouncements was included in our 2021 Form 10-K and is
updated in Note 2 to the condensed consolidated financial
statements included elsewhere in this report.
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ITEM 3. |
CONTROLS AND PROCEDURES
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(a)
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Disclosure Controls and Procedures.
Under the supervision and with the participation of our senior
management, consisting of our principal executive officer and our
principal financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, or
the Exchange Act, as of the end of the period covered by this
report. Based on this evaluation, our management, including our
principal executive officer and principal financial officer,
concluded that as of March 31, 2022 our disclosure controls and
procedures were effective to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms. Our disclosure controls
and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us
in our Exchange Act reports is accumulated and communicated to our
management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving their
objectives, and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
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(b)
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Changes in Internal Control over Financial
Reporting. There were no changes in our internal control
over financial reporting identified in connection with the
evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15
under the Exchange Act that occurred during the three months ended
March 31, 2022, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
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PART II. |
OTHER INFORMATION
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ITEM 1. |
LEGAL PROCEEDINGS
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This information is set forth under “Note 6 – Commitments,
Contingencies And Concentrations – Litigation” to the Consolidated
Financial Statements of this report is incorporated herein by
reference.
Except as set forth below, there have been no material changes to
the risk factors described in the section captioned Part I, Item
1A, “Risk Factors,” in our 2021 Form 10-K. In addition to the other
information set forth in this report, you should carefully consider
the factors discussed in the section captioned Part I, Item 1A,
“Risk
Factors” in our 2021 Form 10‑K, which could materially affect our
business, financial condition, or future results. Moreover, you
should interpret many of the risks identified in our 2021 Form 10-K
as being heightened as a result of the ongoing and numerous adverse
impacts of COVID-19. The risks described in our 2021 Form 10-K and
in this report are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently deem
to be immaterial also may have a material adverse effect on our
business, financial condition, and/or operating results.
Risks Related to Our
Business and Our Industry
Our near term success is highly dependent on the success of the our
DPP platform, and we cannot be certain that we will succeed in
developing one or more of those systems or that, if we do, they
will attain market acceptance or be successfully commercialized in
the United States or elsewhere.
We do not currently have an Emergency Use Authorization, or EUA,
from the U.S. Food and Drug Administration, or FDA, for any of the
COVID-19 Diagnostic Test Systems or for our DPP Respiratory Panel.
We also do not have a CLIA waiver from the FDA for our DPP
HIV-Syphilis test system. Market and regulatory requirements
continue to change at a rapid pace. There can be no assurance that,
if we make a submission of any future EUA or CLIA waiver
application, we will meet the requirements of the prioritization
guidance in effect at the time of the submission or otherwise be
successful in obtaining either (1) an EUA that would permit us to
offer and sell the DPP SARS-CoV-2 Antigen test system or DPP
Respiratory Panel in the United States or (2) a CLIA waiver for our
DPP HIV-Syphilis test.
Even if we are able to obtain any such EUA or CLIA waiver, our
product may not gain broad market acceptance among physicians,
healthcare payers, patients, and the medical community. We cannot
guarantee market acceptance of our product, and have somewhat
limited information on which to estimate our anticipated level of
sales. Our products will require healthcare providers and doctors
to accept and adopt our technology. Our industry is susceptible to
rapid technological developments and there can be no assurance that
we will be able to match any new technological advances. Acceptance
and use of any products we market will depend upon a number of
factors including:
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•
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perceptions by members of the health care community, including
physicians, about the safety and effectiveness of our
products;
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|
•
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limitation on use or warnings required by the FDA or other global
regulators in our product labeling;
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|
•
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the cost of our products relative to competing products;
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•
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convenience and ease of administration;
|
|
•
|
potential advantages of alternative diagnostic and treatment
methods;
|
|
•
|
availability of reimbursement for our products from government or
other healthcare payers;
|
|
•
|
effectiveness of marketing and distribution efforts by us and our
licensees and distributors, if any; and
|
|
•
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the ability of our diagnostic solutions to address different
variants.
|
In addition, with respect to any EUA we obtain, the FDA may revoke
an EUA where it is determined that the underlying health emergency
no longer exists or warrants such authorization, even if we obtain
an EUA, we cannot predict how long such EUA would remain in place.
Such revocation could materially adversely impact our business in a
variety of ways, including if the relevant product is not yet
approved by the FDA under a traditional approval pathway and if we
have invested in the supply chain to provide any of our products
under an EUA, and would require us to obtain a 510(k) or other
marketing authorization from the FDA. If the FDA revokes a
previously issued EUA prior to us having received regulatory
approval to commercialize our DPP SARS-CoV-2 Antigen test system or
DPP Respiratory Panel through a traditional approval pathway, we
would be required to cease our commercialization efforts, which
would substantially and negatively impact our business.
The failure of these products to find market acceptance would
substantially harm our business and would adversely affect our
revenue. If the DPP SARS-CoV-2 Antigen test system, DPP Respiratory
Panel or DPP HIV-Syphilis test are not as successfully
commercialized as expected, we may not be able to generate
sufficient revenue to become profitable. Any failure of one of
these products to be successfully commercialized in the United
States may have a material adverse effect on our business,
operating result financial condition and cash flows, and could
result in a substantial decline in the price of our common stock.
In addition, the production and widely administered use of
efficacious vaccines for COVID-19 may reduce the demand for
diagnostic tests and, as a result, the COVID-19 diagnostic testing
market may not develop or substantially grow. Our future success is
substantially dependent on the manner in which the market for
diagnostic testing develops and grows. If the market develops in a
manner that does not facilitate demand for our products, or fails
to develop or grow in the manner in which we expect or at all, our
business, financial condition, results of operations and cash flows
may be negatively affected.
Clinical trials necessary to support a future test kit submission
will be expensive and may require the enrollment of large numbers
of subjects, and suitable subjects may be difficult to identify and
recruit. Delays or failures in our clinical trials will prevent us
from commercializing any modified or new test kits and will
adversely affect our business, operating results and
prospects.
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 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.
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.
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.
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 manufacturers and commercial laboratories to receive an EUA
for COVID-19 diagnostics as of September 21, 2021, 88 were for
serology tests, 235 were for molecular tests, and 34 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.
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. 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.
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.
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.
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. 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.
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. In-Vitro Diagnostic Regulation entered into
force, which repeals and replaces the Council Directive 98/79/EC,
or E.U. In-Vitro Diagnostic Directive. 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. In-Vitro
Diagnostic Directive prior to May 26, 2022 may generally continue
to be made available on the market or put into service until May
26, 2027, 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. In-Vitro Diagnostic 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. In-Vitro
Device Regulation, which repeals and replaces EU In-Vitro
Diagnostic Directive. 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. In-Vitro Diagnostic
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. In-Vitro Diagnostic
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. In-Vitro Diagnostic
Regulation.
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 “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations─Going Concern
Considerations” 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 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 may encounter challenges in fulfilling
our obligations, and therefore receiving revenue, under those
purchase orders. 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 March 31, 2022, our loan balance, net of unamortized
discounts and debt issuance costs, of $18.9 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.
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
effects of COVID-19 have significantly disrupted world financial
markets and negatively impacted U.S. market conditions, and they
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. Moreover, on April 5,
2022, we received a deficiency letter from the Listing
Qualifications Department of The Nasdaq Stock Market notifying us
that, because the bid price for shares of our common stock had
closed below the $1.00 per share minimum Bid Price Requirement for
thirty consecutive business days, our common stock may be subject
to delisting by as early as October 3, 2022 if we have been unable
to regain compliance with the Bid Price Requirements or to qualify
for an additional period to regain compliance by such date, all as
described in more detail in the Current Report on Form 8-K we filed
with the SEC on April 7, 2022. There can be no assurance that we
will be able to regain compliance with the Bid Price Requirement.
Our inability to regain compliance with the Bid Price Requirement
would, and the existence of the pending deficiency letter could,
materially impair our ability to raise capital.
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.
Additionally, we
are currently subject to the Baby Shelf Rule and the amount of
funds we can raise through primary public offerings of securities
in any 12-month period using our registration statement on Form S-3
is limited to one-third of the aggregate market value of the voting
and non-voting common equity held by non-affiliates. We will
be limited by the Baby Shelf Rule until such time, if any, as our
public float exceeds $75 million.
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Number
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Description
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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 by reference to Exhibit 10.1
to Current Report on Form 8-K filed on January 6, 2022)
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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 by reference to Exhibit 10.1 to Current
Report on Form 8-K filed on February 14, 2022)
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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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Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
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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
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF
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XBRL Taxonomy Definition Linkbase Document
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101.LAB
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XBRL Taxonomy Label Linkbase Document
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101.PRE
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XBRL Taxonomy Presentation Linkbase Document
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†
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Indicates management contract or compensatory plan or
arrangement.
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*
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Certain sensitive personally identifiable information in this
exhibit was omitted by means of redacting a portion of the text and
replacing it with [***]. ç The certifications attached as Exhibit
32.1 accompany the Quarterly Report on Form 10-Q 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.
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Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly 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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Date: May 5, 2022
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By: /s/ Richard Eberly
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Richard Eberly
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Chief Executive Officer and President
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Date: May 5, 2022
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By: /s / Lawrence J. Steenvoorden
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Lawrence J. Steenvoorden
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Chief Financial Officer and Executive Vice President
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44
