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Facing SEC Investigation, Chembio Diagnostics Reports 25 Percent Lift in Preliminary Q2 Revenues

NEW YORK ─ After the close of the market on Monday, Chembio Diagnostics reported preliminary second quarter revenue growth of 25 percent year over year.

It also disclosed that the US Securities and Exchange Commission is investigating the firm, and said it had reached an at-the-market sales agreement to sell up to $60 million in shares of its common stock.

In a document filed with the SEC, Chembio said that for the three months ended June 30, it expects revenues of $6.4 million, compared to $5.1 million in Q2 2020, which would be well short of the analysts' average estimate of $8.5 million.

The company expects Q2 product revenue of $3.9 million, up 3 percent from $3.8 million in Q2 2020; government grant income of $2.3 million, compared to no revenue from government grants in the prior-year quarter; license and royalty revenue of $200,000, a twofold year-over-year increase; and no Q2 R&D revenue, compared to $1.2 million in Q2 2020.

Chembio further reported that it expects to record a $1.3 million impairment loss in Q2 as a result of the write-off of intangible assets, leasehold improvements, and right-of-use assets for leases associated with its Malaysian operations that underwent a retrenchment during Q2 2020. The firm said it expects to incur a Q2 loss of between $500,000 and $1.0 million because of the recognition of overhead related to excess capacity and the write-down of inventory for products that are not salable.

Chembio said it anticipates that based on its preliminary estimates, its total Q2 revenues will satisfy the minimum total revenues covenant set forth in a credit agreement and guaranty dated Sept. 3, 2019, for a $20 million senior secured term loan credit facility that the firm and some of its subsidiaries entered into with Perceptive Credit Holdings.

However, the firm noted in its SEC filing that its Q2 revenues did not meet its expectations, and the shortfall has been a principal cause of its current limited cash and cash-equivalents position. Chembio expects to report cash and cash equivalents for the quarter ended June 30 of $5.8 million, a decrease of $8.6 million from $14.4 million for the quarter ended March 31. Its cash and cash equivalents on March 31 already represented a decrease of $8.7 million from $23.1 million on Dec. 31, 2020.

The decrease in cash and cash equivalents over the first two quarters of 2021 reflected market, clinical trial, and regulatory complications faced in seeking to develop and commercialize a portfolio of COVID-19 test systems during the continuing uncertainty of the COVID-19 pandemic, the firm said.

The company said the decrease was also partly due to continuing expenses incurred in connection with pending legal matters, lower product revenue, and delayed invoicing associated with government grant income, its investments in inventory, and its continuing automation of US manufacturing.

The firm said that the SEC is conducting a non-public, fact-finding investigation relating to its public offering of common stock completed in May 2020, and the US Food and Drug Administration's revocation in June 2020 of an Emergency Use Authorization for the firm's DPP COVID-19 IgM/IgG system that was issued in April 2020.

The company received subpoenas from the SEC in July 2020 and April 2021 seeking documents in connection with the investigation.

The Hauppauge, New York-based diagnostics company also announced an at-the-market sales agreement with investment bank Craig-Hallum that enables it to sell up to $60 million of shares of its common stock. Under the terms of the agreement, Chembio will pay Craig-Hallum a placement fee of 3.5 percent of the gross sales price of shares sold. However, if Craig-Hallum acts as principal, the diagnostics company may sell the shares to it at a price agreed on between the two entities.

Chembio said it anticipates that the net proceeds from any sale of shares under the agreement will be used for general corporate purposes, which may include working capital and capital expenditures.

Chembio also said that in 2020, four purported securities class action lawsuits were filed in the US District Court for the Eastern District of New York by alleged stockholders. The lead plaintiffs filed a consolidated amended complaint on Feb. 12, 2021, alleging claims based on false and misleading statements and omissions concerning the performance of Chembio DPP COVID-19 IgM/IgG System, and an asserted failure to disclose in a timely manner that the FDA EUA for the system was being revoked or was at an increased risk of being revoked.

The firm's wholly owned subsidiary, Chembio Diagnostic Systems, has also initiated arbitration in the International Arbitration Tribunal of the International Centre for Dispute Resolution in New York, alleging that BioSure breached various provisions of a distribution agreement, misappropriated trade secrets of Chembio Diagnostic Systems, engaged in deceptive business acts and practices, and breached the implied covenant of good faith and fair dealing. Its subsidiary "intends to vigorously pursue its claims in the arbitration," Chembio said.

Chembio further said that on March 19, 2021, John Sperzel, its former CEO who is now the CEO of T2 Biosystems, filed a 15-count complaint in the US District Court for the Eastern District of New York, alleging that the firm wrongfully refused to allow Sperzel to exercise certain options to purchase, for an aggregate exercise price of $943,126, a total of 266,666 shares of common stock that were allegedly vested as of the date of his separation from Chembio in January 2020.

The diagnostics company said it expects to release its Q2 operating results during the first week of August.

Chembio's shares were down about 5 percent on the Nasdaq in early morning trading on Tuesday at $2.33.