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) unaudited interim condensed consolidated financial statements as of September 30, 2019 and for the three and nine months ended September 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, have been condensed or omitted pursuant to such rules and regulations. 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 September 30, 2019 and its condensed consolidated results of operations for the three and nine months ended September 30, 2019 and 2018 have been made. 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, which was filed with the SEC on March 18, 2019. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

The Company’s future working capital needs will depend on many factors, including the rate of its business and revenue growth, the timing of its continuing automation of U.S. manufacturing, and the timing of its investment in R&D as well as sales and marketing. The Company believes that its existing cash and cash equivalents will be sufficient to meet the Company’s anticipated cash needs for the foreseeable future consistent with its long-term operating plan. If, however, this source of liquidity becomes insufficient to fund the growth of the Company’s business, the Company may need to reduce the level or slow the timing of its growth plans, which would likely curtail or delay the growth in the Company’s business contemplated by its operating plan and could impair or defer its 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 September 30, 2019 and, its condensed consolidated results of operations for the three and nine months ended September 30, 2019 and 2018 have been made. (Note 3q - Error Correction) 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 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 a licensee of products covered under patents that it owns. The Company does not have future performance obligations under this license arrangement. 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 and planning, product development and design optimization, design verification, design validation and process validation, and pivotal studies.

Disaggregation of Revenue

The following tables disaggregate total revenues:

	For the three months ended September 30, 2019						For the three months ended September 30, 2018
	Exchange Transactions		Non-Exchange Transactions		Total		Exchange Transactions		Non-Exchange Transactions		Total
Net product sales	$	8,510,629	$	-	$	8,510,629	$	8,304,370	$	-	$	8,304,370
License and royalty revenue		238,330		-		238,330		228,553		-		228,553
R&D and grant revenue		880,458		91,522		971,980		960,332		331,870		1,292,202
	$	9,629,417	$	91,522	$	9,720,939	$	9,493,255	$	331,870	$	9,825,125

					Total						Total
Africa					$	1,250,063					$	3,193,098
Asia						505,379						216,527
Europe & Middle East						1,629,965						1,666,066
Latin America						4,296,903						3,404,623
United States						2,038,629						1,344,811
					$	9,720,939					$	9,825,125

	For the nine months ended September 30, 2019						For the nine months ended September 30, 2018
	Exchange Transactions		Non-Exchange Transactions		Total		Exchange Transactions		Non-Exchange Transactions		Total
Net product sales	$	23,381,906	$	-	$	23,381,906	$	22,108,727	$	-	$	22,108,727
License and royalty revenue		703,352		-		703,352		707,010		-		707,010
R&D and grant revenue		2,272,454		1,255,579		3,528,033		2,328,058		1,667,057		3,995,115
	$	26,357,712	$	1,255,579	$	27,613,291	$	25,143,795	$	1,667,057	$	26,810,852

					Total						Total
Africa					$	6,009,103					$	7,156,822
Asia						746,025						1,212,839
Europe & Middle East						4,880,744						3,831,580
Latin America						9,981,874						9,743,764
United States						5,995,545						4,865,847
					$	27,613,291					$	26,810,852

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, all of which was earned and recognized as R&D and grant revenue during the nine months ended September 30, 2019. At September 30, 2019, the Company reported $237,500 in deferred revenue that is expected to be recognized during the last quarter of 2019.

Inventories

Inventories consist of the following at:

	September 30, 2019		December 31, 2018
Raw materials	$	2,653,368	$	2,803,677
Work in process		1,313,045		263,043
Finished goods		4,442,931		4,784,502
	$	8,409,344	$	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 September 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 nine months ended September 30, 2019 and 2018 reflects the potential dilution from the exercise or conversion of other securities into common stock, if dilutive.

There were 650,093 and 693,116 weighted-average number of options outstanding as of September 30, 2019 and 2018, respectively, that were not included in the calculation of diluted per common share equivalents for the three months ended September 30, 2019 and 2018, respectively, because the effect would have been anti-dilutive. There were 672,472 and 709,042 weighted-average number of options outstanding as of September 30, 2019 and 2018, respectively, that were not included in the calculation of diluted per common share equivalent for the nine months ended September 30, 2019 and 2018, respectively, because the effect would have been anti-dilutive. There were 550,000 shares of warrants issued in September 2019. The weighted average of these shares were excluded from the calculation of diluted EPS as 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 (the “2008 Plan”), 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 2008 Plan by 125,000 to 750,000. Under the terms of the 2008 Plan, which expired during 2018, the Board of Directors (the “Board”) 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 September 30, 2019, there were 508,889 options exercised, and at September 30, 2019, 99,132 options were outstanding and no Equity Award Units were available to be issued under the 2008 Plan.

Effective June 19, 2014, the Company’s stockholders voted to approve the 2014 Stock Incentive Plan (the “2014 Plan”), with 800,000 shares of common stock available to be issued. Under the terms of the 2014 Plan, 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 September 30, 2019, there were 132,282 options exercised, and at September 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 2014 Plan. During 2018, 266,839 shares of restricted stock and 20,725 restricted stock units were awarded under the 2014 Plan.

Effective June 18, 2019, the Company’s stockholders voted to approve the 2019 Omnibus Incentive Plan (the “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 Board or its Compensation Committee. As of September 30, 2019, 375,000 shares of restricted stock had been awarded under the 2019 Plan, and 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 nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Cost of product sales	$	2,691	$	5,800	$	8,479	$	19,800
Research and development expenses		56,251		3,600		172,346		19,000
Selling, general and administrative expenses		447,646		65,359		1,050,141		260,244
	$	506,588	$	74,759	$	1,230,966	$	299,044

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

	For the three months ended						For the nine months ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Expected term (in years)		N/A			4.5			N/A			4.9
Expected volatility		N/A	%		39.69	%		N/A	%		39.91	%
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 nine months ended September 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 September 30, 2019		650,093	$	5.77	2.79 years	$	730,142
Exercisable at September 30, 2019		447,759	$	4.98	2.16 years	$	713,762

The following table summarizes information about stock options outstanding at September 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		1.41		3.44		689,143		257,468		3.44		689,143
4.6 to 6.39999		137,875		2.70		5.87		40,999		87,125		5.89		24,619
6.4 to 8.19999		207,875		4.31		7.31		-		84,416		7.32		-
8.2 to 12		46,875		3.85		11.45		-		18,750		11.45		-
Total		650,093		2.79	$	5.77	$	730,142		447,759	$	4.98	$	713,762

As of September 30, 2019, there was $496,296 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 1.82 years. The total fair value of shares vested during the nine months ended September 30, 2019 and 2018 was $295,412 and $379,384, respectively.

The following table summarizes information about restricted stock and restricted stock units outstanding as of September 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 September 30, 2019		662,564	$	7.47

As of September 30, 2019, there was $3,639,325 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 nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Africa	$	1,250,063	$	3,193,098	$	6,009,103	$	7,156,822
Asia		505,379		216,527		746,025		1,212,839
Europe & Middle East		1,027,147		728,073		2,946,813		1,773,872
Latin America		4,296,904		3,404,683		9,981,874		9,743,764
United States		1,431,136		761,989		3,698,091		2,221,430
	$	8,510,629	$	8,304,370	$	23,381,906	$	22,108,727

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

	September 30, 2019		December 31, 2018
Asia		419,719		466,185
Europe & Middle East		157,257		123,752
United States		4,668,818		2,283,983
	$	5,245,794	$	2,873,920

Fair Value of 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).

The carrying values for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities approximate fair value due to the immediate or short-term maturity of these financial instruments. Included in cash and cash equivalents were $20.5 million and $4.7 million as of September 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 total debt of $20.2 million (carrying value of $17.7 million) and $0.2 million as of September 30, 2019 and December 31, 2018, respectively, is a Level 2 fair value measurement under the hierarchy and the company’s debt face value approximates the recorded value as the rate is based upon the current rates available to the Company for similar financial instruments.

Accounts Payable and Accrued Liabilities:

Accounts payable and accrued liabilities consisted of:

	September 30, 2019		December 31, 2018
Accounts payable – suppliers	$	2,975,913	$	3,622,765
Accrued commissions and royalties		819,405		867,344
Accrued payroll		320,266		48,867
Accrued vacation		659,358		264,789
Accrued bonuses		497,190		494,318
Accrued expenses – other		173,824		590,598
TOTAL	$	5,445,956	$	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 Chembio Diagnostics GmbH 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.

The following table reflects changes in goodwill:

Beginning balance at December 31, 2018	$	4,983,127
Chembio Diagnostics GmbH measurement period adjustment		(145,760	)
Change in foreign currency exchange rate		(155,856	)
Balance at September 30, 2019	$	4,681,511

Intangible assets consisted of the following at:

	September 30, 2019							December 31, 2018
	Weighted Average Remaining Useful Life	Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value
Intellectual property	6	$	1,203,121	$	258,045	$	945,076	$	1,089,688	$	173,633	$	916,055
Developed technology	6		1,816,190		194,592		1,621,598		1,910,315		-		1,910,315
Customer contracts/relationships	8		1,093,521		231,894		861,627		1,121,600		151,929		969,671
Trade names	8		107,057		26,764		80,293		108,521		19,731		88,790
		$	4,219,889	$	711,295	$	3,508,594	$	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 nine months ended September 30, 2019 and 2018 was approximately $378,691 and $134,208, respectively. Amortization expense, subject to changes in currency exchange rates, is expected to be $499,871 per year from 2019 through 2023, and total $1,381,699 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 nine months ended September 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 nine-month periods ended September 30, 2019 was 0.5% and 3.9%, compared to the effective tax rate of 0.0% for the three and nine-month periods ended September 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.

R&D:

R&D costs are expensed as incurred. Advance payments for goods and services that will be used in future R&D 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.

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 Loss / Income. Foreign transaction gains and losses are immaterial.

Acquisition Costs:

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

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 (ASU Nos. 2016-02, 2018‑10 and 2018-11 are collectively 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 Note 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.

In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features and Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this ASU addresses the complexity of accounting for certain financial instruments with down round features. Per the ASU, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The ASU is effective for public entities for fiscal years beginning after December 15, 2018 and the Company adopted it effective January 1, 2019. This ASU is applicable to the stock warrants issued as part of the Credit Agreement, as further discussed in Note 7 – Warrant.

Error Correction

As discussed in Note 3b – Revenue Recognition, the Company established an accounting policy to recognize freight and distribution expenses within cost of product sales. In connection with the closing of the Company’s books and the preparation and review of the financial statements for the quarter ended September 30, 2019, management noted that this accounting policy had not been correctly implemented and, as a result, the cost of freight and distribution expenses was netted within net product sales.

The following table presents the impact of adjustments to correctly reflect the adopted accounting policy. These adjustments (i) increase net product sales, total revenues, cost of product sales, total costs and expenses, cash received from customers and grants and cash paid to suppliers and employees by an equal amount within each period and (ii) have no impact on product margins, operating results, earnings per share, net assets, net cash used in operating activities, or equity in any period.

	Net Product Sales						Total Revenues						Cost of Product Sales						Total Costs and Expenses						Cash received from customers and grants						Cash paid to suppliers and employees
	As Filed		Adjustment		Revised		As Filed		Adjustment		Revised		As Filed		Adjustment		Revised		As Filed		Adjustment		Revised		As Filed		Adjustment		Revised		As Filed			Adjustment			Revised
2019:
3 months ended March 31	$	6,382,986	$	241,299	$	6,624,285	$	8,300,966	$	241,299	$	8,542,265	$	4,770,337	$	241,299	$	5,011,636	$	11,396,652	$	241,299	$	11,637,951	$	7,869,167	$	241,299	$	8,110,466	$	(12,349,126	)	$	(241,299	)	$	(12,590,425	)
3 months ended June 30		8,488,291		296,750		8,785,041		9,591,386		296,750		9,888,136		6,693,225		296,750		6,989,975		12,891,187		296,750		13,187,937		N/A		N/A		N/A		N/A			N/A			N/A
6 months ended June 30		14,871,277		538,049		15,409,326		17,892,352		538,049		18,430,401		11,463,562		538,049		12,001,611		24,287,839		538,049		24,825,888		17,627,823		538,049		18,165,872		(24,421,683	)		(538,049	)		(24,959,732	)

2018:
3 months ended March 31		6,398,227		307,813		6,706,040		7,717,132		307,813		8,024,945		4,117,779		307,813		4,425,592		8,371,450		307,813		8,679,263		6,039,385		307,813		6,347,198		(8,358,631	)		(307,813	)		(8,666,444	)
3 months ended June 30		6,857,861		240,456		7,098,317		8,720,326		240,456		8,960,782		5,935,428		240,456		6,175,884		10,474,056		240,456		10,714,512		N/A		N/A		N/A		N/A			N/A			N/A
6 months ended June 30		13,256,088		548,269		13,804,357		16,437,458		548,269		16,985,727		10,053,207		548,269		10,601,476		18,845,506		548,269		19,393,775		12,247,228		548,269		12,795,497		(17,352,226	)		(548,269	)		(17,900,495	)
3 months ended Sept. 30		7,856,038		448,332		8,304,370		9,376,793		448,332		9,825,125		6,774,749		448,332		7,223,081		11,706,630		448,332		12,154,962		N/A		N/A		N/A		N/A			N/A			N/A
9 months ended Sept. 30		21,112,126		996,601		22,108,727		25,814,251		996,601		26,810,852		16,827,956		996,601		17,824,557		30,552,135		996,601		31,548,736		20,816,327		996,601		21,812,928		(28,389,820	)		(996,601	)		(29,386,421	)
Year ended Dec. 31		26,741,020		1,172,189		27,913,209		33,409,251		1,172,189		34,581,440		21,427,243		1,172,189		22,599,432		41,391,919		1,172,189		42,564,108		28,632,084		1,172,189		29,804,273		(40,452,110	)		(1,172,189	)		(41,624,299	)

2017:
Year ended Dec. 31		19,322,302		1,193,524		20,515,826		24,015,427		1,193,524		25,208,951		12,921,157		1,193,524		14,114,681		30,497,977		1,193,524		31,691,501		24,971,299		1,193,524		26,164,823		(30,028,299	)		(1,193,524	)		(31,221,823	)