CHEMBIO DIAGNOSTICS, INC. 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. InFebruary 2020 we began the process to leverage the DPP technology platform to address the acute and escalating need for diagnostic testing. We are continuing to pursue or have pursued:
• an emergency use authorization, or EUA, from the
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
• a Clinical Laboratory Improvement Amendment ("CLIA"), waiver from the FDA for
the DPP HIV-Syphilis test system, which was received in
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.
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Pending Merger with
The Company has entered into a Merger Agreement with Biosynex and Purchaser. Pursuant to the Merger Agreement, onFebruary 14, 2023 , the Purchaser commenced the Offer to purchase all of the issued and outstanding Shares for a purchase price of$0.45 per share, net to the seller in cash, without interest and subject to any required tax withholding. OnMarch 15, 2023 , Biosynex announced an extension of the Offer until6:00 p.m. ,New York City time, onMarch 28, 2023 . Subsequently, onMarch 29, 2023 , Biosynex announced an extension of the Offer until6:00 p.m. ,New York City time, onApril 12, 2023 . If the conditions to the Offer are satisfied and the Offer closes, Purchaser would acquire all remaining Chembio shares by a merger of Purchaser with and into Chembio, with Chembio surviving the Merger as a wholly-owned indirect subsidiary of Biosynex. At the Effective Time, each Share issued and outstanding immediately prior to the Effective Time (including shares paid to holders of vested Chembio restricted stock units) will be converted into the right to receive$0.45 per share. Stock options that are outstanding immediately prior to the Effective Time will automatically terminate for no consideration. The Merger Agreement and the transactions contemplated thereby, including the Merger, were unanimously approved by the Company's Board of Directors. Completion of the Merger is subject to certain customary conditions as set forth in the Merger Agreement and the successful completion of the Offer. There can be no assurance that the Merger will be consummated on the terms described above or at all. The foregoing description of the Merger Agreement and the transactions contemplated thereby, including the Offer, does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Merger Agreement, which has been filed as Exhibit 2.1 to our Current Report on Form 8-K filed with theSEC onJanuary 31, 2023 .
Likely Default Under Credit Agreement
OnSeptember 3, 2019 , we and certain of our subsidiaries, as guarantors, entered into the Credit Agreement and Guaranty (the "Credit Agreement") withPerceptive Credit Holdings II, LP (the "Lender"), under which we received a$20.0 million senior secured term loan that was drawn in full onSeptember 4, 2019 . The Credit Agreement is secured by a first priority lien on substantially all of our property and assets. The Credit Agreement contains financial covenants requiring that we (a) maintain aggregate unrestricted cash of not less than$3.0 million at all times, and (b) achieve specified minimum total revenue requirements for the twelve months preceding each quarter end. The Credit Agreement has aSeptember 3, 2023 maturity date, and we do not currently believe that replacement debt or equity financing arrangements are or will be available to us or, if available to us, will be on acceptable terms. We do not believe that we will be in compliance with the minimum revenue covenant in the Credit Agreement for the four fiscal quarters endedMarch 31, 2023 . Our Lender has previously informed us that it will not agree to any restructuring of the Credit Agreement, and as a result we may be forced to pursue a bankruptcy or restructuring proceeding when the debt matures (or earlier if the lender accelerates following a breach of the minimum total revenue covenant) or pursue a transaction or financing arrangement that could be dilutive to stockholders.
Going Concern Considerations
The Company 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 resulting from COVID19. For the year endedDecember 31, 2022 , the Company also continued to incur significant operating losses and significant expenses in connection with pending legal matters (see Note 12 - Commitments, Contingencies, and Concentrations: Litigation). The Company performed an assessment to determine whether there were conditions or events that, considered in the aggregate, raised substantial doubt about the Company's 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 its 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, when the accompanying financial statements are being issued and (2) when implemented, would mitigate the relevant conditions or events that raise substantial doubt about the Company's ability to continue as a going concern. The Company achieved revenue growth in recent years while profitability has not been at levels as expected. It has 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 of profitable growth. The Company undertook measures to increase its total revenues and improve its liquidity position by continuing to develop the Global Competitiveness Program. The main pillars of the Global Competitiveness Program include the following:
• Focus on higher margin business in growth markets
• Lower manufacturing costs
• Reduce infrastructure costs
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• Strategic review of non-core businesses and assets
The Company's execution of its plans continue to depend, however, on factors and uncertainties that are beyond the Company's control, or that may not be addressable on terms acceptable to the Company or at all. The Company considered in particular how:
• The ongoing healthcare and economic impacts of COVID-19 on the global customer
base for the Company's nonCOVID-19 products continue to negatively affect the
timing and rate of recovery of the Company's revenues from those products.
The Company further considered how these factors and uncertainties could impact its ability over the next year to meet the obligations specified in the Credit Agreement with the Lender. 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. The minimum total revenue requirements are$48.8 million for the twelve months endingMarch 31, 2023 and$50.1 million for the twelve months endingJune 30, 2023 . We do not believe that we will comply with the minimum total revenue covenant for the twelve months endedMarch 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. Furthermore, all remaining principal and interest is due on or beforeSeptember 3, 2023 . There can be no assurance that the Company 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, the Company 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. The Company's 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 and would likely result in the Company being forced to seek protection under a bankruptcy proceeding. Accordingly, management determined the Company could not be certain that the Company's 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 increasing product revenue in the near future, the proposed merger with Biosynex or executing other mitigating plans, many of which are beyond the Company's control, it is unlikely that the Company will be able to generate sufficient cash flows to meet its required financial obligations, including its debt service and other obligations due to third parties. The existence of these conditions raises substantial doubt about the Company's ability to continue as a going concern for the twelve-month period following the date on which the accompanying consolidated financial statements are being issued. The accompanying consolidated financial statements have been prepared assuming the Company 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 consolidated 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 the Company be unable to continue as a going concern. 53
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Consolidated Results of Operations
The results of operations for the years endedDecember 31, 2022 and 2021 were as follows: Year Ended December 31, (in thousands) 2022 2021 TOTAL REVENUES$ 49,522 100 %$ 47,818 100 % COSTS AND EXPENSES: Cost of product sales 38,578 78 % 34,496 72 % Research and development expenses 7,068 14 % 12,487 26 % Selling, general and administrative expenses 24,278 49 % 24,841 52 % Impairment, restructuring, severance and related costs 3,236 7 % 7,048 15 % TOTAL OPERATING COST AND EXPENSES 73,160 78,872 LOSS FROM OPERATIONS (23,638 ) (31,054 ) INTEREST (EXPENSE) / INCOME AND OTHER INCOME 382 (2,912 ) LOSS BEFORE INCOME TAXES (23,256 ) (33,966 ) Income tax (expense) / benefit (34 ) 62 NET LOSS$ (23,290 ) (47 %)$ (33,904 ) (71 %)
Percentages in the table reflect the percent of total revenues.
Total Revenues
Total revenues during 2022 were$49.5 million , an increase of$1.7 million , or 3.6%, compared to 2021. The increase in total revenues reflected a$12.4 million , or 36%, increase in net product sales, which was principally comprised of higher sales inthe United States andAfrica , offset by a decrease in government grant revenue of$9.7 million related to the completion of the BARDA$12.7 million agreement in 2021.
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 increased by
For the years ended December 31 Favorable/
2022 2021 (unfavorable) % Change
(in thousands)
Net product sales $ 47,092 $ 34,737 $ 12,355 36 %
Less: Cost of product sales (38,578 ) (34,496 ) (4,082 ) 12 %
Gross product margin $ 8,514 $ 241 $ 8,273 3,433 %
Gross product margin % 18 % 1 %
In 2022, we continued to invest in automation in order to reduce our reliance on
manual labor and improve our product margins. The $8.3 million increase in gross
product margin resulted from favorable product margins related to the impact of
geographic mix on average selling price.
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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/
2022 2021 (unfavorable) % Change
(in thousands)
Clinical and regulatory affairs $ 1,637 $ 5,109 $ 3,472 68 %
Other research and development 5,431 7,378 1,947 26 %
Total research and development $ 7,068 $ 12,487 $ 5,419 43 %
The overall decrease in total research and development costs for 2022 as
compared to 2021 was primarily associated to decreased clinical trial costs and
other R&D costs related to the BARDA $12.7 million agreement which was completed
on December 2, 2021 . Total research and development costs incurred for the year
ended 2022 were primarily related to ongoing projects in our new product
pipeline.
Selling, General and Administrative Expense
Selling, general and administrative expenses include administrative expenses, sales and marketing costs (including commissions), and other corporate items. The$0.6 million , or 2%, decrease in selling, general and administrative expenses for 2022 as compared to 2021 primarily reflected decrease in professional fees, commissions and recruiting 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 atMarch 31, 2022 . The low price per share value atMarch 31, 2022 caused our book value to exceed our fair value. During the year ended 2022,$0.2 million of severance cost was recorded. During 2021,$7.0 million of impairment, restructuring, severance and related costs was incurred, of which$5.9 million was related to the write-off of intangible assets, net leasehold improvements, and net right-of-use assets for leases associated with our Malaysian operations, and a write down of finite-lived intangible assets and goodwill,$1.1 million was related to restructuring matters and$0.1 million was related to severance charges.
Interest (Expense) / Income and Other Income
Interest (expense) / income and other income was principally comprised of interest expense (net of interest income) offset by$3.2 million cash receipt for the Employee Retention Credit (ERC) that we qualified for in the second and third quarter of 2021. Interest expense decreased by$0.1 million for 2022 as compared to 2021, due to the interest paid on the term loan debt we incurred inSeptember 2019 as a result of repayment of principal starting inSeptember 2022 .
Income Tax Benefit
For 2022 we recognized a tax expense of$0.04 million primarily attributable to state taxes, compared to a tax benefit of$.01 million recorded in 2021. As ofDecember 31, 2022 and 2021, the Company recorded a full valuation allowance against its net deferred tax assets.
Liquidity and Capital Resources
Our cash and cash equivalents totaled
During the year endedDecember 31, 2022 , we funded our business operations, including capital expenditures and working capital requirements, principally from cash and cash equivalents, using$14 million of cash. We also issued and sold 6,466,191 shares of common stock for net proceeds of$4.3 million pursuant to the ATM agreement. 55
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Additionally, the Merger Agreement with Biosynex contains certain termination rights for Biosynex and us. Upon termination of the Merger Agreement under specified circumstances, we may be required to pay Biosynex a termination fee of$850,000 . 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 filing date of this report, when the accompanying financial statements are being issued. See "Likely Default Under Credit Agreement" and "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 and (b) an obligation requiring the payment of principal installments, commencing with the payment of$300,000 onSeptember 30, 2022 . The minimum total revenue requirements are$48.8 million for the twelve months endingMarch 31, 2023 and$50.1 million for the twelve months endingJune 30, 2023 . We do not believe that we will comply with the minimum total revenue covenant for the twelve months endedMarch 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. Furthermore, all remaining principal and interest is due on or beforeSeptember 3, 2023 . 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 and would likely result in the Company being forced to seek protection under a bankruptcy proceeding. 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 offering or likewise, increasing product revenue in the near future, the proposed merger with Biosynex 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." "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 this report. OnApril 5, 2022 , we received notification from the Listing Qualifications Department ofThe Nasdaq Stock Market , or Nasdaq, stating that the Company did not comply with the minimum$1.00 bid price requirement for continued listing set forth in Nasdaq Listing Rule 5550(a)(2) (the "Bid Price Requirement"). In accordance with Nasdaq listing rules, the Company was afforded 180 calendar days (untilOctober 3, 2022 ) to regain compliance with the Bid Price Requirement. OnOctober 4, 2022 , the Company received written notice from Nasdaq stating that, although the Company had not regained compliance with the Bid Price Requirement byOctober 3, 2022 , in accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company is eligible for an additional 180 calendar day period, or untilApril 3, 2023 , to regain compliance with the Bid Price Requirement. To regain compliance, the closing bid price of the Company's common stock must meet or exceed$1.00 per share for a minimum of ten consecutive business days during this additional 180-day period, all as described in more detail in the Current Reports on Form 8-K filed with theSEC onApril 7, 2022 andOctober 4, 2022 . The closing price of our common stock was$0.39 onMarch 24, 2023 . We do not believe that we will regain compliance with the Bid Price Requirement by theApril 3, 2023 deadline, and there can be no assurance that we will ever be able to do so. Given the current trading price of our common stock, it is likely that we will receive a delisting notification from Nasdaq. The existence of the pending deficiency letter could, materially impair our ability to raise capital. Moreover, if we were unable to regain compliance with the Bid Price Requirement, our common stock would likely then trade only in the over-the-counter market and the market liquidity of our common stock could be adversely affected and its market price could decrease. If our common stock were to trade on the over-the-counter market, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and we could face significant material adverse consequences, including: a limited availability of market quotations for our securities; reduced liquidity with respect to our securities; a determination that our shares are a "penny stock," which will require brokers trading in our securities to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our securities; a reduced amount of news and analyst coverage; and a decreased ability to issue additional securities or obtain additional financing in the future. These factors could result in lower prices and larger spreads in the bid and ask prices for our common stock and would substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us. 56
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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 ofDecember 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 ofU.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
Equity and Equity-Related Securities . OnJuly 19, 2021 , we and CraigHallum 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 CraigHallum, as sales agent. Any sales of shares made pursuant to the ATM Agreement will be made pursuant to our shelf registration statement on Form S3 (File No. 333254261) and the related prospectus previously declared effective by theSEC onMay 5, 2021 , as supplemented by a prospectus supplement datedJuly 19, 2021 that we filed with theSEC , pursuant to Rule 424(b)(5) under the Securities Act, onJuly 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. 57
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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.
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 16,175,5195 shares of common stock at a volume-weighted average price of$2.81 per share for gross proceeds of$45.4 million and net proceeds, after giving effect to placement fees and other transaction costs, of$43.1 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. Furthermore, any such sales shall be subject to the Baby Shelf Rule.
Credit Agreement. The following description summarizes certain key provisions of the Credit Agreement:
• Principal Amount. The Credit Agreement provides for a
secured term loan credit facility, which was drawn in full on
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
and a financing fee of$600,000 (3.0% of gross proceeds) payable toCraig-Hallum Capital Group LLC , our financial advisor for the financing.
• 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
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
• Scheduled Repayment. No principal repayments were due prior to
2022. The Company did not elect to prepay principal as described under
"-Optional Prepayment" below and an event of default as described under
"-Default Provisions" below did not occur. Principal installments in the amount
of
maturity on
Credit Agreement which include covenants requiring: i) the minimum cash balance
of
preceding each quarter end. The minimum total revenue requirements are
million for the twelve months ending
twelve months ending
the minimum total revenue covenant for the twelve months ended
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 and the
Lender could elect to declare all amounts outstanding thereunder, together with
accrued interest, to be immediately due and payable.
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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
and 4% from
with respect to any prepayment made on or after
• Guarantees. Our subsidiaries
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
obligations with a lien on substantially all of its assets, and the Lender from
time to time may require
other subsidiaries that has guaranteed our Credit Agreement obligations to do
the same.
• 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
rolling four-quarter ("last twelve month") total revenue amounts as of
minimum total revenue requirements are
ending
2023. We do not believe that we will comply with the minimum total revenue
covenant for the twelve months ended
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.
• 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 theCDC , effectiveSeptember 1, 2022 , a total of up to$3.2 million of awards are available to assist us in developing a rapid POC Syphilis Diagnostic Test using the Company's DPP Technology. Of the total awards available under this contract, we recognized government grant income totaling$0.6 million during the year endedDecember 31, 2022 . Working Capital. The following table sets forth selected working capital information:December 31, 2022 Cash and cash equivalents 18,179 Accounts receivable, net 6,536 Inventories, net 7,715 Insurance receivable 12,186 Prepaid expenses and other current assets 3,835 Total current assets 48,451 Less: Total current liabilities (39,300 ) Working capital 9,151 59
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Our cash and cash equivalents atDecember 31, 2022 , were held for working capital purposes. We currently intend to retain all available funds in excess of required minimum cash balance related to the Credit Agreement 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$12.7 million of cash during the year endedDecember 31, 2022 , primarily due to the net loss adjusted for non-cash items of$14.7 million . Those uses of cash were the result of$4.8 million decrease in accounts receivable, a$4.6 million decrease in inventory, and$14.0 million increase in Prepaid and other current assets, offset in part by a$6.6 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 fromSeptember 2022 throughJuly 2023 , and all remaining principal is payable at maturity onSeptember 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$1.5 million in the year endedDecember 31, 2022 , all of which related to investments in automated manufacturing equipment, facilities, and other fixed assets. As ofDecember 31, 2022 , we had capital purchase obligations of$0.01 million related to additional automated manufacturing equipment, with payments expected to come due during 2023 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 inthe 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. 60
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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) The reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement). (b) The product must be identified separately as belonging to the customer. (c) The product currently must be ready for physical transfer to the customer. (d) The entity cannot have the ability to use the product or to direct it to another customer.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 endedDecember 31, 2022 , the Company performed a quantitative analysis and determined that the carrying value exceeded its fair value and recorded a goodwill impairment charge of$3.0 million .
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 endedDecember 31, 2022 are described.
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