NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation:

The preceding (a) condensed consolidated balance sheet as of December 31, 2018, which has been derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements as of June 30, 2019 and for the three and six-month period ended June 30, 2019 and 2018 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to provide for fair presentation. The interim financial information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 18, 2019.

Our future working capital needs will depend on many factors, including the rate of our business and revenue growth, the timing of our continuing automation of U.S. manufacturing, and the timing of investment in our research and development as well as sales and marketing. If we are unable to increase our revenues and manage our expenses in accordance with our operating plan, we may need to reduce the level or slow the timing of the growth plans contemplated by our operating plan, which would likely curtail or delay the growth in our business contemplated by our operating plan and could impair or defer our ability to achieve profitability and generate cash flow, or to seek to raise additional funds through debt or equity financings, strategic relationships, or other arrangements.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s condensed consolidated financial position as of June 30, 2019 and, its condensed consolidated results of operations for the three and six-month period ended June 30, 2019 and 2018 have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Revenue Recognition:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with customers, Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers(Topic 606). The intent of the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is for a company to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and in certain circumstances, allowing estimates of variable consideration to be recognized before contingencies are resolved. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.

The new revenue standards became effective for the Company on January 1, 2018 and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any material accounting changes that impacted the amount of reported revenues with respect to its product revenue, license and royalty revenue, and research and development (“R&D”) and grant revenues, no adjustment to retained earnings was required upon adoption.

The Company adopted the standards for contracts that were not completed at the date of initial application (January 1, 2018).

Under the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligations.

Product Revenues

Revenues from product sales are recognized and commissions are accrued when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon tendering to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial. Freight and distribution activities on products are performed after the customer obtains control of the goods. The Company has made an accounting policy election to account for shipping and handling activities that occur either when or after goods are tendered to the customer as a fulfillment activity, and therefore recognizes freight and distribution expenses in cost of product sales.

The Company’s payment terms vary by the type and location of the Company’s customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 60 days from date of shipment or satisfaction of the performance obligation.

Reserves for Discounts and Allowances

Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers. The Company’s process for estimating reserves established for these variable consideration components does not differ materially from its historical practices.

Product revenue reserves, which are classified as a reduction in product revenues, are generally related to discounts. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based on all information (historical, current and forecasted) that is reasonably available to the Company, taking into consideration the type of customer, the type of transaction and the specific facts and circumstances of each arrangement. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from the Company’s estimates. If actual results vary, the Company adjusts these estimates, which could have an effect on earnings in the period of adjustment.

Royalty Revenues

The Company receives royalty revenues on sales by its licensees of products covered under patents that it owns. The Company does not have future performance obligations under these license arrangements. The Company records these revenues based on estimates of the sales that occurred during the relevant period as a component of license and royalty revenues. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical royalties that have been paid to the Company, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. Historically, adjustments have not been material when compared to actual amounts paid by licensees.

R&D and Grant Revenue

All R&D and grant contracts are evaluated under the five-step model described above. For certain contracts that represent grants where the funder does not meet the definition of a customer, the Company recognizes revenue when earned in accordance with ASU No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. Such contracts are further described under Disaggregation of Revenue, below. Grants are invoiced and revenue is recognized as expenses are incurred as that is the depiction of the timing of the transfer of services. Performance obligations generally follow the major phases of product development processes: design feasibility & planning, product development & design optimization, design verification, design validation & process validation, and pivotal studies.

Disaggregation of Revenue

The following tables disaggregate Total Revenues.

	For the three months ended June 30, 2019						For the three months ended June 30, 2018
	Exchange Transactions		Non-Exchange Transactions		Total		Exchange Transactions		Non-Exchange Transactions		Total
Net product sales	$	8,488,291	$	-	$	8,488,291	$	6,857,861	$	-	$	6,857,861
License and royalty revenue		248,831		-		248,831		276,526		-		276,526
R&D and grant revenue		619,139		235,125		854,264		755,570		830,369		1,585,939
	$	9,356,261	$	235,125	$	9,591,386	$	7,888,957	$	830,369	$	8,720,326

					Total						Total
Africa					$	2,342,740					$	2,226,540
Asia						119,548						22,348
Europe & Middle East						1,107,558						1,213,548
Latin America						4,612,904						3,266,290
United States						1,408,636						1,991,600
					$	9,591,386					$	8,720,326

	For the six months ended June 30, 2019						For the six months ended June 30, 2018
	Exchange Transactions		Non-Exchange Transactions		Total		Exchange Transactions		Non-Exchange Transactions		Total
Net product sales	$	14,871,277	$	-	$	14,871,277	$	13,256,088	$	-	$	13,256,088
License and royalty revenue		465,022		-		465,022		478,457		-		478,457
R&D and grant revenue		1,392,204		1,163,849		2,556,053		1,367,375		1,335,538		2,702,913
	$	16,728,503	$	1,163,849	$	17,892,352	$	15,101,920	$	1,335,538	$	16,437,458

					Total						Total
Africa					$	4,759,040					$	3,865,070
Asia						240,646						989,922
Europe & Middle East						3,250,779						2,197,424
Latin America						5,684,970						5,956,183
United States						3,956,917						3,428,859
					$	17,892,352					$	16,437,458

Exchange transactions are recognized in accordance with ASU No. 2014.09, and non-exchange transactions are recognized in accordance with ASU No. 2018.08.

Contract Liabilities

Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as (or when) the Company performs under the contract. At December 31, 2018, the Company reported $422,905 in deferred revenue of which $422,905 was earned and recognized as R&D and grant revenue during the six months ended June 30, 2019. At June 30, 2019, the Company reported $518,410 in deferred revenue that is expected to be recognized during the second half of 2019.

Inventories

Inventories consist of the following at:

	June 30, 2019		December 31, 2018
Raw materials	$	2,834,559	$	2,803,677
Work in process		1,556,944		263,043
Finished goods		4,679,173		4,784,502
	$	9,070,676	$	7,851,222

Inventories, consisting of material, labor and manufacturing overhead, are stated at the lower of cost and net realizable value. Cost is determined on the first-in, first-out method. The Company’s policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a write-down for any inventory considered slow moving or obsolete. There were reserves against inventory of approximately $67,000 and $78,000 as of June 30, 2019 and December 31, 2018, respectively.

Loss Per Share:

Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period excluding unvested restricted stock. Diluted loss per share for the three and six-month periods ended June 30, 2019 and 2018 reflects the potential dilution from the exercise or conversion of other securities into common stock, if dilutive.

There were 688,122 and 683,829 weighted-average number of options outstanding as of June 30, 2019 and 2018, respectively, that were not included in the calculation of diluted per common share equivalents for the three months ended June 30, 2019 and 2018, respectively, because the effect would have been anti-dilutive. There were 686,609 and 707,880 weighted-average number of options outstanding as of June 30, 2019 and 2018, respectively, that were not included in the calculation of diluted per common share equivalent for the six months ended June 30, 2019 and 2018, respectively, because the effect would have been anti-dilutive.

Stock Incentive Plan:

Effective June 3, 2008, the Company’s stockholders voted to approve the 2008 Stock Incentive Plan (“SIP”), with 625,000 shares of common stock available to be issued. At the Annual Stockholder Meeting on September 22, 2011 the Company’s stockholders voted to approve an increase to the shares of common stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, which expired during 2018, the Board of Directors or its Compensation Committee had the discretion to select the persons to whom awards were to be granted. Awards could be stock options, restricted stock and/or restricted stock units (“Equity Award Units”). The Equity Award Units became vested at such times and under such conditions as determined by the Board or its Compensation Committee. Cumulatively through June 30, 2019, there were 508,889 options exercised, and at June 30, 2019, 99,132 options were outstanding and no Equity Award Units were available to be issued under the SIP.

Effective June 19, 2014, the Company’s stockholders voted to approve the 2014 Stock Incentive Plan (“SIP14”), with 800,000 shares of common stock available to be issued. Under the terms of the SIP14, the Board or its Compensation Committee has the discretion to select the persons to whom Equity Award Units were to be granted. Awards can be in the form of Equity Award Units. The Equity Award Units vest at such times and under such conditions as determined by the Board or its Compensation Committee. Cumulatively through June 30, 2019, there were 132,282 options exercised, and at June 30, 2019, 344,093 options were outstanding. Upon approval of the 2019 Plan (defined below), no additional Equity Award Units could be issued under the SIP14. During 2018, 266,839 shares of restricted stock and 20,725 restricted stock units were awarded under SIP14.

Effective June 18, 2019, the Company’s stockholders voted to approve the 2019 Omnibus Incentive Plan (“2019 Plan”), with 2,400,000 shares of Common Stock available to be issued. Under the terms of the 2019 Plan, the Board or its Compensation Committee has the discretion to select the persons to whom awards are to be granted. Awards can be in the form of Equity Award Units. The awards vest at such times and under such conditions as determined by the Compensation Committee. As of June 30, 2019, 375,000 shares of restricted stock had been awarded under the 2019 Plan, no options had been issued under the 2019 Plan. 2,025,000 Equity Award Units were available to be issued.

Stock-Based Compensation:

The fair value of restricted stock and restricted stock unit awards are their fair value on the date of grant. Stock-based compensation expense for stock options is calculated using the Black-Scholes valuation model based on awards ultimately expected to vest, together with the fair value of restricted stock and restricted stock unit awards, are reduced for actual forfeitures and expensed on a straight-line basis over the requisite service period of the grant.

Stock option compensation expense in each of the periods presented represents the estimated fair value of unvested, outstanding options, amortized on a straight-line basis over the requisite vesting periods of the entire awards.

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

	For the three months ended				For the six months ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Cost of product sales	$	2,300	$	5,800	$	5,800	$	14,000
Research and development expenses		56,300		3,600		116,100		15,500
Selling, general and administrative expenses		318,300		117,700		602,500		194,800
	$	376,900	$	127,100	$	724,400	$	224,300

The weighted-average assumptions made in calculating the fair values of options are as follows:

	For the three months ended						For the six months ended
	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Expected term (in years)		N/A			5.4			N/A			5.4
Expected volatility		N/A	%		40.12	%		N/A	%		40.12	%
Expected dividend yield		N/A	%		0	%		N/A	%		0	%
Risk-free interest rate		N/A	%		2.70	%		N/A	%		2.70	%

The following table provides stock option activity for the six months ended June 30, 2019:

Stock Options	Number of Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contract Term	Aggregate Intrinsic Value
Outstanding at December 31, 2018		711,968	$	5.62	3.33 years	$	687,364

Granted		-		-			-
Exercised		46,875		3.48			172,242
Forfeited/expired/cancelled		15,000		5.68			30,286
Outstanding at June 30, 2019		650,093	$	5.77	3.04 years	$	719,362
Exercisable at June 30, 2019		429,009	$	4.82	2.37 years	$	703,769

The following table summarizes information about stock options outstanding at June 30, 2019:

	Stock Options Outstanding								Stock Options Exercisable
Range of Exercise Prices	Number of Shares		Average Remaining Contract Term (Year)		Weighted Average Exercise Price		Aggregate Intrinsic Value		Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value
1 to 2.79999		-		-	$	-	$	-		-	$	-	$	-
2.8 to 4.59999		257,468		1.67		3.44		681,419		257,468		3.44		681,419
4.6 to 6.39999		137,875		2.95		5.87		37,943		77,750		5.87		22,350
6.4 to 8.19999		207,875		4.56		7.31		-		84,416		7.32		-
8.2 to 12		46,875		4.11		11.45		-		9,375		11.45		-
Total		650,093		3.04	$	5.77	$	719,362		429,009	$	4.82	$	703,769

As of June 30, 2019, there was $562,488 of net unrecognized compensation cost related to stock options that had not vested, which is expected to be recognized over a weighted average period of approximately 2.0 years. The total fair value of shares vested during the six-month periods ended June 30, 2019 and 2018 was $235,578 and $319,549, respectively.

The following table summarizes information about restricted stock and restricted stock units outstanding as of June 30, 2019:

	Number of Shares & Units		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2018		287,564	$	9.65

Granted		375,000		5.80
Earned/released		-		-
Forfeited/expired/cancelled		-		-
Outstanding at June 30, 2019		662,564	$	7.47

As of June 30, 2019, there was $4,079,720 of net unrecognized compensation cost related to restricted stock and restricted stock units that had not vested, which is expected to be recognized over a weighted average period of approximately 2.42 years.

Geographic Information and Economic Dependency

The Company produces only one group of similar products known collectively as “rapid medical tests”, and it operates in a single business segment. Net product sales by geographic area were as follows:

	For the three months ended				For the six months ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Africa	$	2,342,740	$	2,226,540	$	4,759,040	$	3,865,070
Asia		119,548		22,348		240,646		989,922
Europe & Middle East		741,641		635,579		1,919,666		1,027,649
Latin America		4,612,904		3,266,290		5,684,970		5,956,183
United States		671,458		707,104		2,266,955		1,417,264
	$	8,488,291	$	6,857,861	$	14,871,277	$	13,256,088

Long-lived assets by geographic area were as follows at:

	June 30, 2019		December 31, 2018
Asia		459,978		466,185
Europe & Middle East		169,147		123,752
United States		2,888,576		2,283,983
	$	3,517,701	$	2,873,920

Fair Value of Financial Instruments:

The carrying values for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. Included in cash and cash equivalents were $3.3 million and $4.7 million as of June 30, 2019 and December 31, 2018, respectively, of money market funds that are Level 1 fair value measurements under the hierarchy. The fair value of the Company’s note payable approximates the recorded value as the rate is based upon the current rates offered to the Company for similar financial instruments.

Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories:

Level 1:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2:

Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and,

Level 3:

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Accounts Payable and Accrued Liabilities:

Accounts payable and accrued liabilities consisted of:

	June 30, 2019		December 31, 2018
Accounts payable – suppliers	$	3,292,605	$	3,622,765
Accrued commissions and royalties		715,177		867,344
Accrued payroll		352,689		48,867
Accrued vacation		606,110		264,789
Accrued bonuses		314,565		494,318
Accrued expenses – other		36,663		590,598
TOTAL	$	5,317,809	$	5,888,681

Goodwill Long-Lived Assets and Intangible Assets:

Goodwill represents the excess of the purchase price the Company paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company’s acquisition of opTricon in November 2018 and Chembio Diagnostics Malaysia Sdn Bhd in January 2017. Goodwill is not amortized but rather is tested annually as of the first day of the fiscal fourth quarter for impairment or more frequently if the Company believes that indicators of impairment exist. The Company makes a qualitative evaluation about the likelihood of goodwill impairment, which is based on a number of applicable factors. If the Company concludes that it is more likely than not that the carrying value of the applicable reporting unit is greater than its fair value, then the Company recognizes an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.

Following is a table that reflects changes in goodwill:

Beginning balance December 31, 2018	$	4,983,127
opTricon measurement period adjustment		(145,760	)
Change in foreign currency exchange rate		(14,954	)
Balance at June 30, 2019	$	4,822,413

Intangible assets consisted of the following at:

	June 30, 2019							December 31, 2018
	Weighted Average Useful Life	Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value
Intellectual property	10	$	1,161,984	$	232,157	$	929,827	$	1,089,688	$	173,633	$	916,055
Developed technology	7		1,890,261		154,128		1,736,133		1,910,315		-		1,910,315
Customer contracts/relationships	8		1,174,664		240,159		934,505		1,121,600		151,929		969,671
Trade names	9		108,521		24,842		83,679		108,521		19,731		88,790
		$	4,335,430	$	651,286	$	3,684,144	$	4,230,124	$	345,293	$	3,884,831

Intellectual property, developed technology, customer contracts/relationships, and trade names are amortized over 10, 7, 10, and 11 years, respectively. Amortization expense for the six months ended June 30, 2019 and 2018 was approximately $306,700 and $45,000, respectively. Amortization expense, subject to changes in currency exchange rates, is expected to be $497,761 per year from 2019 through 2023, and total $1,406,081 for all of the years thereafter.

Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value.

No impairment of goodwill, long-lived tangible, and intangible assets was recorded for the six months ended June 30, 2019 and 2018.

Taxes:

At the end of each interim reporting period, the Company estimates its effective tax rate expected to be applied for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis, and may change in subsequent interim periods. Accordingly, the Company’s effective tax benefit for the three and six-month periods ended June 30, 2019 were 3.3% and 6.0%, compared to the effective tax rate of 0.0% and 0.0%, respectively, for the three and six-month periods ended June 30, 2018. The Company’s effective tax rates for both periods were affected primarily by a full valuation allowance on domestic net deferred tax assets and the benefit from foreign net operating losses.

Research and Development:

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

Allowance for Doubtful Accounts:

The Company records allowances for doubtful accounts for the estimated probable losses on uncollectible accounts receivable. The allowance is based upon the credit worthiness of the Company’s customers, the Company’s historical experience, the age of the receivable and current market and economic conditions. Receivables are written off against these allowances in the period they are determined to be uncollectible.

Acquisition Costs:

Acquisition costs include period expenses, primarily professional services, related to acquisition activities.

Foreign Currency Translation:

The functional currency of a foreign subsidiary is the local currency. Assets and liabilities of foreign subsidiaries that use a currency other than U.S. dollars as their functional currency are translated to U.S. dollars at end of period currency exchange rates. The consolidated statements of operations of foreign subsidiaries are translated to U.S. dollars at average period currency exchange rates. The effect of translation for foreign subsidiaries is generally reported in Other Comprehensive Income. Foreign transaction gains are immaterial.

Recent Accounting Pronouncements Affecting the Company:

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires the entity to recognize the assets and liabilities for the rights and obligations created by leased assets. Leases are to be classified as either finance or operating, with classification affecting expense recognition in the income statement. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provide supplemental adoption guidance and clarification to ASU No. 2016-02, which must be adopted concurrently with the adoption of ASU No. 2016-02 and which are cumulatively referred to as “Topic 842”. Topic 842 was effective for the Company in the first quarter of 2019, and is to be applied using either a modified retrospective approach or an optional transition method, which allows an entity to apply the new standard at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

As further discussed at Footnote 5(e) - Leases, the Company adopted Topic 842 on January 1, 2019 under the optional transition method and elected the short-term lease exception and available practical expedients. Under the transition method, the Company did not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date.